16 September 2009

And While We Are At It .... Let's Think about the "Great Vacation"

Regardless of which side one comes down on in the quite public self-re-assessment economists seem to be undertaking, it is important to note how- apparently in a wholly un-ironic way - certain economists adopt a Gradgrind-like posture. Here is a passage from Krugman where he describes a strand of contemporary macro-economic work that apparently denies (1) that recessions really happen and (2) that even if something resembling a recession did occur, there is a perfectly benign (and, of course, theory saving!) way to interpret such an event.
“Yet recessions do happen. Why? In the 1970s the leading freshwater macroeconomist, the Nobel laureate Robert Lucas, argued that recessions were caused by temporary confusion: workers and companies had trouble distinguishing overall changes in the level of prices because of inflation or deflation from changes in their own particular business situation. And Lucas warned that any attempt to fight the business cycle would be counterproductive: activist policies, he argued, would just add to the confusion.

By the 1980s, however, even this severely limited acceptance of the idea that recessions are bad things had been rejected by many freshwater economists. Instead, the new leaders of the movement, especially Edward Prescott, who was then at the University of Minnesota (you can see where the freshwater moniker comes from), argued that price fluctuations and changes in demand actually had nothing to do with the business cycle. Rather, the business cycle reflects fluctuations in the rate of technological progress, which are amplified by the rational response of workers, who voluntarily work more when the environment is favorable and less when it's unfavorable. Unemployment is a deliberate decision by workers to take time off.

Put baldly like that, this theory sounds foolish - was the Great Depression really the Great Vacation? And to be honest, I think it really is silly. But the basic premise of Prescott's "real business cycle" theory was embedded in ingeniously constructed mathematical models, which were mapped onto real data using sophisticated statistical techniques, and the theory came to dominate the teaching of macroeconomics in many university departments. In 2004, reflecting the theory's influence, Prescott shared a Nobel with Finn Kydland of Carnegie Mellon University (stress added).”
Interestingly, The Times has also been running a series [1] [2] [3] [4] of Op-Ed pieces by Barbara Ehrenreich over the past couple of months. In these she reports on how the non-recession is working down there among the vacationers. Maybe we should consider them post cards?



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