Thursday, September 20, 2007
Delong Smacks Lucas Down!
Check it out. I went to grad school during the heyday of Lucas/Sargent/Wallace/Barro "policy-ineffectiveness" theology. The picture of how the macroeconomy works that this gang flacked has turned out to be utterly, utterly wrong. The idea that the business cycle is caused by "unanticipated money" shocks - so that an economy where the Fed acted in predictable ways would be cycle-free: this is, and was, intellectual rubbish! Why have these people paid no price for being so wrong, I wonder? Like the liberal war-bloggers, their eminence is undiminished.
Subscribe to:
Post Comments (Atom)
10 comments:
I was hoping someone who take down Lucas's latest - especially after seeing Mankiw praise. Brad does so very nicely. But let's not forget that the new classical revolution had another business cycle theory as in real shocks. OK, it was kinda hard to blame the 1982 recession on the advent of personal computers unless you think we all wasted too much time playing with them. But the late 1990's boom was in part a favorable productivity shock.
progrowtliberal,
Well, the real problem with the real business cycle people is that they do not have explanations for recessions. Sure, a new tech can accelerate growth as in the late 90s. But just what was that tech shock that gave us the Great Depression? Just on what basis was it that Lucas was so pompous about dismissing Keynes?
What is curious about this latest episode, and is duly noted by DeLong, is that normally Lucas has refrained from openly and plainly speaking about public policy. He has generally remained wreathed in abstract mathematical models so that it was hard to see or say what he was about. In this WSJ article he has come out with a lot of obvious horse manure and nonsense, coming down to earth as it were, and landing with a thump that appears to be breaking some of his reputation...
Rosser
surfeit?
i dunno about the economics, but it seems to me that after a new useful invention the economy gets a surge while everyone who can buys one.
then when everyone has one...probably just before the retailers have realized they ordered too many... there is a sudden slow down.
my guess would be that something like that happens with every near cyclic (chaotic?) phenomenon:
coberly,
Well, RBC does in effect do that. If there is a positive shock, then there is a cyclical response as a wave of investment is followed by a decline of investment in a series of converging cycles that die out. This is really the old Schumpeterian mechanism.
The problem still is, what is a negative technology shock, and what on earth was the one that triggered the Great Depression? Was it just the working out of excessive investment in the newly expanded automobile industry (the 1920s were the decade when a majority of US citizens came to own an automobile).
As Barkley notes, RBC cannot plausibly explain the Great Depression. This is what they say, for any recession: a negative technology shock causes wages to be temporarily low and thus causes workers to voluntarily substitute labor today with labor tomorrow, causing employment today to fall. I swear to God this is what the theory implies; and if this isn't a reductio ad absurdam, I don't know what is! I have always heard attributed to Blinder the great comment that, for RBC, the Great Depression was "a long coffee break." Note, too, that Lucas et. al. deny that there exists such a thing as "involuntary unemployment" - a concept they claim is something Keynes made up. As in the story above, the best they can do is to explain declines in employment - but they are perfectly voluntary.
Nowadays, in order to make any sense at all of, for example, the efficacy of monetary policy, the RBC'ers have been adding "frictions" to the model. To the extent that they are more successful at accounting for macroeconomic reality, it is the frictions that are doing all the work. Frictions plus RBC explain the economy just as Arsenic and Curses, in Voltaire's phrase, kill sheep.
Barkley writes: >The problem still is, what is a negative technology shock, and what on earth was the one that triggered the Great Depression?<
Maybe the real business cycle "theory" could be save by defining a "negative technology shock" as a _slowdown_ in productivity growth (rather than a fall the productivity level). But that's hardly an explanation for the Great Depression of the 1930s (as opposed to that of 2008-...)
Kevin Quinn said: >As Barkley notes, RBC cannot plausibly explain the Great Depression. This is what they say, for any recession: a negative technology shock causes wages to be temporarily low and thus causes workers to voluntarily substitute labor today with labor tomorrow, causing employment today to fall. I swear to God this is what the theory implies; and if this isn't a reductio ad absurdam, I don't know what is! <
Lucas expounded this "theory" very clearly in Klamer's book CONVERSATIONS WITH ECONOMISTS.
>I have always heard attributed to Blinder the great comment that, for RBC, the Great Depression was "a long coffee break." <
I've also heard it called the "Great Vacation." (Or was _I_ who called it that?)
>Note, too, that Lucas et. al. deny that there exists such a thing as "involuntary unemployment" - a concept they claim is something Keynes made up.<
They assume that all markets are in equilibrium all the time. For them, "involuntary" unemployment (their scare quotes) is merely a disequilibrium phenomenon -- and therefore irrelevant.
But if the economy isn't always in disequilibrium, it doesn't really exist. The RBC "theorists" are confusing the model with the economy, the map with the territory.
>Nowadays, in order to make any sense at all of, for example, the efficacy of monetary policy, the RBC'ers have been adding "frictions" to the model. To the extent that they are more successful at accounting for macroeconomic reality, it is the frictions that are doing all the work. <
isn't that called "new Keynesian economics"? (and followed by Mankiw, deLong, etc.)
I'm having a hard time posting comments! What's wrong?
Jim
Lucas is really off the wall. Is it possible to take away his SRPE (Sveriges Riksbank Prize in Economics)?
Lucas was a Keynesian at one point and suffered from a conversion experience. (I can imagine: "My model didn't predict the stagflation that happened. Horrors! I must bow down to Milton Friedman.) No matter what the ideology, those who have recently converted are always the worst adherents. And some, like Lucas, never grow up.
Jim
Rosser
i would just be making amateur guesses, but the bits of the RBC theory I see referenced here don't sound like what I had in mind. On the other hand it sounds like you are almost using the language of turbulent fluid flow, which is what I had in mind.
it occurs to me the technology analogy for the 1920's would be the stock market itself. people kept on buying the new "device" (stocks) until they couldn't buy any more. then the ability to sell stocks plateaued and could no longer fuel the economy. and dead stocks retain their value as well as used computers....
just musing.
coberly,
RBC models are most definitely not turbulent fluid models, which would be more like chaotic dynamics models of the economy. The Kydland-Prescott version of RBC does in fact allow for cyclical fluctuations following a tech shock of any sort, but as I noted they die away. Also, they are pretty regular.
I note that Lucas was not really an RBCer, at least not originally. His (earlier) version did not involve technology at all, that was Kydland and Prescott, imitating Schumpeter. Lucas's version was even more ridiculous than theirs, with it being all driven much more by labor itself (or themselves?) just up and deciding to substitute tomorrow's labor for today's, and go take that long vacation, or coffee break, or wait in line to find a job, or....
Post a Comment