Monday, 11 November 2013

Professional economists conspire against the unemployed using e.g. New Keynsianism.

“All professions are conspiracies against the laity” as George Bernard Shaw said. And if you don’t believe that many professional economists are more interested in lining their own pockets than in sorting out economic problems, then perhaps the words of an economist, Adam Smith, will persuade you.
As he put it, “People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.”
The main objective of academic economists is to further their careers and achieve promotion. And they do that by churning out papers and books, regardless of whether that literature clarifies or muddies economic issues. So if an academic economist can get something published that muddies economic issues, that will probably raise unemployment. But never mind: it furthers the career of the economist, so the economist will fire ahead with the publication.

New Keynsian economics.
A nice example of the above is so called “New Keynsian” economics: an idea that has kept hundreds if not thousands of economists employed worldwide.
One of the two main elements of NK economics according to Wiki is so called “rational expectations”. And according to Wiki, rational expectations is “. . .identical to the best guess of the future (the optimal forecast) that uses all available information.”
In other words households allegedly make calculated choices based on “all the available information”. You ever heard anything so patently unrealistic?
This leads to the completely absurd conclusion (quoting Wiki again) that “If the Federal Reserve attempts to lower unemployment through expansionary monetary policy economic agents will anticipate the effects of the change of policy and raise their expectations of future inflation accordingly. This in turn will counteract the expansionary effect of the increased money supply.”
So do households actually act in the above “rational” and calculated way? Of course not, and the evidence supports the point: that is, households in the US spent a fair proportion of the Bush tax cuts soon as they got their hands on the money: exactly what anyone with some common sense would except them to do. So the “expansionary effect of the increased money supply” was not negated, as rational expectations would have us believe.

Sticky wages and prices.
Another (and hilarious) element of NK is apparently that “sticky prices and wages, are a central aspect of all New Keynesian models.” Er . . yes . . one of the main points made by Keynes himself was that wages were, as he put it “sticky downwards”.
But if your aiming to keep yourself employed, then no harm in dressing up as new, an idea that is old as the stars. Hopefully no one will notice.

A third important element of NK is “microfoundations” apparently. Now if by microfoundations one means ACTUAL EVIDENCE as to what households do (e.g. in reaction to the above Bush tax cuts), that’s OK. But what “microfoundations” actually means is more like: “convenient assumptions made by economists as to what households do so as to help them set out fancy models which they can get published and with no regard to the empirical evidence”.
As Simon Wren-Lewis put it, “Internal consistency rather than external consistency is the admissibility criteria for microfounded models. Which means in ordinary English that academic papers presenting macroeconomic models will be rejected if some parts are theoretically inconsistent with other parts, but not if some model property is inconsistent with the data.”

PS (13th July 2014). Lars Syll has just done an article on the nonsense behind "rational expectations".

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