Wednesday, November 6, 2019

George A. Akerlof — What They Were Thinking Then: The Consequences for Macroeconomics during the Past 60 Years

This article begins with a review of the two main textbook approaches that had evolved by the early 1960s to incorporate the musings of Keynes: the Keynesian cross from Samuelson’s (1948) introductory textbook and the complete, well fleshed-out model in Gardner Ackley’s (1961) advanced macro textbook. This Keynesian- neoclassical synthesis followed a pattern set by Hicks (1937) by focusing on certain elements of Keynes, while setting aside others. Some potential weaknesses of the specific approach in these models were, at least vaguely, sensed at the time. For example, Hicks had, at least obliquely, mentioned the neglect of inflation expecta- tions. In other cases, the model left out topics that Keynes had treated as important, such as the dangers of financial crises and the role of social norms in wage bargaining, and what these topics implied about the potential importance of multiple equilibria in macroeconomic outcomes. However, the Keynesian-neoclassical synthesis of the 1960s was flexible enough that it encouraged a large body of work. The article will show that this work was based on a style that I call “one-deviation-at-a-timism” (a phrase adapted from Caballero 2010). As I will demonstrate, one-deviation-at-a-time constraints have had real consequences for macroeconomics. For example, they have resulted in lack of attention to financial crashes as a macro topic; they have also resulted in the omission of plausible models with very different core conclusions regarding the effectiveness of macro stabilization.
My concerns can be expressed in the terminology of Thomas Kuhn (1962). What was the dominant paradigm for macroeconomics in the early 1960s? What were its vulnerabilities? What was the resistance to addressing these vulnerabilities? Do these vulnerabilities still remain? I shall address these questions regarding the field of macroeconomics from two intertwined perspectives: my perception of what they were thinking as I began graduate school at MIT in 1962, and my view as I look back on the developments in macroeconomics over the past 57 years.
Journal of Economic Perspectives
What They Were Thinking Then: The Consequences for Macroeconomics during the Past 60 Years
George A. Akerlof

7 comments:

AXEC / E.K-H said...

Macroeconomics and the fake History of Economic Thought
Comment on George Akerlof on ‘What They Were Thinking Then: The Consequences for Macroeconomics during the Past 60 Years’*

Napoleon is supposed to have said “History is a myth agreed upon.” or “History is a set of lies people have agreed upon”. This, of course, holds also for the History of Economic Thought.

Economics is a scientific failure for 200+ years. The major approaches — Walrasianism, Keynesianism, Marxianism, Austrianism, MMT — are mutually contradictory, axiomatically false, and materially/formally inconsistent. Yet, on top of the heap of proto-scientific garbage, George Akerlof tries to erect a false-hero-memorial for MIT: “The primary public policy lesson of Keynesian economics ― that we now knew how to respond to economic downturns ― had been a hard-won fight. It had been fought for decades, with high stakes: nothing less than the maintenance of full employment, rather than lapses into Great Depression.” and “The great public policy question of the day ― how to fight underemployment ― had thus also been solved. This message, significantly homegrown at MIT, was revolutionary relative to the thinking of the early 1930s, when economists could reach no clear consensus regarding how to restore full employment.”

This is a clear case of auto-hypnosis which is the defining characteristic of economists and it traditionally finds expression in the self-propagation of economics as the Queen of Social Sciences.

And this is how MIT economists pulled off their PR stunt: “At the time, Paul Samuelson of MIT was the world’s most famous living economist, known for his Foundations of Economic Analysis and for his numerous articles, but especially for his bestselling introductory textbook. Its early editions began with macroeconomics based on the keystone ‘Keynesian cross’ diagram of Samuelson’s invention, which was the uncontested heart of macroeconomics at MIT.”#1

That much is correct, Samuelson started the economics textbook industry. Needless to emphasize that economics textbooks are scientifically worthless to this day.#2, #3

And this is in detail how the hallucinatory scientific revolution happened: “As a reminder, the Keynesian cross plots income on the horizontal axis and expenditures on the vertical axis. Equilibrium occurs where income and expenditures are equal ― along a 45-degree line from the origin ― but this equilibrium could occur either as a ‘deflationary gap’ below full employment, or at full employment, or as an ‘inflationary gap’ above full employment. The analysis behind the figure explored the consequences of observing that, as Keynes had claimed, equilibrium income occurs where desired savings equals desired investment.”

The first methodological blunder was, of course, to apply the equilibrium concept. Samuelson failed to realize that equilibrium is a NONENTITY.#4, #5, #6, #7 The second fatal blunder was inherited directly from Keynes.

The formal basis of the General Theory is given with: “Income = value of output = consumption + investment. Saving = income − consumption. Therefore saving = investment.” (p. 63)

This elementary two-liner is conceptually and logically defective because Keynes did not come to grips with profit: “His Collected Writings show that he wrestled to solve the Profit Puzzle up till the semi-final versions of his GT but in the end he gave up and discarded the draft chapter dealing with it.” (Tómasson et al.)#8

Let this sink in: Keynes had no idea of macroeconomic profit.

See part 2

AXEC / E.K-H said...

Part 2

Because the foundational concepts of profit/income are ill-defined the whole analytical superstructure of Keynesianism is provably false. Samuelson, though, did not realize that the Keynesian macrofoundations were fatally flawed and neither did Post-Keynesians, New Keynesians, and Anti-Keynesians to this day.#9, #10, #11

Practically this means that economic policy guidance has NO sound scientific foundations since Adam Smith. Economists bear the intellectual responsibility for the social devastation of economic crises.#12

Because both Walrasian microfoundations and Keynesian macrofoundations are defective the so-called Keynesian-Neoclassical Synthesis is provably false, in particular, all IS-LM models #13, #14 and all Phillips-Curves #15, #16 (except the original one) are proto-scientific garbage.

This, of course, is NOT the conclusion of George Akerlof. Economists are struggling scientists and prone to error and neglect like anybody else: “The Keynesian-neoclassical synthesis that had emerged by the early 1960s put constraints on macroeconomics. Foremost, it divorced macroeconomists from working on financial stability. Luckily, after the crash of 2008, the prior work of finance economists has been belatedly acknowledged, and the subfield of macro stability has also emerged as quite possibly the most vibrant research frontier in economics.”

The general public appreciates the humbleness of what it is told are Nobel-worthy scientific geniuses.#17 These repeating We-were-a-bit-wrong-then-but-now-we-are-vibrantly-on-the-right-track confessions are part of the PR stunt called economics. The fact of the matter is: economics is NOT science but political agenda-pushing and economists are NOT scientists but clowns and useful idiots in the political Circus Maximus.#18

The History of Economic Thought, including the History of Macroeconomic Thought#19, is a fake from Adam Smith onward to George Akerlof and beyond. All this stuff ends up with absolute necessity at the Flat-Earth-Cemetery.

Egmont Kakarot-Handtke

See part 3

AXEC / E.K-H said...

Part 3

* George A. Akerlof, What They Were Thinking Then: The Consequences for Macroeconomics during the Past 60 Years, Journal of Economic Perspectives Vol. 33
https://pubs.aeaweb.org/doi/pdfplus/10.1257/jep.33.4.171

#1 “The Keynesian cross diagram is a formulation of the central ideas in Keynes’ General Theory. It first appeared as a central component of macroeconomic theory as it was taught by Samuelson in his textbook, Economics: An Introductory Analysis.” (Wikipedia)
https://en.wikipedia.org/wiki/Keynesian_cross

#2 The father of modern economics and his imbecile kids
http://axecorg.blogspot.com/2016/11/the-father-of-modern-economics-and-his.html

#3 To this day, economists have produced NOT ONE textbook that satisfies scientific standards
https://axecorg.blogspot.com/2019/03/to-this-day-economists-have-produced.html

#4 Equilibrium and the violation of a fundamental principle of science
https://axecorg.blogspot.com/2017/06/equilibrium-and-violation-of.html

#5 There is NO such thing as supply-demand-equilibrium

https://axecorg.blogspot.com/2017/08/there-is-no-such-thing-as-supply-demand.html

#6 What Keynes really meant but could not really prove

https://axecorg.blogspot.com/2016/05/what-keynes-really-meant-but-could-not.html

#7 Proof of the inherent instability of the market economy
https://axecorg.blogspot.com/2017/10/proof-of-inherent-instability-of-market.html

#8 Keynes ― the poster boy for the weakness of the economist’s mind
https://axecorg.blogspot.com/2019/10/keynes-poster-boy-for-weakness-of.html

#9 The elementary production-consumption economy is for a start defined by three macroeconomic axioms (Yw=WL, O=RL, C=PX), two conditions (X=O, C=Yw) and two definitions (Qm≡C−Yw, Sm≡Yw−C). Legend: Yw wage income, W wage rate, L employment, O output, R productivity, C consumption expenditures, P price, X quantity bought/sold.

From these macrofoundations follows the market-clearing price P=W/R (1) which defines the core of inflation/deflation theory, and the average amount of fiat money M=κYw (2).

It always holds Q+S=0 or Q=−S (3), in other words, the business sector’s surplus = profit equals the household sector’s deficit = dissaving and, vice versa, the business sector’s deficit = loss equals the household sector’s surplus = saving. This is the most elementary form of the macroeconomic Profit Law. Eq. (3) refutes the Keynesian I=S. For the elementary investment economy holds Q=I−S. Saving and investment are NEVER equal, neither ex-ante nor ex-post.

#10 Economics for Economists
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2517242

#11 Keynes’s Missing Axioms
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1841408

#12 Econogenics in action
https://axecorg.blogspot.com/2019/01/econogenics-in-action.html

#13 The IS-LM macro imbeciles
http://axecorg.blogspot.com/2016/12/the-is-lm-macro-imbeciles.html

#14 Mr. Keynes, Prof. Krugman, IS-LM, and the End of Economics as We Know It
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2392856

#15 Keynes’ Employment Function and the Gratuitous Phillips Curve Disaster
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2130421

#16 Links on the Phillips Curve
https://axecorg.blogspot.com/2019/10/links-on-phillips-curve.html

#17 Scrap the EconNobel
https://axecorg.blogspot.com/2019/10/scrap-econnobel.html

#18 There is NO such thing as “smart, honest, honorable economists”
https://axecorg.blogspot.com/2019/01/there-is-no-such-thing-as-smart-honest.html

#19 Wikipedia History of macroeconomic thought
https://en.wikipedia.org/wiki/History_of_macroeconomic_thought

Matt Franko said...

“This Keynesian- neoclassical synthesis followed a pattern set by Hicks (1937) by focusing on certain elements of Keynes, while setting aside others. Some potential weaknesses of the specific approach in these models were, at least vaguely, sensed at the time. For example, Hicks had, at least obliquely, mentioned the neglect of inflation expecta- tions. In other cases, the model left out topics that Keynes had treated as important, ”

LOL the non-discriminatory moron-fest which is aka known as the dialectic/Platonistic methodology.... it doesn’t work...

Euthanize the Platonists (ban all Liberal Art schools) and all of this immediately goes away....

Matt Franko said...

“synthesis followed a pattern set by Hicks (1937) ”

LOL it’s a pattern (methodia) set by Socrates and his sidekick Plato in 400 BC....

Matt Franko said...

“economists are NOT scientists but clowns and useful idiots in the political Circus Maximus“

Nice metaphor figurative language but what are they in literal terms? Try to document your observation without resorting to your use of figurative language and use only literal language.... what are they? Leaving out the figurative...

AXEC / E.K-H said...

Matt Franko

The answer to your request has already been given in Part 3 = References which was not uploaded because of space restrictions at Mike Norman Economics. See #9, in particular
https://axecorg.blogspot.com/2019/11/macroeconomics-and-fake-history-of.html

Egmont Kakarot-Handtke