Upload
marilynn-jacobs
View
214
Download
0
Tags:
Embed Size (px)
Citation preview
1
The Making of a Revolution –how important are economic crises?
The Third Nordic Post-Keynesian Conference 22-23 May 2014
Finn OlesenAalborg University – Department of Business and
Management
2
A scientific revolution – how and why?
Thomas Kuhn: a scientific revolution should be explained by the existence of anomalies
→ theoretical anomalies→ empirical anomalies
→ conceptual anomalies
3
The 1930sThe era of the Great Depression:
mainstream under attack – time to change the macroeconomic understanding!
4
The 1930s
Kuhn's theory can easily explain how and why we talk about The Keynesian Revolution:
→ lack of optimality: Yt is less than full employment
→ what is involuntary unemployment all about (theoretically, empirically and conceptually)?
5
The 1930s
With Keynes’s General Theory the scene was set for a revolution in economics
Research (normal science activities) followed with inspiration from Keynes’s macroeconomic model:
’the principle of effective demand’
Still today we are using the 45o-diagram, the IS/LM model and the AD/AS model when we teach
basic macroeconomics
6
1930sEconomics did undergo many changes as a
result of The General Theory(theoretical as well as methodological – as any
Post Keynesian would tell you)
Just to mention six important aspects
7
1930sFirstly, macroeconomists acknowledged the
necessity of having focus on how the level of aggregated output was determined and how
it could be manipulated e.g. by economic policy
(focus on the processes of income determination by use of a macroeconomic
model)
8
1930sSecondly, macroeconomists got a new view on
the importance of aggregated demand
Aggregated demand now came to play a much more active role in the economic analysis
(at the same time within basic Keynesianism aggregate supply took over the more passive
role that demand effects had hitherto played in the economic analysis)
9
1930sThirdly, macroeconomists got a new view on
how to conduct monetary policy
Away with the classical view that monetary policy had to do with price stability and
nothing else. From now on, fluctuations in aggregate production was very important and
also a concern of bankers: monetary policy should be coordinated with other aspect of the
general economic policy (especially fiscal policy)
10
1930sFourthly, macroeconomists got a new view on
how to conduct fiscal policy
Away with the classical view on fiscal policy stating, that the budget should always be
balanced. Potential crowding out effects were no longer that important if the economy
functioned at a level less than full employment. Budget deficits (and a public debt) could be
acceptable(functional fiscal policy)
11
1930sFifthly, macroeconomists got a new view on
international affairs – countries should operate internationally in coordination not in
conflict with each other(the Bretton Woods System)
12
1930sSixthly, macroeconomists began doing
econometrics and thereby gave the politicians a vital instrument, that they could use when
deciding what to do economic policy wise when they tried to minimise the fluctuations
in aggregated demand and output
13
The 2010s2008: from an international financial crisis to
the present Great Recession of many countries:
mainstream under attack once again – time to change the macroeconomic understanding???
14
The 2010smainstream under attack:
1. Bye-bye to the representative agent and rational expectations?
2. And what about financial matters?3. And still DSGE modelling?
15
The 2010sWell:
1. Yes, probably2. Yes, it seems so
3. No, TINA governs
16
The 2010sYes, probably because:
The assumption of rational expectations is:”a strong one, and one may wonder if it should
be relaxed, especially when considering relatively short-run responses to disturbances, or the consequences of newly adopted policies
that have not been followed in the past – both of which are precisely the types of situations which
macroeconomic analysis frequently seeks to address”
17
2010sAnd furthermore:
”the assumption that an economy’s dynamics must necessarily correspond to an RE
equilibrium may seem unjustifiably strong … It makes sense to assume that expectations
should not be completely arbitrary, and have no relation to the kind of world in which the
agents live; indeed, it is appealing to assume that people’s beliefs should be rational, in the
ordinary-language sense, though there is a large step from this to the RE hypothesis”
18
The 2010sAnd that is why:
”We should like, therefore, to replace the RE hypothesis by some weaker restriction, that nonetheless implies a substantial degree of
conformity between people’s beliefs and reality – that implies, at the least, that people do not
make obvious mistakes”
19
The 2010sAnd this is a view on rational expectations that
is given by a mainstreamer:
Michael Woodford (2013:304): Macroeconomic Analysis Without the Rational Expectations Hypothesis, Annual Review of Economics,
2013, Vol. 5, pp. 303-46
20
The 2020sYes, it seems that financial aspects matters more than
expected hitherto by mainstreamers
As stated by e.g. Romer (2011:358):
”The crisis of 2008-2009 has made it clear that non-Walrasian features of credit markets have important macroeconomic consequences. Disruptions in credit markets can cause large swings in economic activity,
and credit-market imperfections can have large effects on how other shocks affect the macroeconomy”
21
The 2010sAn alternative to DSGE modelling? No, apparently TINA
still rules the game:
”While the problems of the field have hardly all been resolved, there are no longer such fundamental
disagreements among leading macroeconomists about what kind of questions one might reasonably seek to
answer or what kinds theoretical analyses or empirical studies should even be admitted as contributions to
knowledge … [and this is done by using DSGE models] … there are really no longer alternative approaches to the resolution of macroeconomic issues”.; Woodford
(2008:2 & 13)
22
The 2010sHowever, some mainstreamers express themselves a little
less fundamentalist (perhaps due to empirical facts of resent years):
“First, despite the models’ complications, there is a great deal they leave out. For example, until the resent crisis, the models’ treatment of credit-market imperfections
was generally minimal. Second, the microeconomic case for some important features of the models is
questionable. Most notably, the models include assumptions that generate inertia in decision making …
[which] … is mainly motivated not by microeconomic evidence, but by a desire to match macroeconomic
facts”; Romer (2011:361)
23
The 2010sAnd actually, the DSGE modelling has been
empirical falsified as:Although the DSGE models can cope with random
exogenous events; events or shocks need not be random nor exogenous – often disturbances are
endogenous in nature rather than exogenous
Stiglitz (2012:32): “In most models, the disturbances to the tranquillity of the economy were exogenous, but historically – as now – the
important shocks are endogenous”
24
The 2010sMacroeconomic patterns in real life are not only patterns of unique steady-states paths –
real life phenomena is seldom ergodic
DSGE try to include aspects of uncertainty; however, only of an epistemological nature – there is no room for an uncertainty that is
ontological
25
The 2010sOf course, economic behaviour is dependent on expectations; however in real life, households and
firms do not act economically based on perfect rational expectations. They make mistakes
(stochastically but much more important also of a systematically kind).
Likewise, of course, households and firms make decisions of an intertemporal kind; however, these intertemporal decisions are not characterised by
perfect optimality, rather decisions are often (always) of a 2. best kind
26
The 2010sAnd methodologically, the ‘hypothetical-
deductive method’ used by the DSGE modelling is not the most relevant method
when you acknowledge that:
”unlike atoms or cells, individuals are free and, so, unpredictable, because they learn and
change their behavior; because institutions also change their behavior; and because a general uncertainty permeates individual behavior and economic analysis”; Bresser-
Pereira (2012:9)
27
The 2010sSo apparently, it seems, the modern
macroeconomic understanding is currently undergoing some revisions
However, seen from a Post Keynesian
perspective, it is more than questionable if these revisions would be sufficient to make
mainstreamers to be able to perform a macroeconomic analysis that really, in a
relevant way, copes with the essential concepts of: time, money, expectations & uncertainty.
28
The 2010sUnfortunately, it seems that mainstreamers are
still bound to do analyses that are ergodic in nature
The non-ergodic view on economics is regrettable only accepted by the Post
Keynesian understanding, as non-mainstreamers have had no influence at all on the modern macroeconomic New Neoclassical
Synthesis
We might be right but hardly no one seems to listen
29
The 2010sNo hope for the future then?
Well, that depends on the students of economics today
Perhaps we are able to tell them a story about the
interplay between economic theory and the facts of real life that is interesting and convincing to them
At least, we have to try. As we actually do at The University of Aalborg
30
The Making of a Revolution
Thank you very much