Diane Coyle has a nice review of Richard Thaler's new book, Misbehaving. Diane's review is, for the most part, appropriately laudatory. But she does voice a concern that I share. Here is Diane...
"Behavioural economics is now one of the most popular areas of the subject, ... but the new embrace by economists makes me uneasy. This is not just because of the well-known debate about paternalism (as discussed by Gilles St Paul in The Tyranny of Utility or Julian LeGrand and Bill New in Government Paternalism: Nanny State or helpful Friend?) It is because the sight of economists delighting in a new tool to engineer society is alarming –"
I agree. Here is a quote from my review of Akerlof and Shiller's 2009 book Animal Spirits, another piece that draws on behavioural economics to engage in social engineering. Akerlof and Shiller want to replace rational choice with behavioural economics. And here is what they mean by that...
In May of this year, Jess Benhabib and I organized a conference at the Federal Reserve Bank of San Francisco with much help from Kevin Lansing at the Fed. Many thanks Kevin!
Kevin has just sent me a link to a website put together by the Fed with links to all of the papers, including slides of presenters and discussants plus a video of Karl Shell's dinner talk on the history of sunspots. The conference was sponsored by the NBER, UCLA and NYU. Many thanks to all who helped make this possible.
In a recent letter to The Guardian, a coterie of mainly English academics has criticized George Osborne's Mansion House speech in which he proposed to run a budget surplus in normal times.
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| Mansion House |
According to the letter writers,
The chancellor’s plans, announced in his Mansion House speech, for permanent budget surpluses [my italics] are nothing more than an attempt to outmanoeuvre his opponents (Report, 10 June). They have no basis in economics. Osborne’s proposals are not fit for the complexity of a modern 21st-century economy and, as such, they risk a liquidity crisis that could also trigger banking problems, a fall in GDP, a crash, or all three.
The bankers are angry. They feel the regulations designed to prevent another meltdown are cramping their style. Their bonuses are down. I agree. Red tape is not the way to save the banking system.
The banks engaged in a freewheeling orgy of unregulated risk taking for two decades. And when the world crashed: they expected, and received, bailouts. But we don't need to bash the banks to save the system.
As a society, we do not have a stake in saving HSBC. We do not have a stake in saving Barclays, or RSBC, or Lehmann Brothers, or Bank of America. But we do have a stake in saving the banking system. Here is a link to a piece I wrote in 2009 on how to do that.
For a neo-paleo-Keynesian like me, the first week of an undergraduate macroeconomics lecture is taken up with accounting: Tedious but necessary. What is GDP? How is it different from GNP? National Income? How do we measure it? Does it matter? I've always struggled with outside readings to fill this material out and make it interesting. Now I have one. Diane Coyle has written a timely and very readable little tome about her love affair with national income accounting. It's very short, and you will be able to gobble it down in an afternoon. I did, while whiling away a few hours on a flight.
In IS-LM models there is always something in the background shifting the IS curve. What is it?
In my view that 'something' is Keynes' animal spirits that we should add to our models as a new fundamental.
In my work, I close my models by adding an equation that I call a 'belief function'. The belief function is an effective way of operationalizing the Old Keynesian assumption of ‘animal spirits’. It is a forecasting rule that explains how people use current information to predict the future. That rule replaces the classical assumption that the quantity of labor demanded is always equal to the quantity of labor supplied.
Here is a link to the blog I wrote on that topic last year.
Models of sunspots and multiple equilibria were developed in the 1980s as an alternative to the dominant Real Business Cycle agenda. For the last couple of decades, these models have taken a backstage role as explanations of the macroeconomy. Now they are back with a vengeance.
On Thursday and Friday of this week, Jess Benhabib and I are running a conference at the San Francisco Fed that showcases new research on multiple equilibria and financial crises. The papers at this conference trace their roots to an agenda on sunspots, developed at the University of Pennsylvania in the 1980s.
The sunspot agenda began with the seminal paper by David Cass and Karl Shell, Do Sunspots Matter?, the pathbreaking paper on Self-Fulfilling Prophecies by Costas Azariadis and a paper by myself and Michael Woodford in which we developed techniques that form the basis for dynamic models of indeterminacy that are now widely used to understand monetary policy regimes.
Another important landmark was the 1994 conference at NYU, published in the Journal of Economic Theory as a symposium on Growth Fluctuations and Sunspots. Here is a link to a survey paper that explains the history of the sunspot agenda and its connection to endogenous business cycles.
I'm looking forward to the dinner talk on Thursday night by Karl Shell and I'm also looking forward to seeing the tremendous range of papers that are moving this agenda forwards in new and exciting directions. Here is a link to the conference papers.
