The Fed’s Coming Indiscretion?

by Mario Rizzo   There seems to be broad agreement among economists that the current recovery from the recession will be characterized by a slowly falling unemployment rate. This makes a good deal of sense since the problem that created the recession was a misdirection of resources into a number of sectors including housing construction and … Continue reading The Fed’s Coming Indiscretion?

Keynes on the Bismuth — Castor Oil Cycle

by Jerry O'Driscoll     J. M. Keynes was well-aware of the problems of conducting counter-cyclical policy to stabilize employment.   The problem is when to add stimulus, when to withdraw it, and not to overdo it.    In Keynes' Treatise on Money (1930), Keynes analogizes it to a family taking care of a sick child with doses of … Continue reading Keynes on the Bismuth — Castor Oil Cycle

Pigou is the new Keynes

by Sandy Ikeda A full-page article in today's Wall Street Jounal begins: At the Heavenly Models home for deceased economists, an award is being presented to the resident whose work best explains financial crises, global warming, and other pressing issues of today. The winner, according to author John Cassidy, is A.C. Pigou, the new flavor … Continue reading Pigou is the new Keynes

The New Interventionist Economics

by Roger Koppl Two recent posts on this blog (here and here) raise the issue of animal spirits and where macro is headed.  I’ve recently completed a draft manuscript saying we are headed for “BRACE” economics.  I say the “New Interventionist Economics” will be characterized by five features: Bubbles Radical Uncertainty Animal Spirits Complexity Dynamics … Continue reading The New Interventionist Economics

Animal Spirits

by Jerry O’Driscoll In a previous post, Mario Rizzo reminds us that Keynes was concerned with the volatility of investment.  Keynes was not alone.  By the dawn of the 20th century, virtually every significant business cycle theorist viewed the volatility of investment as the central theoretical problem. In the General Theory, Keynes (p. 149) posed … Continue reading Animal Spirits

Economics To End Economics

by Mario Rizzo   I used to think that Ludwig von Mises was exaggerating quite a bit when he suggested that Keynes was not really an economist. One way he did this was to associate Keynes with infamous monetary cranks like Silvio Gesell. The following quotation will give you a flavor of Mises’s opinion:   “John Maynard … Continue reading Economics To End Economics

Robert Barro on the Impotence of Stimulus

by Mario Rizzo In an interesting opinion piece for the Wall Street Journal, Robert Barro and Charles Redlick give empirical evidence supporting the claim that stimulus spending doesn't work. By "doesn't work" they mean that the government spending multiplier is less than 1. This means that stimulus spending increases national income by less than the … Continue reading Robert Barro on the Impotence of Stimulus

Richard Posner on the Precipice

by Mario Rizzo    Richard Posner's latest conversion is both charming and alarming. It is charming because it exhibits a youthful enthusiasm for a newly-discovered idea: Keynesianism. He just recently read John Maynard Keynes’s book The General Theory of Employment, Interest and Money. Posner’s tone echoes that of Paul Samuelson: “To have been born as an … Continue reading Richard Posner on the Precipice

The Great Moderation In Macroeconomics

by Mario Rizzo   I have now read both Paul Krugman’s New York Times essay on the state of macroeconomics and John Cochrane’s reply. They are each, in very different ways, quite disappointing. The level of argument is poor, the prejudices are simplistic, and the tones are annoying.   Beginning with tones: Krugman is too dismissive of … Continue reading The Great Moderation In Macroeconomics

Auction Markets and Optimally Sticky Prices

by Joseph T. Salerno Keynesian macroeconomists, old and new, have long criticized their classical and contemporary opponents for ignoring reality and treating the market economy as a giant auction in which prices are “perfectly flexible,” responding instantly to changes in supply and demand.  This charge is wrong on two counts.  First, all markets for outputs … Continue reading Auction Markets and Optimally Sticky Prices

Prices and Information

by Jerry O'Driscoll   In the recent discussion of Say's Law, the issue of "sticky" prices came up. The term is the source of much confusion. The opposite of "sticky" prices is not "flexible" prices, but infinitely flexible prices. No matter how flexible a price, short of infinite flexibility, there will be quantity responses. Quantity responses are … Continue reading Prices and Information

Say’s Law Today

by Jerry O’Driscoll   This post follows on my earlier one, “It’s All About Say’s Law.”   Say’s Law of Markets answered the fears of under-consumption as the spreading industrial revolution brought forth an ever more bountiful supply of goods. The law’s logic is that production creates the income that is the source of the demand for … Continue reading Say’s Law Today

It’s All About Say’s Law

by Jerry O'Driscoll A friend with Keynesian leanings recently remarked that "it's all about Say's Law."  He was referring to the contemporary debates over macroeconomic policy.  He was correct, but few economists on any side of the debates understand that is the issue, or why it is important. Say's Law was anticipated by Adam Smith … Continue reading It’s All About Say’s Law

Should Economists Think About What They Do?

by Mario Rizzo   Believe it or not, this is a controversial question! Brad DeLong has argued that the profession seems to know less today about macroeconomics than, say, Keynes did. Paul Krugman has expressed similar sentiments. They see a kind of collective or professional unlearning in the past thirty or forty years. They are right.   … Continue reading Should Economists Think About What They Do?

Monetary Policy At War With Itself

by Mario Rizzo   It is well-known that John Maynard Keynes favored permanently low interest rates in order to foster adequate and stable investment demand. Let us first focus on stability and then we'll see a connection to adequacy.  What happens when counter-cyclical policy (aka Lerner’s “functional finance”) is practiced?   The Wall Street Journal ran an excellent small … Continue reading Monetary Policy At War With Itself

Keynes versus Hayek: A rerun of the 1930s

by Mario Rizzo   [This was submitted to the Financial Times as a possible op-ed piece. Unfortunately, it was rejected. Nevertheless, it seems to me that most readers of the financial press are still unaware of just how fundamental a challenge F.A. Hayek made to the economics of J.M.Keynes. Hayek’s challenge often gets homogenized with other … Continue reading Keynes versus Hayek: A rerun of the 1930s

DE HAUT EN BAS: Niall Ferguson, Paul Krugman and John Maynard Keynes

by Mario Rizzo   Recently Niall Ferguson wrote an interesting op-ed piece for the Financial Times about a debate of sorts he has been having with Paul Krugman on the spike in long-term interest rates and its relation to the large debt the U.S. Treasury must finance.   In the course of that article Ferguson described Krugman’s … Continue reading DE HAUT EN BAS: Niall Ferguson, Paul Krugman and John Maynard Keynes

Relative Prices Matter At All Times

by Mario Rizzo Paul Krugman has written a column stating that wage cuts at this time are a bad idea. Following Keynes he claims that nominal cuts will do no good – they will not stimulate employment (or prevent unemployment) – because aggregate demand will fall. Real wages will thus remain unchanged.   In part, Keynes … Continue reading Relative Prices Matter At All Times

Keynes Against DeLong: A Comment on the Cowen-DeLong Debate

by Mario Rizzo   I am reading with some exasperation Brad DeLong’s comments in his exchange with Tyler Cowen on the efficacy of the stimulus package.   Clearly, DeLong is a rigid aggregate demand theorist. He talks about output and employment as if it were some homogeneous thing. In his mind, macroeconomics is just about … Continue reading Keynes Against DeLong: A Comment on the Cowen-DeLong Debate