Presentation Transcript

1. The Making of a Revolution –how important are economic crises?

   The Third Nordic Post-Keynesian Conference 22-23 May 2014 Finn Olesen Aalborg 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 1930s The 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. 1930s Economics 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. 1930s Firstly, 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. 1930s Secondly, 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. 1930s Thirdly, 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. 1930s Fourthly, 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. 1930s Fifthly, 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. 1930s Sixthly, 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 2010s 2008: 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 2010s mainstream under attack: Bye-bye to the representative agent and rational expectations? And what about financial matters? And still DSGE modelling?
15. The 2010s Well: Yes, probably Yes, it seems so No, TINA governs
16. The 2010s Yes, 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. 2010s And 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 2010s And 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 2010s And 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 2020s Yes, 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 2010s An 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 2010s However, 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 2010s And 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 2010s Macroeconomic 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 2010s Of 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 2010s And 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 2010s So 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 2010s Unfortunately, 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 2010s No 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