Chicago economics out of touch with the real world

25 May, 2014 at 20:44 | Posted in Economics | 6 Comments

new classicalTom Sargent is a bit out of touch with the real world up there in his office … Certain people have a capacity for ignoring facts which are patenty obvious, but are counter to their view of the world; so they just ignore them …

Sargent is a sort of tinkerer, playing an intellectual game. He looks at a puzzle to see if h ecan solve it in a particular way, exercising these fancy techniques.

Alan Blinder

Do you think this is too harsh? Well, then I suggest you read the following excerpt from the interview with Sargent in Arjo Klamer’s The New Classical Macroeconomics (1984):

People say that many of your assumptions are unrealistic.

It is true that these assumptions are unrealistic.

Do you feel comfortable with them?

Yes, about certain matters. I’m aware of all the problems with them. There are philosophical contradictions about using this methodoology. Deep down I don’t believe in them, but I don’t have a better method of understanding what’s going on out there.

But if the best is not good enough? Wittgenstein’s dictum in Tractatus Logico-Philosophicus comes to mind:

Wovon man nicht sprechen kann, darüber muss man schweigen.


  1. Without intending to defend a moron like Sargent, claiming that economists should shut up while their methods are imperfect is equally moronic. I’d rather have a central banker who uses a mixture of DSGE and VARs (like maby CBs do) to inform his decision process than somebody who just flies by the seats of his pants.

  2. One of the key issues, even at the everyday level of the common worker, is the rate of growth of the money supply (however it would be interesting to discuss accelerations in the rate of money circulation). The Chicago School’s monetarist theory of inflation holds that the Federal Reserve System should not let the money supply increase at an excessively rapid rate in order to control inflation. Milton Friedman’s monetarist theory claimed that the recession leading to the great depression was caused in part by the Fed’s tight money supply, however in Friedman’s ‘Monetary History’ he established that the banks which failed were primarily the unsupervised banks.

    So, what does a tight money supply mean? This question is relevant because many common people believe that the Fed simply prints money at will without understanding the relation of interest rates to loan rates to investment. Talcott Parsons analogizes the process of the expanding money supply as a lower interest rate propels people to seek loans; when the loans are granted by the banks, the banks issue a check for the ‘new’ money, therefore the Fed must issue more cash.

    Recently, the Fed got into the practice buying back the bonds significantly before maturity to cut the long term debt and stimulated investment from the bond’s dividends. The Bond buyback of course required the printing of new money to make the sale but reduced the overall cost of the bonds.

    The most controversial proposal from Friedman, the Chicago School spokesman, was that the Fed ought to be required to maintain a constant rate of growth of the money supply. So, the issue here is whether increasing the money supply, that is, a budget or fiscal deficit, causes inflation or increases aggregate demand. If the price increases and the loan constriction of the past 6 years is any sign, the money supply is still to limited! Bit, I think that collateral or credit rating are appropriate requirements for loans.

    Friedman’s actual practice however belies his theory. Where he stated in his books that he was opposed to cutting wages as a way of stimulating the economy, as Naomi Klein has shown, he went hog wild advising foreign states to privatize and cut government employment and increase lean production methods. This advise led to multiple rebellions and

    • “One of the key issues, even at the everyday level of the common worker, is the rate of growth of the money supply”

      Care to elaborate? I am a “common worker” and could not care less about the growth rate of some monetary aggregate. And while some CBs were engaged in targeting some monetary aggregate back in the seventies and eighties nobody does this nowadays anymore.

      • For elaboration I guess you have to ask Alan, who is the one expressing that view in the quote …

  3. Carlos, Most people that I meet have complained about the Fed in one way or another and the complaint has been that the Fed just prints money up. BTW, my name is appended to any post I make, therefore, unless I put in quotes and fail to mention the source, then I am the source of my post. Hope you are not confused.

    • “Carlos, Most people that I meet have complained about the Fed in one way or another and the complaint has been that the Fed just prints money up.”

      In the case of QE this is factually wrong as the Fed massively increased bank reserves and not the amount of dollar bills in circulation. In general the complaint about “money printing” comes either from Austrian morons or people who entertain similar ideas, i.e. people who have no idea about the very basics of macroeconomics.

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