Robert Lucas the storyteller

16 March, 2016 at 08:15 | Posted in Economics | 1 Comment

economists pretend to know

We are storytellers, operating much of the time in worlds of make believe. We do not find that the realm of imagination and ideas is an alternative to, or retreat from, practical reality. On the contrary, it is the only way we have found to think seriously about reality. In a way, there is nothing more to this method than maintaining the conviction … that imagination and ideas matter … there is no practical alternative”

Robert Lucas (1988) What Economists Do

Sounds great, doesn’t it? And here’s an example of the outcome of that serious think about reality …

lucIn summary, it does not appear possible, even in principle, to classify individual unemployed people as either voluntarily or involuntarily unemployed depending on the characteristics of the decision problems they face. One cannot, even conceptually, arrive at a usable definition of full employment as a state in which no involuntary unemployment exists.

The difficulties are not the measurement error problems which necessarily arise in applied economics. They arise because the “thing” to be measured does not exist.

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  1. That kind of thinking didn’t die with Robert Lucas.

    I believe Keynes said that if unemployed people refuse work at a reduced wage, they are voluntarily unemployed… but if they accept reduced wages, and full employment does not return, then they are involuntarily unemployed.

    Scott Sumner in Keynes stole my musical chairs model said:
    But what is so obvious about involuntary unemployment, as defined by Keynes? We all agree that there were lots of people without jobs. We all agree that lots of them wanted to be working. We all agree that lots of them were miserable. I call that “involuntary unemployment.” But I think they were unemployed because of sticky wages, and that if workers collectively accepted lower wages then we would have had full employment in 1936.

    Sumner does not use the definition of “involuntary” provided by Keynes. And he does some shoddy low-level criticism to try to make Keynes look bad.

    Sumner continues:
    Keynes also believes that if workers did accept wage cuts, it would not solve the problem. Prices would also fall in response, and hence real wages would not fall. I don’t think he’s right, but the key point is that he thinks that assumption somehow magically turns “voluntary unemployment” into “involuntary unemployment.”

    Sumner isn’t doing economics at all here. He’s doing a “grammar and syntax” thing. And building on Lucas. And getting far more respect than he deserves.

    But not from me.


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