RBC models — nonsense on stilts

3 February, 2017 at 16:40 | Posted in Economics | 2 Comments

tobin_2049712cThey try to explain business cycles solely as problems of information, such as asymmetries and imperfections in the information agents have. Those assumptions are just as arbitrary as the institutional rigidities and inertia they find objectionable in other theories of business fluctuations … I try to point out how incapable the new equilibrium business cycles models are of explaining the most obvious observed facts of cyclical fluctuations … I don’t think that models so far from realistic description should be taken seriously as a guide to policy … I don’t think that there is a way to write down any model which at one hand respects the possible diversity of agents in taste, circumstances, and so on, and at the other hand also grounds behavior rigorously in utility maximization and which has any substantive content to it.

James Tobin

Real business cycle theory basically says that economic cycles are caused by technology-induced changes in productivity. It says that employment goes up or down because people choose to work more when productivity is high and less when it’s low. This is of course nothing but pure nonsense, and how on earth the guys that have promoted this theory — Thomas Sargent et consortes — could be awarded The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel is really beyond comprehension.

In yours truly’s History of Economic Theories (4th ed, 2007, p. 405) it was concluded that

ekthe problem is that it has turned out to be very difficult to empirically verify the theory’s view on economic fluctuations as being effects of rational actors’ optimal intertemporal choices … Empirical studies have not been able to corroborate the assumption of the sensitivity of labour supply to changes in intertemporal relative prices. Most studies rather point to expected changes in real wages having only rather little influence on the supply of labour.

Rigorous models lacking relevance is not to be taken seriously. Or as Keynes had it — “it is better to be vaguely right than precisely wrong.”



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  1. Dear,
    How to implement to the field?

  2. Real Business Cycles are actually due to the attitude that greedy people take to the nature of land. Land prices in development regions and in other places are not stable and have a tendency to slowly rise as the infrastructure (paid for by our tax money) is developed. So like every other commitment to share prices, the speculative land owners (with bank support) buy cheap land and then hold it out of use as its price and value grows. Its almost sure to rise with time (Trumpites please note–speculators, you can get a free-lunch off our tax payments for improvements to the community!)

    Due to the competition for land, its price rises along with the rent tenants pay and then the produce grown on the land and the home accommodation rented on the land both gradually increase. But less goods are being made because wages take longer to grow. The reduction in produce means less earnings and greater degrees of unemployment. Eventually the prices becomes so high that the builders can no longer make a profit when their completed properties are offered for sale, and the mortgages already being applied to previously built properties begin to sour as the cost of consumer goods goes up and the average wages go down in comparison.

    A crisis is reached when the building trade lays off workers and suddenly there is a slump! This theory is the one proposed by Henry George in his seminal book of 1879 “Progress and Poverty” which is still in print and sold at least 3 million copies. The speculators suddenly find a need to withdraw their money, so the banks need to borrow from the government (and get “bailed out”). George showed the way to stop these cycles repeating is by making the speculation in land values no longer worthwhile. George’s Single Tax on land values would stop the holding of land unused and allow its price to stabilize after it had become un-inflated by the speculators. There are ethical considerations which apply to everyone who is paying tax on their earnings/purchases, etc. and being exploited by the land dealers.


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