Solow kicking Lucas and Sargent in the pants

28 Jul, 2019 at 13:25 | Posted in Economics | 2 Comments

robert_solow4Professors Lucas and Sargent … have a proposal for constructive research that I find hard to talk about sympathetically. They call it equilibrium business cycle theory, and they say very firmly that it is based on two terribly important postulates — optimizing behavior and perpetual market clearing. When you read closely, they seem to regard the postulate of optimizing behavior as self-evident and the postulate of market-clearing behavior as essentially meaningless. I think they are too optimistic, since the one that they think is self-evident I regard as meaningless and the one that they think is meaningless, I regard as false. The assumption that everyone optimizes implies only weak and uninteresting consistency conditions on their behavior …

It is plain as the nose on my face that the labor market and many markets for produced goods do not clear in any meaningful sense. Professors Lucas and Sargent say after all there is no evidence that labor markets do not clear, just the unemployment survey. That seems to me to be evidence. Suppose an unemployed worker says to you “Yes, I would be glad to take a job like the one I have already proved I can do because I had it six months ago or three or four months ago. And I will be glad to work at exactly the same wage that is being paid to those exactly like myself who used to be working at that job and happen to be lucky enough still to be working at it.” Then I’m inclined to label that a case of excess supply of labor and I’m not inclined to make up an elaborate story of search or misinformation or anything of the sort … Why doesn’t the unemployed worker who told me “Yes, I would like to work, at the going wage, at the old job that my brother-in-law or my brother-in-law’s brother-in-law is still holding”, why doesn’t that person offer to work at that job for less? Indeed why doesn’t the employer try to encourage wage reduction? That doesn’t happen either … Those are questions that I think an adult person might spend a lifetime studying. They are important and serious questions, but the notion that the excess supply is not there strikes me as utterly implausible.

Robert Solow

No unnecessary beating around the bush here.

The always eminently quotable Solow says it all.

The purported strength of New Classical macroeconomics is that it has firm anchorage in preference-based microeconomics, and especially the decisions taken by inter-temporal utility-maximizing “forward-looking” individuals.

To some of us, however, this has come at too high a price. The almost quasi-religious insistence that macroeconomics has to have microfoundations — without ever presenting neither ontological nor epistemological justifications for this claim — has put a blind eye to the weakness of the whole enterprise of trying to depict a complex economy based on an all-embracing representative actor equipped with superhuman knowledge, forecasting abilities and forward-looking rational expectations. It is as if — after having swallowed the sour grapes of the Sonnenschein-Mantel-Debreu-theorem — these economists want to resurrect the omniscient Walrasian auctioneer in the form of all-knowing representative actors equipped with rational expectations and assumed to somehow know the true structure of our model of the world.

Solow once again shows us how totally and unbelievably ridiculous Chicago economics is.

On August 23 this great economist will be 95. Congratulations Robert!

2 Comments

  1. . . . two terribly important postulates — optimizing behavior and perpetual market clearing.
    .
    uncertainty is the common monkey wrench left in the gears that renders one, “meaningless” (or in my terms, undefined) and the second false.
    .
    this observation may be superfluous to Solow’s able critique, but still I think it remains too little appreciated that uncertainty renders “profit maximization” and similar ideas difficult to define. even reducing “optimization” to consistency may not be enough (or too much, as consistency may not be a sensible response to an evolving uncertainty)
    .
    the second implication of pervasive uncertainty, however, is that sunk-cost investment in production capacity will be the norm. capital as a factor of production is a response, if you like, to uncertainty and that response will create production cost structures that make a true market equilibrium in price impossible for most goods in continued production.
    .
    in practice, as can be observed in any grocery store or restaurant or university department, most prices (and wages and rents) are administered, not bid.
    .
    failing to notice this basic fact concerning the nature of the modern economy is apparently a requirement to do economics academically.

  2. People think that wages will naturally fall when the economy slows and thus eliminate unemployment. While wages were falling in the Great Depression, prices were falling faster than wages which meant that real wages were rising.

    Perhaps more significant, and more puzzling, than the behavior of the workweek, was the behavior of the real wage. My paper with Powell showed, for the industry data set used also in this paper, that real wages were typically countercyclical during the prewar period. This countercyclicality is equally apparent if indexes of wage rates: are used instead of average hourly earnings to measure real wages; it seems to have held for the manufacturing sector as a whole (Alan Stockman, 1983) as well as, for individual industries. The tendency of real wages to rise despite high unemployment was especially striking during the major depression cycle (1929—37): real wages rose during the initial downturn (1930—31). They rose sharply again in 1933—34 and 1937, despite unemployment rates of 20.9 percent in 1933, 16.2 percent in 1934, and 9.2 percent in 1937 (according to Darby’s correction of Stanley Lebergott’s 1964 figures). In contrast, my paper with Powell found some evidence of real wage procyclicality in similar data for the post-war period.
    —Essays on the Great Depression (Ben Bernanke) (p. 207)


Sorry, the comment form is closed at this time.

Blog at WordPress.com.
Entries and comments feeds.