Richard Epstein |2003 Reflects on Anti-Discrimination Laws Since His Book Forbidden Grounds

How neoclassical are New Keynesian dynamic stochastic general equilibrium models?

In sum, New Keynesian models are most certainly not reincarnations of textbook IS–LM models with maximization added on. Rather, they are real business cycle models augmented with a few distortions—typically sticky prices and monopoly power—and shocks that do little to contribute to fluctuations or influence the nature of optimal policy

From Kehoe, Patrick J., Virgiliu Midrigan, and Elena Pastorino. 2018. “Evolution of Modern Business Cycle Models: Accounting for the Great Recession.” Journal of Economic Perspectives, 32 (3): 141-66.

Clearly, @NZTreasury didn’t read @paulkrugman before wining and dining @ProfSteveKeen as a #GFC prophet

From https://krugman.blogs.nytimes.com/2012/04/02/oh-my-steve-keen-edition/ and see https://creditwritedowns.com/2012/04/banks-matter-krugmans-barter-mysticism.html for the text of broken link

Why am I reminded of Neoclassical Economics? Let me count the ways…

Firstly, there are similar underlying principles to the DSGE models that now dominate Neoclassical macroeconomics, and as with Ptolemaic Astronomy, these underlying principles clearly fail to describe the real world. They are:

  1. All markets are barter systems which are in equilibrium at all times in the absence of exogenous shocks—even during recessions—and after a shock they will rapidly return to equilibrium via instantaneous adjustments to relative prices;
  2. The preferences of consumers and the technology employed by firms are the “deep parameters” of the economy, which are unaltered by any policies set by economic policy makers; and
  3. Perfect competition is universal, ensuring that the equilibrium described in (1) is socially optimal.

If that were actually the real world, then not only would there not be a crisis now, there would never have been a Great Depression either—and recessions would simply be minor statistically unpredictable but inevitable events when the majority of shocks hitting the economy were negative, and they would rapidly be resolved by adjustments to relative prices (wages included, of course).

So economists like Krugman—who describe themselves as “New Keynesians”—have tweaked the base case to derive models that “ape” real-world data, with “sticky” prices rather than perfectly flexible ones, “frictions” that slow down quantity adjustments, and imperfect competition to generate less-than-optimal social outcomes.

This is Ptolemaic Economics: take a model that is utterly unlike the real world, and which in its pure form can’t possibly fit real world data, and then add “imperfections” so that it can appear to do so.

Free to Choose Part 5: Created Equal Featuring Thomas Sowell

Rugby sponsors draw the line in odd places

Simon & Garfunkel – The Sound of Silence (from The Concert in Central Park)

From Champ and Freeman

Richard Clapton – Girls On The Avenue (1975)

Unintended consequences of @eugeniesage’s #plasticbagfascism

How safe are nuclear weapons?

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