Friday , October 23 2020
Home / Project Syndicate / The Three Revolutions Economics Needs

The Three Revolutions Economics Needs

Summary:
The silence of most economists on the underlying causes of the political ructions erupting throughout the West – and on what, if anything, can be done to restore economic vigor – has been deafening. And it provides further evidence of the profession's refusal to acknowledge the need for change. PARIS – The West is in crisis – and so is economics. Rates of return on investment are meager. Wages – and incomes generally – are stagnating for most people. Job satisfaction is down, especially among the young, and more working-age people are unwilling or unable to participate in the labor force. Many in France decided to give President Emmanuel Macron a try and now are protesting his policies. Many Americans decided to give Donald

Topics:
Edmund S. Phelps considers the following as important:

This could be interesting, too:

[email protected] (Luke Froeb) writes Should gig economy jobs should be regulated by the state?

Scott Sumner writes Once again, China to the rescue!

Scott Sumner writes Utah is not a banana republic

Tim Harford writes Should we really scream at each other about lockdowns before figuring out what the word means?

The silence of most economists on the underlying causes of the political ructions erupting throughout the West – and on what, if anything, can be done to restore economic vigor – has been deafening. And it provides further evidence of the profession's refusal to acknowledge the need for change.

PARIS – The West is in crisis – and so is economics. Rates of return on investment are meager. Wages – and incomes generally – are stagnating for most people. Job satisfaction is down, especially among the young, and more working-age people are unwilling or unable to participate in the labor force. Many in France decided to give President Emmanuel Macron a try and now are protesting his policies. Many Americans decided to give Donald Trump a try, and have been similarly disappointed. And many in Britain looked to Brexit to improve their lives.

Yet economists have been largely mute on the underlying causes of this crisis and what, if anything, can be done to restore economic vigor. It is safe to say that the causes are not well understood. And they will not be understood until economists finally engage in the task of reshaping how economics is taught and practiced. In particular, the profession needs three revolutions that it still resists.

The first concerns the continuing neglect of imperfect knowledge. In the interwar years, Frank Knight and John Maynard Keynes launched a radical addition to economic theory. Knight’s book Risk, Uncertainty, and Profit(1921), and Keynes’s thinking behind his General Theory of Employment, Interest, and Money(1936) argue that there is no basis – and could be no basis – for models that treat decision-makers as having correct models with which to make decisions. Knight injected an uncertain future, Keynes added the absence of coordination. But subsequent generations of economic theorists generally disregarded this breakthrough. To this day, despite some important work on formalizing Knight’s and Keynes’s insights (most notably by Roman Frydman and his colleagues), uncertainty – real uncertainty, not known variances – is not normally incorporated into our economic models. (An influential calculation by Robert J. Barro and Jason Furman, for example, made predictions of business investment resulting from Trump’s corporate profits tax cut without bringing in Knightian uncertainty.) The Uncertainty Revolution still has not succeeded.

Second, there is still a neglect of imperfect information. In what has come to be known as the “Phelps volume,” Microeconomic Foundations of Employment and Inflation Theory, we brought to light a phenomenon overlooked by economists. Overestimation by workers of wage rates outside their towns brings inflated wages and thus abnormally high unemployment; underestimation brings bargain pay levels and thus abnormally low unemployment. When workers lose their jobs in, say, Appalachia they have little idea – no well-based estimate – of what their wage would be outside their world and how long it might take to find a job; so they might remain unemployed for months or even years. There is a deficiency of information, not “asymmetric information.”

More than that, the volume sees every actor in the economy as being thrown back on whatever sense he or she can make of it, as Pinter depicted, and to do the best they can, as Voltaire...

Leave a Reply

Your email address will not be published. Required fields are marked *