Orthodox macroeconomic playbooks

Posted: 31 May 2010 in Uncategorized
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While Narayana Kocherlakota [pdf] laments the absence in 2008 of a macroeconomic playbook explaining how to respond to the economic crises, Brad DeLong [ht: nk] counters that orthodox macroeconomics has had a playbook that was first drafted 185 years ago.

Here’s Kocherlakota:

I believe that during the last financial crisis, macroeconomists (and I include myself among them) failed the country, and indeed the world. In September 2008, central bankers were in desperate need of a playbook that offered a systematic plan of attack to deal with fast evolving circumstances. Macroeconomics should have been able to provide that playbook. It could not. Of course, from a longer view, macroeconomists let policymakers down much earlier, because they did not provide policymakers with rules to avoid the circumstances that led to the global financial meltdown.

And DeLong:

That Narayana Kocherlakota and company did not know it existed–that he and his circle had never studied Kindleberger and Minsky, let alone Fisher and Bagehot and Mill, and knew Keynes and Hicks only as straw men to be ritually denounced as sources of error rather than smart people to be listened to–will doubtless appear to future generations as an interesting episode in the history of political economy. But nobody should confuse the failure of Kocherlakota’s branch of macroeconomics with the failure of macroeconomics in general.

For Kocherlakota, it’s all about adding computing power, market frictions, and external shocks to a “modern” macroeconomics based on Say’s Law. DeLong explains that, in order for a “general glut” to exist, it’s necessary to give up Say’s Law, understand the dynamics of a monetary economy, and allow the monetary and fiscal authorities to expand the supply of safe assets and expand government expenditures. Both Kocherlakota and DeLong have shown that, voilĂ , the rabbit can be pulled out of the hat!

While the two sides of the orthodox debate now have playbooks that admit the possibility of crises, neither is willing to connect that possibility to the dynamics of a specifically capitalist economy. In other words, neither wants to admit that an economy based on a capitalist exploitation inevitably creates the conditions of crisis. That, of course, would require a radically different playbook.

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