By Jonathan Schlefer
ISBN-10: 0674052269
ISBN-13: 9780674052260
Economists make convinced assertions in op-ed columns and on cable news—so why are their reasons at odds with both convinced assertions from other economists? And why are all monetary predictions so hardly borne out? Harnessing his frustration with this contradiction, Schlefer got down to examine how economists arrive at their opinions.
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Additional info for The Assumptions Economists Make
Example text
Improvements in the design and production of integrated circuits dramatically lowered computing prices over the course of decades. The dot-coms built a whole new range of Internet services, creating goods and demand for them that had never existed before. The Harvard economist Joseph Schumpeter famously argued that innovation, interrupting what he called the “circular flow” of markets in equilibrium, drives development. If such external shocks were the only mechanisms that interrupted 22 the assumptions economists make the circular flow, they would not undermine the idea of the invisible hand.
It fools firms by tampering with the money supply and inflation, so they misjudge real prices. To the extent that firms are fooled, they adjust prices subop timally, causing booms and busts. Thus, inept government efforts to smooth business cycles actually cause them. Lucas’s model supports Friedman’s argument that the Fed caused the Great Depression. Macroeconomists began to build models attempting to show how the “microeconomics” of firms and consumers making optimal decisions in an invisible-hand economy might be reconciled with the “macroeconomics” of business-cycle booms and busts that hardly look optimal.
But you cannot at the same time have any assumptions you want and reach any conclusions you want. A model provides a check on thinking: it restricts us at least to consistent economic worlds, however imaginary they might be. The catch is that models can be treacherous. While some assumptions made by economists capture important insights, others are insane. All you have to do is decide which capture insights, which are insane, 30 the assumptions economists make and in which situations. Unfortunately, this turns out not to be such an easy challenge.
The Assumptions Economists Make by Jonathan Schlefer
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