FOO Law and Economics

Thursday, January 29, 2009

EconoSpeak: Ricardian Equivalence Does Not Imply That Obama’s Fiscal Stimulus Will Be Ineffective

The debate arises in part because some economists focus on rationality in the long run, while others (Keynesians et al) focus on irrationality in the short run.

It seems the argument that “stimulus” cannot work rests on rational expectations -- people expect that fiscal/monetary expansion now will require fiscal/monetary retrenchment later. In other words, rational expectations defeat Keynesian prescriptions.

But Kindleberger argued, cogently, that crises are irrational. If we had continuous rationality, we would not observe manias and busts. But we do observe such, so there must be some irrationality out there.

How to reconcile the opposing views? Rationality is useful for the long run where Say’s Law works, and irrationality applies to the Keynesian “short run,” when prices and wages are sticky. We are somewhere in between these two “runs,” so there is room for old-fashioned Keynes and also for some skepticism as to its potency.

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Economics as Zen

The market is like a post-impressionist painting.. The close view is no more real than the far view.. That is all.
-- Deirdre McCloskey

Ponzi units ... make position by selling out positions.
-- Hyman Minsky

Words ought to be a little wild, for they are the assaults of thoughts on the unthinking.
-- John Maynard Keynes

The wish is father to the thought.. What it means is that the wish is the father of faith.
-- Ludwig von Mises

T. S. Eliot wrote about the bottoms of trousers worn rolled

Having long toiled within a behemoth, I have since decamped to a quiet bay, at times on a single outrigger. I contemplate how social order and the economy interact. And what it's all about.

I've come to realize, painfully, that opportunity cost shatters the lenses of artificial privilege and self-delusion -- either you can or can't, whatever be the object. Why? Because opportunity cost is the next best thing.

Contemplation works.

-- Orlando Roncesvalles