Comment of the Day: Charles Steindel: Weekend Reading: Paul Krugman (2011): Mr Keynes and the Moderns: "Yes. When I was in grad school in the '70s it was tacitly taught that the 'General' in the title was essentially Keynes' marketing—what we think of as 'Keynesian' economics was really a special, not general, case. The standard fresh-water critique that we can likely get rid of cyclical problems, most notably a sluggish return to full employment, by structural reforms (essentially, removing rigidities in price and wage setting) was seen as having at least some merit. 2008 taught me otherwise...
...First, of course, that swings in expectations can be massive enough to upset the whole macro apple cart. We always knew that, but under the spell of Lucas (and possibly Fama—surely pricing in efficient markets can't be governed by animal spirits) we kind of shoved that aside. More importantly, I think, zero rigidities means something like absolutely continuous wage and price setting. That is the extraordinarily "special" case, not the existence of normal human behavior (including things like processing information and the realities involved in adjusting prices and wages, including the drafting and adoption of the necessary contracts and legislation) which produces inevitable rigidities...
I would note that in Fama's efficient markets theory movements in the stock market are nothing but animal spirits: They are not movements in expected future profits, dividends, or earnings. They are rarely movements in safe interest rates. They are almost invariably movements in required-rates of return—time-varying risk- and term- premier that are unmotivated...
#shouldread #commentoftheday
