Arnold Kling  

Axel Leijonhufvud, Recalculation Theorist

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What I call the Recalculation Story has many origins. One of them is Axel Leijonhufvud. He recently wrote,


The economy is an adaptive dynamical system. It possesses the self-regulating, "equilibrating" properties that we usually refer to as "market mechanisms". But these mechanisms do not always suffice to ensure the coordination of activities in the complex system. Almost forty years ago, I proposed the "corridor hypothesis". The hypothesis suggested that the economy might show the desirable "classical" adjustment properties within some "corridor" around a hypothetical equilibrium path but that its self-regulating capabilities would be impaired in the "Keynesian" regions outside the corridor. For large displacements from equilibrium, therefore, the market system might not be able recover unless aided by stabilisation policy.

Read the whole thing. I cannot resist quoting these paragraphs:

Around the turn of the century the pendulum began to swing back - although not very far. "Freshwater" and "saltwater" macroeconomists came to a "brackish" compromise known as the New Neoclassical Synthesis. The New Keynesians adopted the dynamic stochastic general equilibrium (DSGE) framework pioneered by the New Classicals while the latter accepted the market "frictions" and capital market "imperfections" long insisted upon by the former.

This New Synthesis, like the Old Synthesis of fifty years ago, postulates that the economy behaves like a stable general equilibrium system whose equilibrating properties are somewhat hampered by frictions. Economists of this persuasion are now struggling to explain that what has just happened is actually logically possible. But the recent crisis will not fit.

Thanks to Mark Thoma for the pointer.


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CATEGORIES: Macroeconomics



COMMENTS (3 to date)
fundamentalist writes:

Can't wait to read the book. The recalc theory has a long pedigry. Hayek traces it back to Richard Cantillon in the early 18th century, about 50 years before Smith.

woupiestek writes:

"Economists of this persuasion are now struggling to explain that what has just happened is actually logically possible."

Sumner isn't.

I understood the post Keynesian point of view as an example of a phase passage, similar to the critical mass of uranium: having an unfavorable ratio of debt to income makes a company or household unstable. When debt forces a company to 'decay' to a lower level of economic activity, it sends out radiation in the form of a lowering of demand. When this radiation hits other unstable companies, they tend to decay as well. So beyond some critical concentration of unstable agents, a chain reaction occurs, imploding entire sectors of the economy.

However, it seems to me that the financial sector consists of nothing but highly unstable companies, and that the central bank might therefore be as powerful to start and stop an economic implosion of the financial sector, as classical economists like Sumner suggest.

qgambit writes:

"Economists of this persuasion are now struggling to explain that what has just happened is actually logically possible."


Bubbles and (the accompanying) banking/financial crises have been happening for centuries.

"What just happened" is very logically possible.


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