Bryan Caplan  

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Dorman on Minimum Wage... Recalculation vs. Structural U...
Eventually, however, the war spread to the very issue of whether unemployment in recessions in involuntary...  Sweetwater economists began to respond to the natural gravitational pull of the assumptions of optimization and well-functioning markets, which tend to rule out the possibility of involuntary unemployment.  Saltwater economists were outraged - Franco Modigliani (Nobel, 1985) once protested, "Was the Great Depression nothing but an outbreak of laziness?"  Sweetwater economists, notably Edward Prescott, believe that unemployment indeed can be explained by changes in the incentive to work, rather than the Keynesian mechanism of effective demand failure.

In my view, if we use the "prediction machine" concept of economics, then Keynesian Saltwater economics works better...

...Herbert Stein once wrote that although economists do not know very much, noneconomists know even less.  Similarly, I would say that Saltwater economists do not know very much macroeconomics.  However, Sweetwater economists, who deny that there is such a thing as involuntary unemployment, know even less.
My question for the author, whoever he may be: "Are Keynesian predictions really more accurate?  Or is the Keynesian story simply more introspectively plausible?"


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COMMENTS (7 to date)
HispanicPundit writes:

Arnold Kling said it here. But of course you already knew that.

Jim Rose writes:

bryan,

isn't the explanation of some for the much lower hours worked and employment and labour force participation in europe since the 1970s a variation in the "the Great Depression was nothing but an outbreak of laziness"

the more polite term is cultural differences led europeans to want to consume more leisure and work less and this prefernce insensified after the 1970s.

the drop in hours worked per person in Europe was as large as during the great depression, as Ed Prescott has noted.

Hyena writes:

What's the problem exactly?

If demand falls low enough, the return to working probably becomes negative. That's a very poor incentive.

RPLong writes:

Why must we all accept the Keynesians' premises? Because Friedman said that we're all Keynesians?

The problem with the freshwater economists is that they attempted to counter Keynesian arguments using a Keynesian framework. This is as foolishly impossible as attempting to disprove Marxism by first assuming that it is correct.

Rand pointed out 40 years ago that capitalism was in crisis because economists had accepted the philosophical premises of the socialists. When Mises frustratedly pointed out that even the freshwater economists were socialists with regard to monetary policy, Friedman implied that Mises was being unreasonable. But there is a reason Mises wrote Epistemological Problems in Economics.

I think it is indeed a failure of introspection. So many economists learn economic theories without ever thinking through their basic logical premises, and what must also be true, assuming the premises are true.

Arnold Kling writes:

I said it, I'm guessing in around 2003. I did not like rational-expectations macroeconomics then, and I still don't. I don't think it predicted well at all.

Today, I would give less credit to Keynesian macro as a prediction tool. The Keynesian paradigm is sufficiently plastic that you can explain anything and rule out nothing. The same probably can be said of the recalculation paradigm. However, my guess is that in ten or twenty years, we will look back and find more useful research in the recalculation paradigm.

Salem writes:

We are all entitled to change our minds. But I'm more interested by:

We all believe that government support for scientific research helps the economy.
Do you still believe that it helps (more than the cost of funding it hinders)?

Troy Camplin writes:

If one says Keynesianism is more "introspectively plausible," isn't that the same as saying that it amounts to little more than "folk economics"? To say it may be more "introspectively plausible" is to undermine it as a serious economic theory (which is fine by me, as I think it isn't).

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