Tuesday, February 1, 2011

Two Intellectual Heavyweights Body Slam The MIT Economics Establishment

EPJ's own Dear Leader, Robert Wenzel, recently remarked upon what happens when economists go stupid. Now, Minnesota financial blogger Eric Falkenstein has weighed in on the matter and it appears he's decided to be fighter number two to Wenzel's growing tag team:
Unfortunately Keynesians don't have any intuition for this, because everything's all just 'aggregate demand', not housing, technology, energy, etc. Aggregation leads to simplifcation, but clearly it has a cost, and I think any macro theory that ignores the fact that an economy is a network of firms and individuals is pointless.

Hayek's early work on business cycles focused on misalignments in the structure of production. Alas, this was basically impossible to formalize. Keyenes's model, meanwhile, was adopted into the Hansen-Hicks synthesis that looked a lot like the simple Supply/Demand equations economists were used to, so everything seemed copacetic. A bad idea, in a tractable model, has a long life, because everyone forgets about all the hand waiving assumptions that underlie such models.
There's more, and Falkenstein is even partial to Wenzel's patented "Bottom line:" summary finishing move.

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