it’s interesting to note that, despite his Marshallian (anti-Walrasian) proclivities, it was Friedman himself who started modern macroeconomics down the fruitless path it has been following for the last 40 years when he introduced the concept of the natural rate of unemployment in his famous 1968 AEA Presidential lecture on the role of monetary policy. Friedman defined the natural rate of unemployment as:
"the level [of unemployment] that would be ground out by the Walrasian system of general equilibrium equations, provided there is embedded in them the actual structural characteristics of the labor and commodity markets, including market imperfections, stochastic variability in demands and supplies, the costs of gathering information about job vacancies, and labor availabilities, the costs of mobility, and so on."
Aside from the peculiar verb choice in describing the solution of an unknown variable contained in a system of equations, what is noteworthy about his definition is that Friedman was explicitly adopting a conception of an intertemporal general equilibrium as the unique and stable solution of that system of equations, and, whether he intended to or not, appeared to be suggesting that such a concept was operationally useful as a policy benchmark. Thus, despite Friedman’s own deep skepticism about the usefulness and relevance of general-equilibrium analysis, Friedman, for whatever reasons, chose to present his natural-rate argument in the language (however stilted on his part) of the Walrasian general-equilibrium theory for which he had little use and even less sympathy.
Inspired by the powerful policy conclusions that followed from the natural-rate hypothesis, Friedman’s direct and indirect followers, most notably Robert Lucas, used that analysis to transform macroeconomics, reducing macroeconomics to the manipulation of a simplified intertemporal general-equilibrium system. Under the assumption that all economic agents could correctly forecast all future prices (aka rational expectations), all agents could be viewed as intertemporal optimizers, any observed unemployment reflecting the optimizing choices of individuals to consume leisure or to engage in non-market production.Woj’s Thoughts - I had to read this section of Glasner’s fantastic post twice because its conclusion is so striking given the particular economist involved. Although I was aware Friedman’s work played a large role in the neoclassical synthesis, it remains strange to think that someone so opposed to government intervention would set forth a policy benchmark by which future economists would determine intervention is necessary.
2) Buchanan: Seeing With New Eyes, by Garett Jones @ EconLog
Buchanan saw Arrow's Theorem as a solution to a problem raised by America's founders: how can democracies avoid the tyranny of the majority? Well here's one way, Buchanan said: Just let democracy behave normally. As long as people are diverse enough in their views for Arrow's assumptions to hold, then the factions holding power will change relatively often. His words:
"Would not a guaranteed rotation of outcomes be preferable, enabling the members of the minority in one round of voting to come back in subsequent rounds and ascend to majority membership?"
Where other economists--including myself--had seen Arrow's Theorem as an indictment of democracy, as a reducing the scope for democratic utopianism, Buchanan saw an argument that democracy might not be quite so dangerous after all.Woj’s Thoughts - Although I did not have the opportunity to meet James Buchanan, as a student of economics and member of the George Mason community, I’m saddened by his recent passing. This past semester I became more formally introduced to his work through his book Cost and Choice. The many remembrances, including the one above, have shed even more light on the multitude and magnitude of his achievements throughout his life. I look forward to learning far more about the ways in which Buchanan separated himself from average economists in the years ahead.
3) Burn This Into Your Brain…. by Cullen Roche @ Pragmatic Capitalism
I really like this quote from the NY Fed:
“Most commonly used measures of the broad money supply include both currency and certain types of bank deposits, which in effect represent money created by banks when they make loans, but not reserves. These broad money measures tend to be more directly relevant for economic activity and inflation.” (emphasis added)Woj’s Thoughts - The NY Fed recognizes that “inside” money is relevant for economic activity and inflation. How come mainstream economics doesn't?