Robert Shiller's Godley-Tobin Lecture

Godley-Tobin Lecture later this month in Boston, during the Eastern Economic Association Meetings.

Phishing for phools

I've been trying to read this. Not a huge fan of the field of behavioral economics (or here; subscription required). Don't get me wrong, yes, it provides some critiques of elements of the mainstream (marginalist) approach, regarding essentially the notion of individual rationality, as did the work of, say, Herbert Simon, in the past. People don't tend to act in a rational way, at least not in the substantive way that is prescribed by the mainstream.

Evidence on the notion of universal selfishness is weak. Experiments have undermined the notion that the primary motivation of human action is self-regard. The ultimatum game, which has been played in many different countries and cultures, suggests that humans have a strong preference for fairness. Sam Bowles, who provides a short blurb for the book's back-cover, is one of the several progressive economists that thinks that the critique of rationality developed by behavioral economics is revolutionary, and that it is the source of an alternative to the mainstream (or probably more in line with his views of an evolution of the mainstream; he once said in a lecture at the University of Utah that Marx and Arrow said essentially the same things).

My view, and I promised a more detailed discussion when I'm done with the book, is that this is just one more iteration of the marginalist analysis trying to be relevant by introducing imperfections, the previous one being the idea of information economics, often associated with Joseph Stiglitz and George Akerlof, who is the co-author of the book with Robert Shiller. Stiglitz referred to his information economics as "Post Walrasian and Post Marxian Economics." It was very much in the Walrasian tradition, however.

In the case of behavioral economics, the notion that individual behavior is what matters continues to be central, even though the assumptions on how agents behave differ. The methodological individualist notion that all explanations must start from the microeconomic unit of analysis, and that microfoundations are central, prevails. The predominance of the individual over the whole. That is substantially different from what I would see as the main methodological stance of heterodox economics. Behavior is often discussed as being underpinned by social classes, as in the surplus approach tradition, and history and institutions are the basis for behavior. Markets often get stuck in sub-optimal positions, not so much because agents behave irrationally (even though they do, and behavioral insights might be incorporated in heterodox models), but because they work in different ways than assumed in marginalist analysis.

Issues of causality are considerably more important than behavioral issues. It is the structure of causality between variables that implies that effective demand (rather than Say's Law) holds, meaning that investment determines savings, for example. The same can be said about the determination of prices, where subjective elements are considered as given (and discussed at a lower level of abstraction, in historical and institutional fashion), and analysis proceeds from the objective elements associated to the technical conditions of production and a given distributive variable (again distribution being discussed at a lower level of abstraction, where the historical and institutional factors that affect labor legislation, the strength of unions, etc. play an important role).

PS: Besides these problems the book by Akerlof and Shiller starts by quoting Adam Smith invisible hand out of context, which is really problematic, and shows that the profession should go back and learn the history of its own discipline.

Robert Shiller on media misinformation and monetary policy

Yesterday I listened to this interview on the radio (Bloomberg's Surveillance) with Robert Shiller (you can jump to the last 9 minutes, that's when Shiller starts talking). He is for fiscal stimulus to get us out of the funk, but for higher rates to deal with outline asset prices. No discussion of using regulation to preclude speculation and bubbles in asset markets.

PS: The piece cited at the beginning of the interview is this one.

Lars P. Syll: Shiller & Roubini's Fears of Swedish Housing Bubble Justified

By Lars P. Syll

The Swedish Riksbank has according to Lars E.O. Svensson been pursuing a policy during the last fifteen years that in reality has made inflation on average more than half a percentage units lower than the goal set by the Riksbank. The Phillips Curve he estimates shows that unemployment as a result of this overly “austere” inflation level has been almost 1% higher than if one had stuck to the set inflation goal of 2%. What Svensson is saying, without so many words, is that the Swedish Fed for no reason at all has made people unemployed. As a consequence of a faulty monetary policy the unemployment is considerably higher than it would have been if the Swedish Fed had done its job adequately. So far, so good — I have no problem with Svensson’s argument about the inadequacy of the Swedish inflation targeting policies. However, what makes the picture more complicated is that we do have a housing bubble in Sweden — it’s not just a figment of imagination the “bad guys” use to intimidate us with. [That said, I, of course, in no way want to imply that central bank interest rate targeting (and/or accommodations) is the best way to counteract housing bubbles. Far from it.]

Read the rest here.

The Bank of Sweden gives the prize for the efficient market hypothesis

Lars Syll was right, the Bank of Sweden awarded the Sveriges Riksbank Prize in Memory of Alfred Nobel to Eugene Fama for the Efficient Market Hypothesis (EMH). Lars Peter Hansen and Robert J. Shiller were also recognized for the work on the statistical tests about rational bubbles and for providing evidence that suggests that the EMH might not work, respectively. Even if tempered by Shiller, a New Keynesian that writes with Akerloff, it is still pretty audacious to give Fama and the EMH a 'Nobel' after the last financial crisis. If you had doubts about the state of the profession, and the resilience of the mainstream, this should wipe them out.