Winter Holiday

I am spending my winter holiday at home. No work, no research, no papers, no students… no e-mails. At this time of the year I do nothing just hang about. There is a traditional hiking which I go on every year some days before christmas evening. I enjoy the time I spend alone. The only noise I hear is my own breathe… shearing through the frozen meadows. So this is the time of long and lonely walks in the surrounding hills, having a cup of tea or coffee at the mysterious chateau standing on the nearby lake, and reading, reading, reading… Looking for old feelings that cannot be grabbed or brought back during the weeks of work, lecturing and travelling. Pure contemplation. Storing memories that can fuel me throughout the routine of everyday life.

If you are interested, here are some old pictures of my hometown… the scenes I visit day by day.

… and last but least I would like to wish you a happy new year. See you soon, in January.

Advertisements

Keynes on Newton

This story is about an institutional economist writing about a scientist seeking laws.

Nobel-laureate Steven Weinberg in his “To Explain the World” (Harper Collins, New York, 2015) tells an interesting story about Keynes and Newton (Ch. 14). Keynes purchased some of Newton’s papers in the 1936 auction at Sotheby’s. Keynes had been the first person to see some of the manuscripts which had been kept secret until the papers were sold in 1936. Keynes is rumoured to have been fascinated by Newton’s manuscripts. Later Keynes devoted a whole lecture (Newton, the Man, 1946) to the evaluation of Newton’s theory and significance and his contribution to the evolution of modern science. It is worth quoting in length:

“Newton was not the first of the age of reason. He was the last of the magicians, the last of the Babylonians and Sumerians, the last great mind which looked out on the visible and intellectual world with the same eyes as those who began to build our intellectual inheritance rather less than 10,000 years ago. Isaac Newton, a posthumous child born with no father on Christmas Day, 1642, was the last wonderchild to whom the Magi could do sincere and appropriate homage.”

In contrast, Steven Weinberg, a modern scientist somehow treading in Newton’s footsteps gives a different portray:

“But Newton was not a talented holdover from a magical past. Neither a magician nor an entirely modern scientist, he crossed the frontier between the natural philosophy of the past and what became modern science. Newton’s achievements, if not his outlook or personal behavior, provided the paradigm that all subsequent science has followed, as it became modern.”

Now I feel tempted to interpret this situation as Keynes had problems in realizing the importance of looking into the hidden layers of reality. Looking for something that cannot be observed directly must me magic. I know this is an oversimplification but the same problem appears to be a characteristic of the institutionalist camp among economists. While mainstream economics is directed at looking for the fundamental economic laws and, in a Weberian sense, to highlight some facets of our socio-economic reality, institutional economists prefer theories and concepts with more direct descriptive relevance. It may be the age-old fallacy. What we cannot see that cannot be in existence.

Beyond the Realism of Mainstream Economic Theory. Phenomenology in Economics.

In this paper some special features of phenomenology which enable them to be a possible ground for a research program in economics, complementing previous
mainstream results, are reviewed. The potential fruits and their importance will
also be highlighted. The direct purpose is to study what scientific problems have been
hidden beyond the territory of mainstream economics and what scientific methods
are available for economists to scrutinize an area mainly ignored, that is, the unquestioned
aspects of our socio-economic reality. Along these lines we can get to findings
that can complement the traditional research directions of mainstream economics.
Keywords : phenomenology, reality, abstraction, types, experimental economics.
JEL codes : B41, B49, C92.

The full text of the paper is available here.

The New Classical Concept of “Voluntary Unemployment”

The concept of voluntary unemployment as applied by new classicals provides us with important insights as to the practice economists by highlighting certain mechanisms and neglecting others make efforts to explore the underlying causal structure. On the paper co-authored by Rapping (Lucas – Rapping 1969), Lucas had a serious debate with Albert Rees (see Rees 1970). In this debate Rees, who was shocked by the fact that Lucas and Rapping tried to interpret an evidently involuntary unemployment situation on the basis of voluntary unemployment, voiced the usual arguments. These concerns were responded to by Lucas with a brief paper (Lucas 16972). Assuming labour market equilibrium did not imply their neglecting or rejecting unemployment as a real social phenomenon and, moreover, the equilibrium approach was definitely in tune with the perceived fluctuations in employment. Lucas and Rapping detailed an employment equation which by Rees was erroneously said to be independent of real GNP. Rees interpreted this step of theirs as omitting aggregate demand as an explanatory variable. This mistake of Rees can be traced back to a simple methodological error: before econometric estimation a simultaneous equation system has to be re-specified in a reduced form instead of the original structural form in order that the effects of exogenous variables could be evaluated. In the Lucas-Rapping model real GNP is an exogenous variable, so eliminating the endogenous variables must not be skipped before the stage of estimations (this is what is meant by specifying a reduced form). By taking this fact into consideration one can clearly understand the relationship: the rate of unemployment is presumed to be dependent on the real wage on the one hand, whereas real wage is assumed to be dependent on real GNP. Bearing this in mind, at the end of a correct mathematical deduction one may get to an equation in which the rate of unemployment can be estimated as a dependent variable of real GNP per household (among other explanatory variables).

All in all, the interpretation in which Lucas and Rapping were said to make unemployment independent of aggregate demand is fundamentally erroneous. Moreover, this model was fairly in accordance with the relationship between real output and unemployment dynamics.

The concept of voluntary unemployment means that households reduce their labour supply when realizing that current wages are below the level of real wages they expected. The crucial problem here is that how quickly households would modify their expectations. According to the critique this modification should occur in quite a short time when the facts once are realized. However, Lucas and Rapping called attention to the fact that “facts” are rather dubious on the one hand, and on the other hand expected wages and prices definitely dropped during the Great Depression, even though slower than the factual data. Actually, these two explanations are interrelated, since there are only few people among the unemployed who are clearly cognizant of their normal and expectable wage level and who in the hope of higher wages tend to persist in looking for new jobs before they may feel tempted to cut their wage claims. On second thoughts this mechanism involves the signal processing problem (according to which information deficiencies bear a part in triggering large scale fluctuations) of the island models appeared soon afterwards.

It stands to reason that unemployment dynamics under the Great Depression could not be explained on information deficiencies and a conception built on voluntary unemployment alone. The persistence of unemployment must have had further causes–causes that were neglected by Lucas and Rapping. But anyway, Lucas and Rapping succeeded in highlighting the fact that until the revision took place unemployment was voluntary. In other words, before unemployment turned into involuntary there was a stage in which it was voluntary. There are multiple, interconnected explanations. As Lucas (1972) puts it:

“It would also be misleading to conclude this paper without discussing the possibility that »traditional« theory can account for the residual rigidities unexplained by our model.”

Yes, this is how Lucas phrased. A careful analysis of the texts sheds light on the fact that Lucas has always been accurate to highlight that the mechanisms he postulated can hardly account on their own for the fluctuations under study.

References

Lucas, R.E. (1972): Unemployment in the Great Depression–Is There a Full Explanation? Journal of Political Economy, 80(1): 186–191.

Lucas, R.E. – Rapping, L.A. (1969): Real Wages, Employment, and Inflation. Journal of Political Economy, 77(5): 721–754.

Rees, A. (1970): On Equilibrium in Labor Markets. Journal of Political Economy, 78(2): 306–310.

great-depression-jobs