Monday, March 28, 2016


Scott Sumner in Keynes stole my musical chairs model:

But what is so obvious about involuntary unemployment, as defined by Keynes? We all agree that there were lots of people without jobs. We all agree that lots of them wanted to be working. We all agree that lots of them were miserable. I call that “involuntary unemployment.”

By way of contrast, here is one of Syll's Two reasons DSGE models are such spectacular failures:

In the basic DSGE models the labour market is always cleared – responding to a changing interest rate, expected life time incomes, or real wages, the representative agent maximizes the utility function by varying her labour supply, money holding and consumption over time. Most importantly – if the real wage somehow deviates from its ‘equilibrium value,’ the representative agent adjust her labour supply, so that when the real wage is higher than its ‘equilibrium value,’ labour supply is increased, and when the real wage is below its ‘equilibrium value,’ labour supply is decreased.

In this model world, unemployment is always an optimal choice to changes in the labour market conditions. Hence, unemployment is totally voluntary.

Syll is perfect. Sumner can't even keep straight which is his own definition and which is by Keynes. Sumner's story is embarrassingly bad. That's why I keep pointing it out.

1 comment:

The Arthurian said...

Roger Farmer sees the same thing that Lars P Syll sees:
"For the thirty years leading up to the Great Recession, most economists built economic models where there is never any unemployment and the quantity of labor demanded is always equal to the quantity of labor supplied."