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14 Nov 09

LRB · John Gray · We simply do not know!

AP Macro and IB teachers should read this review of George Akerlof and Robert Schiller's book "Animal Spirits". There are some great points in this piece that can be brought into the AP or IB classroom with regards to the assumption of rational behavior and more importantly the Keynesian/Classical debate on Macroeconomic policy issues.

www.lrb.co.uk/...we-simply-do-not-know - Preview

Keynes rational behavior free markets markets macroeconomics animal spirits fiscal policy efficiency

The last two years, in which capitalism has suffered one of its periodic shocks, have given John Maynard Keynes a new lease of life. Events have demonstrated the limits of the theory that economies can be relied on to be stable if they are lightly regulated and otherwise left to themselves. There is now much talk of the paradox of thrift, whereby the rational choices of individuals can prove collectively ruinous, and of the need for government to counteract the inherently anarchic tendencies of markets. Keynes has been revived because he understood that markets are very often irrational. Unfortunately, few of those who urge that we go back to him seem to have understood why he believed this.
Apart from a brief postscript to one of the chapters and a few remarks in the preface, George Akerlof and Robert Shiller’s Animal Spirits was written before the current crisis. Yet, based on research undertaken over many years, it can be read as prefiguring the current disillusionment with economics. The trouble with prevailing theories, in Akerlof and Shiller’s view, is that they assume human beings are more rational than they actually are. ‘This book, which draws on an emerging field called behavioural economics, describes how the economy really works,’ they claim. ‘It accounts for how it works when people really are human, that is, possessed of all-too-human animal spirits.’
3 more annotations...
- ‘Just as Adam Smith’s invisible hand is the keynote of classical economics,’ they write, ‘Keynes’s animal spirits are the keynote to a different view of the economy – a view that explains the underlying instabilities of capitalism.’ Here they are endorsing the caricature of Smith propagated by neoliberal ideologues anxious to confer a distinguished patrimony on an illegitimate intellectual offspring.
- Shackle took Keynes’s argument a step further, and showed that no economic policy can ensure economic stability indefinitely. ‘Keynesian’ policies are no exception to this rule. Deficit financing and monetary expansion may have worked well in the conditions that existed after the Second World War. It is not clear that they will be so effective today, when globalisation has brought a freedom of capital movements that did not exist then.
  - Is old fashioned Keynesian fiscal stimulus enough to solve today's economic challenges? - on 2009-11-14
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- Economics and politics are not separate branches of human activity, and economic life cannot be studied independently of social divisions and political conflicts among populations, along with their cultures and religions.

06 Oct 09

The story of the stimulus - Paul Krugman Blog - NYTimes.com

Paul Krugman tells the story of stimulus...

krugman.blogs.nytimes.com/...the-story-of-the-stimulus - Preview

fiscal policy stimulus package Paul Krugman

10 Jun 08

Obama or McCain - who’s better for Housing Market | Wexzilla - Phoenix | Scottsdale Real Estate

Blogger James Wexler summarizes McCain and Obama's strategies for dealing with America's housing crisis:

"Sen. Obama has suggested $10billion in government funding to help homeowners sell their homes of modify their loans to avoid bankruptcy or Foreclosure.

Sen. McCain feels like this is a bailout. He feels struggling homeowner and borrowers should share the responsibility and if helped should share equity (if there is a gain) with the lender and Federal Government.

Obama wants the government to lend money to struggling home owners. Money which usually comes in the form of higher taxes

McCain has pledged to eliminate (AMT ) taxes. A break that many Americans want (and need). However AMT tax cut with other extended tax cuts leaves less money for such help to home owners. Unless, other government programs are sacrificed. A move, most do not want."

wexzilla.com/whos-better-for-housing-market - Preview

economics housing prices recession fiscal policy

11 May 08

Rebates won't work, say 82% of Americans in poll - May. 9, 2008

The impact of the $110 billion of tax rebates Americans can expect in the mail in the next month is questionable to most Americans: "Only 24% of respondents said they would spend the check on something they need or want. Nearly half - 45% - of those polled said they would use the check to pay off bills, and 22% said they would put it in the bank." \n\nNot looking too good as far as "stimulus" goes...

money.cnn.com/...index.htm - Preview

fiscal policy economics