Re: GT and microfoundations

["Alan G. Isaac" <aisaac@xxxxxxxxxxxx>]

Paul,

So now you are saying it is better to be
precisely wrong than roughly right?

It is easy to write down theories that
are internally consistent (i.e., follow
the rules of logic). Responding to the
real world is much harder.

Many mainstream economists are quite
pragmatic and realistic, and they should
not be denigrated for eschewing rigorous
theory in favor of empirical explorations.
While it is true that data interpretation is
always theory laden, it is unfair to treat,
for example, applied monetary economists
as believing in the Lucas (1973 JET) model,
when their writings make it clear that they
do not. (Indeed, I would argue that even Lucas
does not claim that his model is descriptive.)

What were the PK policy predictions in the
face of the growing budget surplus?
(The answer is in the archives of this list!)
Of course this massive predictive failure
can be rationalized in retrospect,
especially by stressing the impracticality
of prediction (even though we all
must predict all the time, and policy cannot
be made without prediction).

But back to the point I raised: how do PKs
differ from the mainstream on the neutrality
of money. I believe you largely dodged this
by mischaracterizing the mainstream.
For example, I claim you simply misread Friedman.
When he says that in the long run money does
not matter he means just what one can deduce
from his entire body of writings:
*not* that it does not matter that the economy
is monetized, but *rather* that the nominal
quantity of money in circulation is not a key
determinant of the average level of real activity.
For example, Brazil and Argentina should
not have expected to achieve high real
growth when they adopted hyperinflationary
monetary policies. Do you deny *this*?

Just to be clear, these are not rhetorical questions.
I want to understand where you stand on this.
In my view there is overwhelming empirical
evidence bearing on this, which I have cited before
on this list. (And, just to be clear, I have never
argued that evidence supports the monetarist
*causal* story.)

Taking a bit more difficult issue . . .
Do you deny that there are many circumstances
in which a one-time, modest, change (endog
or exog) in the level of the money supply has no
important (i.e., policy relevant) effects on consumption
and production decisions after a few years?
If you do not deny this, how does that square with
your insistence that money is never neutral?
If you do deny it,
i. where can I find this conclusion
as a logical deduction from the models you have
laid out in your publications, and
ii. how do you square your view with the real
world evidence?

Alan




paul davidson wrote:

> Call me "old fashioned" but I still believe that theory should follow the
> rules of logic.