Monday, May 21, 2012

Lies your teacher told you

1. That Solow, Samuelson, and all those other crude, naive Old Keynesians thought the Phillip's Curve was a structural relation. Not true guys (HT Robert Waldmann). Lucas drove the point home in a very valuable way, but like many great critiques, he had to trump up the charges to really make his point (Keynes did this too, of course).

2. And speaking of Keynes, the other thing you often get from people is the impression that nobody cared about rational expectations and forward looking behavior before the 70s and 80s. There is a grain of truth to this. The old models abstracted from that, but that doesn't mean the economists that came before the models ignored the point. Jonathan shares a great passage from Keynes which, when I read it, sounded like it could have been the introduction to a seminal article on rational expectations fifty years later:
"The psychological time-preferences of an individual require two distinct sets of decisions to carry them out completely.  The first is concerned with that aspect of time-preference which I have called the propensity to consume, which, operating under the influence of the various motives set forth in Book III, determines for each individual how much he will reserve in some form of command over future consumption. 
But this decision having been made, there is a further decision which awaits him, namely, in what form he will hold the command over future consumption which he has reserved, whether out of his current income or from previous savings." (the General Theory, page 166).

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