Excellent thoughts from Mark Thoma:
"Physicists are used to thinking about inanimate objects that do not
react to policies or experiments that might affect them. To take a
simple but illustrative example, suppose you tell your TV that you are
about to throw a brick through the screen. Even after being warned, the
TV will just sit there and be destroyed as the brick is hurled its way.
But if you tell humans you are about to throw a brick at them, and the
threat has some credibility, they will take action to avoid harm.
People, unlike the objects physicists are used to working with, won’t
just stand there and let the brick hit them in the head. This introduces
additional complexity that is not present in the models that physicists
rely upon – modeling humans is much harder than modeling brainless
Old fashion economic models were much like the
models that physicists use. That is, expectations were modeled in a way
that did not allow people to move out of the way of the brick even if
they knew it was coming. They were just like the TV. For example,
policies that stimulated the economy by lowering real wages could not be
offset and undermined by workers demanding wage increases. Because of
this, policy was maximally effective.
In modern macroeconomic
models expectations are modeled in a more reasonable way, and agents are
able to take action to avoid the harmful byproducts of macroeconomic
policy. In present day Classical models, agents are sufficiently nimble
to avoid harm as they dance effortlessly out of the way when the brick
is tossed. In these models, policy doesn’t matter at all. In New
Keynesian models agents fully anticipate policies, but frictions prevent
them from fully avoiding harm. It’s similar to one of those bad dreams
where you know the monster is coming, but your feet just won’t move fast
enough to get out of the way. In New Keynesian models, sluggishness
allows the brick to deliver a glancing, but not fatal blow – that is,
policy is effective, but not as effective as when agents do not move at
We have enough racial problems in this country...
59 minutes ago