Arnold Kling learned his macroeconomics from the same folks who trained Paul Krugman. Kling’s response is somewhat different. Kling has determined that the old “mainstream” macro is pseudo-scientific junk, and he’s happily dumped it in the garbage can of bad science. His new vision is nothing else but a development of the labor side of Hayek’s micro-coordination picture of the problem of unemployment. Kling introduced his Hayekian alternative to “mainstream” macro yesterday:
Mainstream macroeconomics is “hydraulic.” There is something called “aggregate demand” which you adjust by pumping in fiscal and monetary expansion.
I wish to reject this whole concept of macroeconomics. Instead, I want to get economists to think about unemployment in terms of the economic calculation problem …
Back before I tuned out of academic macro, Franco Modigliani could mock the real business cycle model as treating a downturn as a “mass outbreak of laziness.” You could get a real downturn from a productivity shock in a one-good, one-type-of-labor economy. Heterogeneity was not part of he story.
Imagine that we had a central planner. The planner decides what goods to produce and how to distribute them according to his own tastes. The planner does not know the optimal way to allocate resources relative to his tastes, so he arrives at an allocation by trial and error. After enough trial and error, he gets the right number of auto workers, doctors, teachers, and so on.
Then a major event comes along that makes his current allocation wrong. Until he is able to grope his way to the new best allocation, some firms have idle workers and some firms have shortages of workers. In this telling, unemployment results from a calculation problem.
Think of the stimulus package. Why isn’t it immediately putting people to work? Because the planners want to put people to work productively, and it takes time to organize projects that do so. They could have hired people 6 months ago to do nothing, but coming up with useful work takes years.
Now, substitute the decentralized market for the planner. We think of the market as this wonderful calculation mechanism, with wages and prices adjusting to get the optimal allocation of resources. But this calculation mechanism, like our planner, works gradually through a process of trial and error. Like our planner, it can be temporarily overwhelmed by the extent of reallocation required.
Think of our current economy as The Great Recalculation. Our planner (the market) is trying to figure out what to do with former mortgage brokers, real estate agents, manufacturing workers, construction workers, and so on. Which of them should wait for their industries to come back? Which ones should switch careers? Which ones need to go back to school? While our planner tries to figure it out, lots of folks remain unemployed, waiting for the planner to give them clear direction.