HAYEKIAN REALITIES BRING ‘NORMAL SCIENCE’ TO AN END IN MACROECONOMICS

A long period of Kuhnian “normal science” is over in macroeconomics, banking, and finance — the news comes directly from the top guns in science (see also here, here, here, and here.)   What killed it? A series of empirical and conceptual anomalies — Hayekian facts — too immense to ignore.  Hayekian facts like the reality of genuine uncertainty, heterogeneous and non-commensurable expectations, credit, money & leverage generated malinvestment bubbles, and post-bubble malinvestment and labor discoordinations that were ready and waiting to swing down the hammer and remold the science of macroeconomics into something sturdier, something sounder. If you had been paying attention to research scientists like former BIS chief economist William White (Alan Greenspan couldn’t manage raise his head to look White in the eye) you were well aware of what was about to unfold — what was destined to unfold.

Add on top of that the fact of  the general bewitchment of the macroeconomics profession by a series of non-explanatory, causally empty math constructs — which are now being challenged by a whole host of rival conception in finance, macroeconomics, and behavioral economics, etc. — and what you have are the necessary conditions for a period of re-assessment, novel thought, hard work –i.e. a period of what Kuhn called “revolutionary science” where genuine scientific advance is possible — where scientific progress can take place beyond the old conceptual cul de sac of the failed macroeconomics of the past.  (For more on Kuhn and scientific advance, see my paper “Thomas Kuhn and the Differential Selection of Desiderata for Theory Choice Through the Differential Selection of Community Members Acting Upon Alternative Implicit Criteria for Theory Choice.”)

References:

Der Speigel, “The Man Nobody Wanted to Here”.

W. White, “Procyclicality in the financial system: do we need a new macrofinancial stabilisation framework?”

W. White, “Modern Macroeconomics is On the Wrong Track”.

W. White, “Is Price Stability Enough?”.

W. White, “Globalization and the Determinants of Domestic Inflation”.

R. Frydman & M.Goldberg, “An Economics of Magical Thinking”.

R. Frydman & M. Goldberg, “The Imperfect Knowledge Imperative in Modern Macroeconomics and Finance Theory”.

R. Caballero, “Macroeconomics after the Crisis: Time to Deal with the Pretense-of-Knowledge Syndrome”.

D. Laidler, “The Monetary Economy and the Economic Crisis”.

O. Blanchard, “The Future of Macroeconomic Policy”.

J. Stiglitz, “A Balanced Debate about Reforming Macroeconomics”.

R. Reis & M. Woodford, “Conference on Heterogeneous Expectations and Economic Stability”.

D. Colander, Testimony before the U.S. House Committee on Science and Technology.

R. Frydman & M. Goldberg, Beyond Mechanical Markets.

R. Frydman & M. Goldberg, “Financial Markets and the State”.

R. Frydman & M. Goldberg, “Epilogue”.

O. Blanchard, “Rewriting the Macroeconomists ‘Playbook’ in Light of the Crisis”.

W. White, “Comments”.

More on this in the coming days and weeks.

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It is not so well known that it [Keynes's and my own Hayek-inspired move from thinking in terms of price-levels and the rate of interest to thinking in terms of inputs and outputs] is matched by a movement from Hayek to Harrod. I once asked Harrod what had put him on to the construction of his so-call ‘dynamic’ theory; he said, to my surprise, that it was thinking about Hayek. — John Hicks

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