Sunday, March 2, 2008

The End of Great Moderation- Econ Talk of the Week

Alex Leijonhufvud on great moderation, inflation targeting, cybernetics and economic theory.

Axel Leijonhufvud and a Bit of Autobiography
Some further search uncovered a book in distinguished blue binding, and an intriguing title in golden letters, On Keynesian Economics and the Economics of Keynes: A Study in Monetary Theory by an author with a familiar Scandinavian name, Axel Leijonhufvud. I was completely captivated by this book, and it became my economics bible until I graduated from the University of Copenhagen.

Leijonhufvud presented macro economics in way that made sense (of course, my professors considered him a "minor verbalist" although some admitted, when pressed, that he had a "fine intuition"). He had — with Robert Clower — been one of the first economists to make a reasoned call for micro-foundations in macro-economics, stressing that micro-foundations should be built on rationality assumptions but with great attention to information assumptions. He argued that aggregation was something highly problematic. Implied in this was a break with the general equilibrium model. Modelling should be done, not by postulating ad hoc rigidities, but by examining adjustment processes, "false prices", "rationing," etc.

Leijonhufvud claimed in the book to be able to re-construct Keynes as following exactly such a program. This "economics of Keynes" was a far cry indeed from the "Keynesian economics" that I hated. Leijonhufvud had a great style and he made a provocative argument. Naturally, I became a diehard Leijonhufvudian. Leijonhufvud's book also led me to discover the work of Hayek, and later Kirzner and Mises, as well as Shackle and Loasby. I think it also led me in the direction of Herbert Simon, and therefore ultimately towards the muzzy management stuff that I currently do.

Axel Leijonhufvud: Life Among the Econ

The uses of the past

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