This may or may not relate to the issue of “mathiness” raised by Paul Romer, recently cited by by Joshua Gans and by Mark Thoma. It is from an essay I am working on:
Keynesianism treats the economy as a single business producing one output, called GDP. This modeling strategy focuses all attention on the problem of choosing how much to produce. It assumes away the problem of choosing among outputs or the problem of choosing from among many possible production methods or supply-chain configurations.
This single output, GDP, is produced by a single technique, called the aggregate production function. Thus, the Keynesian modeling strategy ignores the existence of multiple alternative patterns of specialization. Keynesians act as if there were exactly one pattern of specialization in the economy. There is no need to choose among alternative patterns, to discard outmoded patterns, or to discover new patterns.
In the Keynesian framework, jobs are only lost when there is a drop in demand. In the PSST framework, and in the real world, jobs are constantly being destroyed, for a variety of reasons.
Economic progress consists of re-arranging production of output to be more efficient. It is an always-ongoing process that necessarily destroys jobs. A new consumer product makes other products obsolete, or at least less desirable. A new invention or managerial innovation makes it possible to produce the same output with fewer workers. A new configuration of trade uses labor more efficiently…
In the Keynesian story, all unemployment looks like the temporary layoffs that used to occur in automobiles and steel when firms accumulated excess inventories. Once inventory balance was restored, workers were recalled to the same jobs.
In the PSST story, all unemployment looks like structural unemployment. That is, workers who lose jobs will not find that those jobs return in several months, or ever. Instead, displaced workers will have to be employed by different firms, often in different industries.
In the Keynesian story, the process of economic adjustment to a shock consists of arriving at the correct relationships between the money supply and the aggregate price level and between the price level and the aggregate wage. In the PSST story, the process of economic adjustment to a shock requires entrepreneurs to discover new arrangements of tasks that add sufficient value to generate sustainable profits. As with all entrepreneurial effort, this is a trial-and-error process. Some new businesses will fail, generating no sustainable employment. Only a few will be so successful that they create large numbers of new jobs. Sorting out this process will take time.
From the perspective of someone who finds that the PSST story fits well with economic thinking, the Keynesian modeling strategy seems contrived and misguided. By aggregating the economy into a single business, Keynesianism necessarily shoves the phenomenon of structural adjustment and the ferment of entrepreneurial trial and error into the background. Keynesians regard this as a useful simplification. Instead, Keynesianism is more like Hamlet without the Prince.
Because your post started with mathiness, I started thinking about what equations might describe parts of PSST in the scenarios you describe. It seemed to me that one key factor influencing a PSST adjustment to unemployment will be the degree of entrepreneurism in the economy. A proxy for that might be new business formation. It can be influenced both by purely cultural factors (how much do we look up to business people vs. bureaucrats vs. warriors vs. do-gooders vs. priests vs. etc.) and by regulatory factors.
Have you ever tried to turn the PSST story into math (partial or general)?
Max L.
I have a few thoughts on this. He needs several graduate students, the environment, and the desire.
Excellent!
I’m hoping you’ll post a link to the full essay when you’ve finished. I consider your Patterns of Sustainable Specialization and Trade (PSST) conceptual framework to be the most promising contribution I’ve seen in and to macroeconomics in a very long time.
One suggestion though (Sorry, I have to) …
You write, “In the PSST story, all unemployment looks like structural unemployment.” [Emphasis mine.]
I would recommend that be re-written to the effect that structural unemployment be considered/accepted as more prevalent/likely, rather than all unemployment looking like structural unemployment.
Extending your final metaphor, Keynesianism is like Rosencrantz and Guildenstern. They are entertaining characters, and bringing them from the background of the play to the foreground, as Tom Stoppard did, is interesting, but the most interesting thing about the play Hamlet is Hamlet, not R and G.
Arnold, you are too polite to say so, but what emerges from your essay is that Keynesianism, no matter how much the underlying assumptions are dressed up in mathematics, is fundamentally simplistic – too simple to deal with the complex reality of an economy.
It isn’t that specialization doesn’t exist or that changes in production don’t occur, but that they occur all the time without causing recessions. The development of new organizations and processes draw employment and resources away from lesser ones. This seems to be a problem for PSST. It is not change and progress that result in recessions, developments that succeed, or even those that fail, but development of large scale patterns that are only discovered to be unsustainable in retrospect or ones that were sustainable at some level but taken to extremes collapse as bubbles. Newness only matters that it misleads us into pursuing bubbles in the first place and overdevelop them, but this what animal spirits are. Our enthusiastic embrace of bubbles is followed by an equally depressive rejection when they burst, while their promise was always limited and their failure always excessive.
You are getting at the problem. By analogy, Anal (Animal, Jesus autocorrect would you leave me alone?) spirits assume a stomping on the gas,and then the breaks. PSST assumes a wrong or missed turn.
I think this is obviously right. My only addition would be to say that the whole process of looking at national economies in isolation is probably also an oversimplification.
Arnold Kling’s theory of Patterns of Sustainable Specialisation and Trade (PSST) is a model opening up promising new avenues for a more differentiated perception of the economy.
I only hope, he will, one day, make similar efforts at differentiation in his views of the role of politics and the state.
For more, consider especially the two remarks at the bottom of this post: http://redstateeclectic.typepad.com/redstate_commentary/2015/05/hamlet-without-the-prince-of-keynsian-economics.html
Romer explicitly defends aggregate production functions and says Joan Robinson was political, not scientific. First page of http://paulromer.net/wp-content/uploads/2015/05/Mathiness.pdf