Thursday, April 07, 2011

Robert Lucas On The Impossibility Of Involuntary Employment

As I understand it, so-called Dynamic Stochastic General Equilibrium (DSGE) models are central to contemporary mainstream macroeconomics. Some may want to criticize DSGE on the grounds that they failed to predict the recent global financial crisis. I think a stronger criticism would be that they led their users to believe in the impossibility of current circumstances arising.

I think of DSGE models as having evolved out of trends in macroeconomics started by Robert Lucas. Here is Lucas being sarcastic:
"The first sentence in Malinvaud, The Theory of Unemployment Reconsidered, is 'The term involuntary unemployment makes it obvious from the start that the labor market is one in which supply exceeds demand.' Thus we acquire factual information about labor markets from the terminology earlier theorists have used to describe them!" -- Robert E. Lucas, Jr. Models of Business Cycles. Basil Blackwell (1987).
And here is more:
"A theory that does deal successfully with unemployment needs to address two quite distinct problems. One is the fact that job separations tend to take the form of unilateral decisions - a worker quits, or is laid off or fired - in which negotiations over wage rates play no explicit role. The second is that workers who lose jobs, for whatever reason, typically pass through a period of unemployment instead of taking temporary work on the 'spot' labor market jobs that are readily available in any economy. Of these, the second seems to me much the more important: it does not 'explain' why someone is unemployed to explain why he does not have a job with company X. After all, most employed people do not have jobs with company X either. To explain why people allocate time to a particular activity - like unemployment - we need to know why they prefer it to all other available activities: to say that I am allergic to strawberries does not 'explain' why I drink coffee. Neither of these puzzles is easy to understand within a Walrasian framework, and it would be good to understand both of them better, but I suggest we begin by focusing on the second of the two." -- Robert E. Lucas, Jr. Models of Business Cycles. Basil Blackwell (1987).

1 comment:

Ian Wright said...

As far as I understand it, DGSE is not dynamic in any sense understood in the other sciences. Market-clearing equilibrium is always assumed. So the reality of insufficient effective demand relative to the potential labor force is ruled out by construction.