Afternoon Must-Read: Bill Janeway: Doing Capitalism in the Innovation Economy

Bill Janeway: Doing Capitalism in the Innovation Economy: “This entails reconstruction of the core of macroeconomics…

…by drawing on innovative approaches to understanding behavior in the peripheral financial markets. Ricardo Caballero observes: ‘In the context of the current economic and financial crisis, the periphery gave us frameworks to understand phenomena such as speculative bubbles, leverage cycles, fire sales, flight to quality, margin- and collateral-constrained spirals, liquidity runs, and so on–phenomena that played a central role in bringing the world economy to the brink of a great depression. This literature also provided the basis for the policy framework that was used to contain the crisis.’ The challenge remains: to construct integrated models of a financial economy whose participants both are aware of the limits and fragility of their own knowledge and condition their behavior on that of others similarly aware. Whether it will prove possible to generate general equilibrium from such realistic microfoundations remains an open question. Perhaps frustration in that pursuit will encourage alternative efforts…