Must-Read: George Akerlof (1979): The Case against Conservative Macroeconomics: An Inaugural Lecture

Must-Read: George Akerlof was right forty years ago to say that the “microfoundations” of Lucas and Sargent were simply fake:

Unemployment arising because workers can’t tell what their wages really are because they are unable to observe the prices they pay, and thus confuse a downward nominal shock to incomes and prices with a downward real shock to their wages? The insistence that because most unemployment spells are short the bulk of unemployment that is medium- or long-spell is simply not there?

George Akerlof (1979): The Case against Conservative Macroeconomics: An Inaugural Lecture: “The old classical economics bases its case against the efficacy of fiscal policy on the low interest elasticity of money demand… http://delong.typepad.com/2553741.pdf

…the New Classical Economics argues that no anticipated government policy… can affect real output… not from any special assumptions concerning money demand, but… from…

• first, that aggregate supply depends only on unanticipated price changes;
• second, that expectations are formed rationally; and
• third, that prices and wages adjust to clear product and labour markets….

Long durations [of unemployment] question the New Conservative view that unemployment can be blamed on aberrations of supply owing to misinformation regarding real wages. They are consistent, however, with the standard Keynesian interpretation… in which jobs are rationed…. Job rationing is… consistent with utility maximization… [by] agents… undesirous or fearful of disobeying standard business practice or of supporting such disobedience.