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What killed macroeconomics?

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By Robert Skidelsky

LONDON ― The problem with quantitative easing (QE), quipped then-U.S. Federal Reserve Chair Ben Bernanke in 2014 about the Fed's bond-buying program, "is it works in practice but it doesn't work in theory." One could say the same about macroeconomic policy in general, in the sense that there is no robust theory behind it. Governments routinely "stimulate" the economy to "fight" unemployment, but with a theory that denies there is any unemployment to fight.

Mathematical refinement aside, economics has returned to what it was a century ago: the study of the allocation of given resources, plus the quantity theory of money. Macroeconomics ― the theory of output as a whole, which was invented by John Maynard Keynes ― has virtually disappeared.

For example, what causes unemployment? The standard textbook answer is "downward wage rigidity." A hairdresser who asks for a wage of $14 per hour, but who can be profitably employed only at $13 per hour, is choosing not to be employed. That choice is thus voluntary, reflecting a preference for leisure, or a decision not to be a hairdresser. The same is true of all workers in an economy. On this view, what is called unemployment is a choice not to work.

The key assumption here is that everyone optimizes: They choose the best available option for themselves. Work is always available at some price. Therefore, unemployment is optimal for the unemployed. Given the assumption, the logic is unassailable.

So, if the government expands the money supply in an effort to increase employment, the only result will be inflation, because monetary expansion........

© The Korea Times

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