Lecture: George Akerlof on Behavioral Macroeconomics
Introduction (Via Akerlof Lecture)
In the late 1960s there was a shift in the job description of economic theorists. Prior to that time microeconomic theory was mainly concerned with analyzing the purely competitive, general equilibrium model based upon profit maximization by firms and utility maximization by consumers. The macroeconomics of the day, the socalled neoclassical synthesis, appended a fixed money wage to such a general equilibrium system. “Sticky money wages” explained departures from full employment and business cycle fluctuations. Since that time, both micro and macroeconomics have developed a Scarry-ful book of models designed to incorporate into economic theory a whole variety of realistic behaviors. For example, “The Market for ‘Lemons’” explored how markets with asymmetric information operate. Buyers and sellers commonly possess different, not identical information. My paper examined the pathologies that may develop under these more realistic conditions.
For me, the study of asymmetric information was a very first step toward the realization of a dream. That dream was the development of a behavioral macroeconomics in the original spirit of Keynes’ General Theory. Macroeconomics would then no longer suffer from the ad hockery of the neoclassical synthesis, which had over-ridden the emphasis in The General Theory on the role of psychological and sociological factors, such as cognitive bias, reciprocity, fairness, herding, and social status. My dream was to strengthen macroeconomic theory by incorporating assumptions honed to the observation of such behavior. A team of people have participated in the realization of this dream. Kurt Vonnegut would call this team a kerass, “a group of people who are unknowingly working together toward some common goal fostered by a larger cosmic influence.”2 In this lecture I shall describe some of the behavioral models developed by this kerass to provide plausible explanations for macroeconomic phenomena that are central to Keynesian economics.
Findings (Via Akerlof Lecture)
It is now thirty years since the revolution that began in growth theory and then swept through microeconomics. The new microeconomics is standard in all graduate programs, half of a two-course sequence. Adoption of the new macroeconomics has been slower, but the revolution is coming here as well. If there is any subject in economics which should be behavioral, it is macroeconomics. I have argued in this lecture that reciprocity, fairness, identity, money illusion, loss aversion, herding, and procrastination help explain the significant departures of real-world economies from the competitive, general-equilibrium model. The implication, to my mind, is that macroeconomics must be based on such behavioral considerations. Keynes’ General Theory was the greatest contribution to behavioral economics before the present era. Almost everywhere Keynes blamed market failures on psychological propensities (as in consumption) and irrationalities (as in stock market speculation). Immediately after its publication, the economics profession tamed Keynesian economics. They domesticated it as they translated it into the “smooth” mathematics of classical economics.92 But economies, like lions, are wild and dangerous. Modern behavioral economics has rediscovered the wild side of macroeconomic behavior. Behavioral economists are becoming lion tamers. The task is as intellectually exciting as it is difficult.