Jonathan Schlefer

AssumptionsThere are no mathematical requirements for Assumptions, but there are thinking requirements. The book is about what economists do in their secret lives as economists, when they aren’t dashing off op-eds to tell everybody else what to believe, pulling the wool over undergraduates’ eyes in textbooks, or otherwise engaging in public relations. What economists otherwise do is make simplified assumptions about our world, build imaginary economies based on those assumptions – otherwise known as models – and use them to draw practical lessons. In fact, we all do much the same thing less formally when we think about economies, since the real world is way too complicated to understand in all its multitudinous detail. I explain the structure of models in words because nobody disputes the math, and readers of this book don’t need to be dragged through it. But grasping the intuitions that good models capture still demands thought. And the real disputes arise about assumptions that underlie a model, how to interpret it (what might this abstraction legitimately be interpreted as implying?), and whether it is at least not wildly inconsistent with experience. Where these disputes arise, my approach, as it was at Technology Review, is not to simplify but to roll up my sleeves and explain.

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  1. shinichi Post author

    The Assumptions Economists Make

    by Jonathan Schlefer

    Be warned: as a card-carrying political scientist, I may entertain a certain smoldering envy toward the imperialistic powers of the social sciences—namely, university economics departments. But my outsider’s perspective has its uses, since I am duly startled by features of the economics landscape that economists barely notice, so inured have they become to them. Moreover, I’m curious about economics. You need curiosity to write about anything you might criticize, because otherwise you never spend the energy and thought to figure out what it says in the first place. And sometimes when you figure out what it says, criticisms you thought you had evaporate, strengthen, or otherwise change.


    Lucas’s model is monetary — it assumes an unchanging technology — but Kydland and Prescott incorporate technology. In particular, they assume that the same “real” force that neoclassicals see as driving long-run growth also drives business cycles: technology-induced changes in productivity. Positive technological shocks increase productivity, causing upturns and increasing wages, thus encouraging everyone to work more and sacrifice some leisure. Negative shocks reduce productivity, causing downturns and reducing wages, thus encouraging everyone to work less and enjoy more leisure. On this theory, even though Kydland and Prescott preserve the neoclassical production function, the real wage can actually rise during upswings, as it is often observed to do.

    There are just a few problems. Well, quite a few. RBC models suppose that productivity shocks generate business cycles, but they measure productivity by the Solow residual. Nothing says the Solow residual — that measure of our ignorance — actually captures technology. It just rises and falls when growth rises or falls.36 As mentioned, it ran backward during the Great Depression, presumably because the economy shrank, and then it surged during World War II, presumably because the economy surged. RBC models are a tautology: business cycles occur because growth surges and declines.

    Worse, not only are these models a tautology—they are a tautology that turns out to be wrong. They say that employment rises or falls because actors choose to work more when productivity is high and less when it’s low. This idea is nuts.


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