Behavioral Macroeconomics and Macroeconomic Behavior

By Akerlof, George A. | American Economist, Spring 2003 | Go to article overview

Behavioral Macroeconomics and Macroeconomic Behavior


Akerlof, George A., American Economist


Think about Richard Scarry's Cars and Trucks and Things That Go. (1) Think about what that book would have looked like in sequential decades of the last century had Richard Scarry been alive in each of them to delight and amuse children and parents. Each subsequent decade has seen the development of ever more specialized vehicles. We started with the model-T Ford. We now have more models of backhoe loaders than even the most precocious four-year old can identify.

What relevance does this have for economics? 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 so-called 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 overridden 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 which are central to Ke ynesian economics.

For the sake of background, let me take you back a bit in time to review some history of macroeconomic thought. In the late 1960s the New Classical economists saw the same weaknesses in the micro-foundations of macroeconomics that have motivated me. They hated its lack of rigor. And they sacked it. They then held a celebratory bonfire, with an article entitled "After Keynesian Macroeconomics." (3) The new version of macroeconomics that they produced became standard in the 1970s. Following its neoclassical synthesis predecessor, New Classical macroeconomics was based on the competitive, general equilibrium model. But it differed in being much more zealous in insisting that all decisions--consumption and labor supply by households, output, employment and pricing decisions by producers, and the wage bargains between both workers and firms--be consistent with maximizing behavior. (4) New Classical macroeconomics therefore gave up the assumption of sticky money wages. To account for unemployment and economic fluct uations, New Classical economists relied first on imperfect information and later on technology shocks.

The new theory was a step forward in at least one respect: price and wage decisions were now based upon explicit microfoundations. But the behavioral assumptions were so primitive that the model faced extreme difficulty in accounting for at least six macroeconomic phenomena. In some cases, logical inconsistency with key assumptions of the new classical model led to outright denials of the phenomena in question; in other cases, the explanations offered were merely tortuous. …

The rest of this article is only available to active members of Questia

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Default project is now your active project.
Project items

Items saved from this article

This article has been saved
Highlights (0)
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

Citations (0)
Some of your citations are legacy items.

Any citation created before July 30, 2012 will labeled as a “Cited page.” New citations will be saved as cited passages, pages or articles.

We also added the ability to view new citations from your projects or the book or article where you created them.

Notes (0)
Bookmarks (0)

You have no saved items from this article

Project items include:
  • Saved book/article
  • Highlights
  • Quotes/citations
  • Notes
  • Bookmarks
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Buy instant access to cite pages or passages in MLA, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited article

Behavioral Macroeconomics and Macroeconomic Behavior
Settings

Settings

Typeface
Text size Smaller Larger Reset View mode
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Help
Full screen

matching results for page

    Questia reader help

    How to highlight and cite specific passages

    1. Click or tap the first word you want to select.
    2. Click or tap the last word you want to select, and you’ll see everything in between get selected.
    3. You’ll then get a menu of options like creating a highlight or a citation from that passage of text.

    OK, got it!

    Cited passage

    Style
    Citations are available only to our active members.
    Buy instant access to cite pages or passages in MLA, APA and Chicago citation styles.

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

    1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

    Cited passage

    Thanks for trying Questia!

    Please continue trying out our research tools, but please note, full functionality is available only to our active members.

    Your work will be lost once you leave this Web page.

    Buy instant access to save your work.

    Already a member? Log in now.

    Oops!

    An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.