Chicago and Macro goes the way of the Dodo
by Benjamin on June 18, 2009
Alright then, has everyone now heard the argument that more debt funded government spending will crowd out an equal and opposite private investment or consumption? I’m sure it sounds familiar, because there is something about that story, especially as it is sold by Chicago’s Eugene Fama and John Cochrane very recently.
The story excludes the current circumstance of the economy (recession), it assumes – in its classic form – that the economy is not credit driven, and as Paul Krugman complains: “What’s so mind-boggling about this is that it commits one of the most basic fallacies in economics — interpreting an accounting identity as a behavioral relationship”. In fairness Krugman is only responding to Brad DeLong who goes a little further in lambasting the Chicago guys:
Milton Friedman knew this. Irving Fisher knew this. Simon Newcomb knew this. David Hume knew this. John Cochrane does not know this: does not know that the velocity of circulation is an economic variable rather than a technological constant. I do want to pound my head against the wall. I do not know what else to do…
