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New-Keynesian Thermodynamics

Once, while a good friend was visiting me on a particularly cold winter's night, the temperature in the poorly uninsulated living room of my old Victorian house dropped to a distinctly chilly 62 degrees.   "Can't you make it any warmer?" she asked?  "I'm afraid I can't," I said;  "the thermostat's already on 68."  "Try setting it at 80," she replied.

I didn't indulge her (well, not that way).  But I wonder whether those economists who have been calling for a higher inflation target would have.

  • http://wcoats.wordpress.com/http://works.bepress.com/warren_coats/ wcoats

    What do you say to those economist who want to hit the 2% target rather than raise it?

    • George Selgin

      That's different. I think the 2% target far from ideal, as you know. But whatever its shortcomings those of setting a still higher target "because" we have fallen below 2% are much worse.

  • MichaelM

    It's not a New Keynesian thing, but I've been reading some of Lord Keynes' more recent postings on his alternative 'market pricing' theory that he's naming after cost plus or mark-up pricing. His most recent post (here http://socialdemocracy21stcentury.blogspot.com/2013/11/why-hayeks-theory-of-prices-and.html) pretty directly attacks the idea that prices contain any useful information about supply and demand. However, he's been doing postings pretty exclusively on the topic for a few months now.

    What do you think about this, George? Personally, I feel like there's a little bit of evidential cherry-picking here (he looks at some of the more ossified manufacturing sectors in the global market, notices pretty tight sticky pricing behavior, and generalizes this a bit much), as well as theoretical blind-sightedness (his generalization of this behavior ignores, in my opinion, how even relatively sticky prices can play an important role in coordinating production over the right time horizon), and his overall critique runs up against a serious broad empirical issue (if he's right, why do market economies work at all?), but I'm not really an expert so some thoughts would be appreciated.

    • Lord Keynes

      MichaelM,

      (1) "I've been reading some of Lord Keynes' more recent postings on his alternative 'market pricing' theory that he's naming after cost plus or mark-up pricing"

      It is not "my" theory: it is standard Post Keynesian/(old) American Institutionalist theory, and general heterodox Keynesian theory.

      (2) "His most recent post … pretty directly attacks the idea that prices contain any useful information about supply and demand"

      That is untrue: I say that **mark-up prices/full cost prices/administered prices** do not convey the information imagined by Hayek (and incidentally standard neoclassical theory) given that they are generally inflexible with respect to demand. Of course, this does not deny that flexprice market prices can convey the informational role of Hayek.

      (3) "I feel like there's a little bit of evidential cherry-picking here (he looks at some of the more ossified manufacturing sectors in the global market, notices pretty tight sticky pricing behavior, and generalizes this a bit much), "

      Your charge is simply false. The empirical evidence is robust, based on well sampled surveys from all over the first world *from all sectors*, not just manufacturing.

      And as for why market economies "work", their fixprice sectors work on quantity signals (demand, sales orders, sales volume, etc.), by which output supply is adjusted to demand, via use of inventories/stocks. And they do not have strong tendencies to general equilibrium.

      • MichaelM

        I appreciate the reply, Lord Keynes, but, as I said, these are the impressions of a layman. I'm not 100% confident in any observation I could make here, I just wanted the impressions of someone else who I would trust to better understand what's being talked about.

  • http://rdmckinney.blogspot.com/ McKinney

    Excellent! The current approach has failed, so mainstream economists want to try more of the same! Brilliant!

    • George Selgin

      By your logic, McKinney, if X isn't working, and someone proposes Y, the very fact that Y isn't X makes it a jolly good idea. Now that's what I call "brilliant" thinking!

      • http://rdmckinney.blogspot.com/ McKinney

        Sorry, but I was being sarcastic. I agree with you completely!