Juggling With Our Neo-Classical Balls

Brad Delong has an interesting post on the limitations of neo classical analysis, which while it is directed at another topic, is equally relevant in the context of my output gap arguments. Brad puts it so much better than I can, but the point in fact is the same, the 'balls' in my court are human and embedded capital values, technological change, demography, learning and ageing etc, global divison of labour and value etc, etc. This is just so complex that we need to be clear about what we know, and may not know. To whom the gods would destroy, they first give 'knowledge' in order to drive them mad.

Now economists'--at least, neoclassical economists'--standard methodology is to start from a well-functioning neoclassical market economy, impose one distortion or blockage at a time, and estimate its consequences. This methodology is not very helpful as far as this issue is concerned ............ Any assessment of the value of international capital mobility must juggle six different balls in the air at once: six important deviations from the neoclassical framework: irrational noise traders in financial markets, severe moral hazard weaknesses in banking and other parts of the financial system, excessively short planning horizons on the part of governments, the sociology and economics of technology spillovers and technology transfer, the sociological dynamics of retail corruption and wholesale interest-group politics, the importance of well-functioning market-regulating institutions, and our (currently missing) framework for analyzing government failure (the public-choice parodies of such a framework do not yet count). Oops. That's seven different balls in the air.

We economists don't have the tools or the smarts to juggle more than one or maybe two such balls in the air at any one time. As a result, our analyses of international capital mobility are much more like "Gee, I kept one ball in the air, and I think this one was the biggest ball" than like the Flying Karamazov Brothers juggling routines that they need to be.
Source: Semi Daily Journal
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