Sunday, September 02, 2007

Only Inconsistent With Neoclassical Economics

Robert Schiller is at it again, claiming that bubbles are inconsistent with economic theory, and therefore tries to go outside the realm of economics.

"Economists, in particular those at the Federal Reserve, are loathe to believe asset markets have become bubbles because bubbles seem inconsistent with rational investor and consumer behavior, the bedrock of economic analysis. “The notion of a speculative bubble is inherently sociological or social-psychological, and does not lend itself to study with the essential toolbag of economists,”"

He may be right that they are inconsistent with neoclassical economic theory, but he need not leave the field of economics to explain them. All he need to do is study Austrian economics, or more specifically the Austrian business cycle theory.

And besides, going into sociology or socio-psychology doesn't really solve the problem if you intend to remain comitted to neoclassical assumptions. The neoclassical theory has a implicit sociological/socio-psychological theory about the hyper-rational investor, which cannot be changed unless you're gonna change neoclassical theories. Particularly if you're also going to remain committed to neoclassical theories about the neutrality of money and the impossibility that central bank actions will create situations where it could be economically rational for investors to create bubbles, but economically irrational for society as a whole, as the central bank subsidize interest rates for the investor and pledges to limit their damage if they get out of the bursted bubble market too late.


Anonymous Diana said...

Hi Stefan,
check out this article if you havn't already come across it - "DON'T SWEAT OVER THE FEVER, CURE THE DISEASE" by Joergen Oerstroem Moeller.

11:04 AM  

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