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Thursday, February 3, 2011

New Economic Thinking? Not Likely!

You may find this interesting.

Everyone (except macro economists, Nobel Prize winners, et al), agree that modern macro economic theory is an utter and complete failure.

George Soros funded an organization which he chose to call The Institute for New Economic Thinking.

Since, as you know, I think the Business Cycle completely explains all economic behavior in developed countries, I thought I would take a shot at getting some of George’s money with an off chance of actually providing an alternative to modern macro economic thinking.

It is also important to understand that there is absolutely no

place in modern macro economic thinking for Business Cycles, which is why they keep babbling about finding equilibrium points. That is in spite of hundreds of years of history that demonstrates the nonsense of finding equilibrium points.

Anyway, the enclosed proposal was rejected out of hand (by modern macro economic professors).

A New Approach to Macroeconomics

A Proposal

The existing theories of macroeconomics have proven virtually useless in the past three years. Here is a timely example. Unemployment in the U.S. is currently about 10% and has been at that level for many months now, and shows no immediate signs of improving in spite of the happy talk from Washington. One camp of macroeconomists (see Summers) insists that those people are unemployed because they are lazy and they will all go back to work as soon as their unemployment benefits run out. The other camp (see Stiglitz) insists that the unemployed are incompetent and that is the reason they are unemployed.

When those two theories are put to the test of describing reality, they become just plain ludicrous, no matter how many Nobel prizes their authors have received.

The Bureau of Labor Statistics says there are now five applicants for every job opening. Four of those five people will remain unemployed, not because they are lazy or incompetent. They will remain unemployed because there is only one job opening.

The larger point here is that most current macroeconomic thinking has no basis in reality, and that is the main reason that it is useless beyond creating elegant mathematical theories, getting invited to speak at conferences and as a basis for securing tenure in some economics department filled with like minded people.

One more example before we leave the dis-connect between macroeconomic thinking and reality. The “Cash for Clunkers” bill was based on a theory that such purchases would stimulate the economy. Anyone with any experience in reality would have known that all that was going to happen was that sales would be shifted forward into the “discount” period, and fall as soon as the “sale” was over. And that is exactly what happened.

The idea for this proposal is that a serious revision in macroeconomic thinking is most likely going to come from outside the present economic theory community.

The Basic Idea Supporting This Proposal For New Macroeconomic Thinking

The Business Cycle is one indisputable fact of life in every developed economy over the past five hundred, or so, years. It recurs again and again, and always with the same characteristics. The economic thinkers who have bothered to even think about these facts have concluded that “shocks” to “supply” or “demand” are the explanation for the expansion and then contraction of economies. This disagreement is close to the one about how many fairies could dance on the head of a pin.

In reality, the Business Cycle is driven by psychology, not finance, and certainly not economic theory. However, lending is the mechanism that enables the expansion/contraction cycle that is the Business Cycle. This proposal is for a research project to demonstrate the connections between consumer psychology, the expansion and contraction of the economy, and the lending mechanism that facilitates it.

A Note

This proposal may have two shortcomings.

1) I am not an economist. I do have a PhD from the Graduate School of Business Administration, University of Southern California. In order to graduate, I passed the written test in economics. My recent book, The Great Recession Conspiracy (available at and as a Kindle book) concerns the reality of Business Cycles and the government policies that would be most appropriate.

I have spent my career studying consumer behavior (which, presumably is what economics is about) so I know a great deal about how actual people make decisions, and why they do. (The Role of Risk in Consumer Behavior, Journal of Marketing, 1974, et al). In addition, I have had management positions in two major corporations, and I have been a principal in three small businesses. In short, I have had considerable practical experience with how the economy actually works in addition to an academic career.

2) I do not have a current university affiliation. However, if this proposal is funded, I will recruit an associate from the University of California Irvine where I was a visiting professor. But the good news is that no overhead charges will be required in the budget.

What Is The Problem and Why Is It Important?

The fundamental problem is that the Business Cycle is poorly understood, if at all, by economists. As a result, government policies are continually developed that are utterly inappropriate for effective dealing with the economy. One example; in over five hundred years of observing Business Cycles, the characteristics are remarkably consistent. One characteristic is that the economy under study is either expanding or contracting, and there has never been an equilibrium point where the economy was neither expanding or contracting. Yet economists continue to talk about "ending the bubble", or some version of the idea that there is an equilibrium point.

Such an equilibrium point only exists in macroeconomic mathematical models; it does not exist in real life. As a result, misguided economic policies are continually implemented that are wasteful and useless at best, and counter productive at the worst.

And that goes to the heart of this proposal. Much of current macroeconomic theory does not describe, or reflect the way real people make decisions about their lives and how they deal with their assets and liabilities.

Against a broader canvas, there is now a debate raging in Congress about further stimulation of the economy, or new programs aimed at deficit reduction. Neither proposal displays the slightest understanding of the Business Cycle.

The importance of this project lies in its ability (perhaps) to provide useful guidelines for government policies that are based in reality, not theory, and will actually work to the benefit of the economy and the citizens of the U. S. Those guidelines are exactly what are missing from current government policy.

It is easy to promise great changes coming to government policy based on new data. The president likes to say he favors fact and data based plans. If this project is successful, perhaps it will give him (and succeeding presidents) a fact based method of developing economic policy. But the reality is that the usefulness of the results of this project depends on the whimsy of politicians, and it would be a mistake to over promise.

The Research Project

This proposal is a direct response to the challenge presented by; “In the absence of rigorous testing of the empirical validity of each of the competing theories, the debate concerning theories and implications of business fluctuations appears to be vacuous.” (The Business Cycle”, Theories and Evidence. Proceedings of the Sixteenth Annual Economic & Policy Conference of the Federal Reserve Bank of St. Louis, 1992)

This project will examine the relationship between the Gross National Product (NBER series dates) and a series of data that reflect the realities of the Business Cycle. Regression analysis would be the tool of choice.

Financial variables:

Fed Funds Rate

Libor Rates

Loans Outstanding

Direct variables:

University of Michigan Consumer Confidence Index

Conference Board Consumer Confidence Index

Purchasing Agents Index


Indirect variables:




New Mortgages

Credit Cards Issued

New Housing Starts

New Business Licenses

Business Failures

Late Credit Card Payments


Auto Sales

Personal Bankruptcies

Bank Robberies

And undoubtedly, there will be others. The objective is to find leading, lagging and co-incident variables to better understand the working of the Business Cycle. Even if there is no measurable correlation between any of these variables and the expansion and contraction of the economy, this would be a finding of consequence.

Budget and Time Table

I have managed dozens of exploratory research projects, and the one lesson I have learned is never commit to a fixed budget until the outlines of the project are very, very clear. Every time, new directions, new ideas, new facts emerge from exploratory research that sends the project in new directions. But, based on a rough estimate of two senior researchers @50/hour, plus UCI computer time, a budget in the area of $50,000 to $60,000 seems appropriate. A time table of approximately six months is probably a good estimate.


The primary focus would be on Congress first. Then on business media, i.e., Wall Street Journal, Financial Times, Bloomberg Business Week, Economist, etc. General media would also be included, i.e., New York Times, Washington Post, Los Angeles Times, etc. Selected economic journals would also be included.

There is the possibility of a book, but that is getting way ahead of the story.


Reinhart and Rogoff say, “No matter how different the latest financial frenzy or crisis always appears, there are usually remarkable similarities with past experience from other countries and from history. Recognizing these analogies and precedents is an essential step toward improving our global financial system, both to reduce the risk of future crisis and to handle catastrophes when they happen.” And a little later they say, “Countries, institutions, and financial instruments may change across time, but human nature does not.” (This Time Is Different, 2009)

Current macroeconomic thinking is virtually useless because it is entirely controlled by academics that are completely committed to mathematical formulas that they claim represent actual human behavior. There is enormous evidence they do not reflect any recognizable economic reality. The direct result is that large amounts of money are being wasted by the government, there is extensive human suffering from unemployment, and millions of hours of productive labor are being lost forever because current macroeconomic theory is useless for formulating government policy.

It is way past time for someone to yell out loud, “The emperor has no clothes!”

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