Do Microfoundations address the Lucas Critique?

Modern macroeconomics has been endlessly criticized, not only by critics of mainstream economics, but also by many prominent mainstream economists. For example, nobel price winners such as Paul Romer, Paul Krugman, and Joseph Stiglitz have written articles in which they disparage modern macroeconomists. Even economists who have been very involved with such models such asContinue reading “Do Microfoundations address the Lucas Critique?”

Casey B. Mulligan and the Competency Problem in Economics

The other day on twitter I had a conversation I’ve had many times. An economist defending price theory said that Usually, this wouldn’t be very notable. I have lost track of the number of PhD economists I have caught making this mistake. But as I looked into this person’s position within the field of economics,Continue reading “Casey B. Mulligan and the Competency Problem in Economics”

How increasing returns leads to non-neutrality of money

In 1980 an economist called Yew-Kwang Ng published a paper called Macroeconomics with Non-perfect Competition to little acclaim. The paper was cited a few times, and someone wrote a response that entirely missed the point of his argument. The main argument of his paper was largely ignored. Yew-Kwang Ng has written essentially the same paperContinue reading “How increasing returns leads to non-neutrality of money”

Competition with increasing returns to scale

When I criticize mainstream economics for neglecting increasing returns to scale there is one argument that is always brought up. In its most basic form the argument goes: an industry with increasing returns to scale is a natural monopoly. Since most companies are not monopolies, increasing returns to scale must not be common. I haveContinue reading “Competition with increasing returns to scale”

S=I: The most misunderstood equation in economics

The saving equals investment identity (S=I) is probably the most misunderstood equation in economics. Achieving the top rank in this highly competitive category requires an extraordinary level of miscomprehension, and the S=I identity does not disappoint. PhD students and many professors frequently misunderstand it, and misrepresent when teaching their students. In fact, it is sometimesContinue reading “S=I: The most misunderstood equation in economics”

Two Misconceptions about Supply Curves

Often people who go on to study economics are unaware of the misconceptions that Economics 101 leaves them with. In fact, when discussing the problems with introductory economics a few of the defenders of the curriculum will without fail demonstrate these misconceptions. Having recently encountered a few of these misconceptions in the wild I decidedContinue reading “Two Misconceptions about Supply Curves”

Theoretical arguments against decreasing returns to scale

There is actually a fairly well known argument against the existence of decreasing returns to scale. The economist Miles Kimball gives an excellent treatment of the argument on his blog. The argument is also briefly mentioned in some graduate microeconomics textbooks, for example Microeconomic Theory by Mas-Colell and Whinston. The argument goes as follows. SupposeContinue reading “Theoretical arguments against decreasing returns to scale”

Increasing returns and decreasing costs

Before discussing evidence for the shape of cost functions it is useful to go over the relationship between cost functions and production functions. The concepts of increasing returns and increasing costs are often confused in these discussions. Empirical studies do not usually attempt to measure cost functions but instead measure properties of production functions, andContinue reading “Increasing returns and decreasing costs”

The math behind supply curves

When I took introductory microeconomics towards the end of my undergraduate I expected almost everything in the course to be nonsense. Most of the claims of the economics profession that I had encountered seemed to me to be so far from the world around me that I expected the course to be full of errors.Continue reading “The math behind supply curves”

Supply and demand: reasons for scepticism

Supply and demand is perhaps the best known concept in economics. Much of undergraduate microeconomic teaching is based on this concept, and there is general agreement that it is one of the foundational concepts of the field. Even professors whose work involves challenging some of the assumptions of the field refer to it as theContinue reading “Supply and demand: reasons for scepticism”