The economist Axel Leijonhufvud noticed macroeconomics on the flawed monitor for many years. He was involved with the query of why a lack of coordination in dynamic economies could cause critical crises. An obituary.
Trendy macroeconomics reminds him of trendy Hollywood movies, Axel Leijonhufvud as soon as mentioned. The pyrotechnics work, however there may be a lack of convincing content material. The economist, who comes from southern Sweden however primarily teaches in the United States, was primarily involved with the query of why market economies often get into such extreme crises that relying solely on the self-therapeutic powers of the market is accompanied by unbearably massive financial, political and social prices. His reply was: Market economies are like difficult dynamic techniques during which the needed optimum coordination through markets doesn’t work routinely as a result of the individuals in the financial course of don’t all the time act rationally, as a result of the data needed for optimum coordination shouldn’t be obtainable and since in extreme crises personal and state establishments don’t essentially act optimally.
In his doctoral thesis from 1968 (“On Keynesian Economics and the Economics of Keynes”), which was sensational at the time, he turned towards the prevailing interpretation then and now that the British economist John Maynard Keynes defined crises primarily as the consequence of rigid wages and costs. Keynes’ declaration of the disaster was way more demanding. He thought-about an alternate view, which sees market economies all the time on the very best path so long as the state largely stays out of financial life, to be simply as absurd.
Leijonhufvud responded with the idea of “hall”. He describes minor deviations of nationwide economies from their optimum progress path as innocent phenomena to which the state doesn’t must react. This describes a hall during which nationwide economies can keep with out nice prices. Past this hall, nonetheless, critical and probably lengthy-lasting crises threaten. In lots of works, Leijonhufvud has handled the query of the place the boundaries of the hall are.
In research on inflation, for instance, he traced the adverse results of excessive inflation on the informative worth of firm steadiness sheets and authorities funds plans and thus on the skill to verify the success of politicians and managers. In the case of deflation, he described the risks that consequence from over-indebtedness of personal households for the general financial growth. “I’ve all the time been fascinated by the extremes of financial instability,” the Swede mentioned in an interview together with his colleague Brian Snowdon. He accused prevailing economics of underestimating the function of cash and monetary markets – a criticism that solely turned widespread after the 2008 monetary disaster.
Nonetheless, he by no means turned a elementary critic of market economies; for instance, he made disparaging remarks about Joan Robinson. Nor did he increase any elementary objections to the widespread use of mathematically formulated fashions and empirical work. However he very a lot feared a narrowing of the perspective of the prevailing doctrine by ever extra far-reaching specialization that now not questioned its which means.
It’s nonetheless often requested whether or not macroeconomics wouldn’t be higher off following Leijonhufvud’s put up-1970 analysis program moderately than the concepts of his American rival Robert Lucas, who popularized the idea of rational people in easily functioning market economies. The query is idle. Leijonhufvud was a solitaire who, in his personal phrases, didn’t wish to type a college and who was by no means capable of overcome a pessimistic perspective all through his life: “I am a Swede, so I am by no means optimistic.” (David Laidler names causes inherent in the concept for Leijonhufvud’s failure in a concept-historic perspective.)
The Swede was simply as suspicious of herd formation, which can be not unknown in economics, as the thesis that linear progress in information would make the research of financial historical past and the historical past of financial theories out of date. Axel Leijonhufvud handed away on Could fifth at the age of 88.