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"Too many" economists. Like who, Simon? Give us names! A long list of names.

I don't think he can do it. He can't because all economic models and theories embed ad hoc assumptions. (Btw, I've addressed this complaint before, here.) So why does he say things like this? I'm not entirely sure. 

 

He seems to want to tell us that nominal wages are sticky, something that standard economic theory is evidently incapable of explaining, and that a set of economists belonging to some sort of commission have made terrible policy mistakes by ... um, refusing to admit that wages are sticky ... because economic theory cannot be used to support the observation? I am confused. 

 

I am also confused about what the following statement has to do with his opening complaint:

 

Now, let's see if I understand. Some economists evidently believe that the "output gap" cannot be very big because, if it was, we should be seeing deflation. Let me point out that the very concept of an "output gap" relies on the presumption of sticky nominal prices -- an ad hoc assumption forming a center piece of NK theory. So what Wren-Lewis appears to be saying here is that his ad hoc assumption is better than their ad hoc assumption. This may very well be true--but again, what it has to do with his original complaint, I have no idea. 

 

No big deal. Wren-Lewis, who I think usually makes for a good read, was maybe a bit sloppy on this occasion. I can certainly relate. Let's just move on. 

Oh, but no. Nope. My favorite curmudgeon has to take an unsolicited hand-off and proceed to let loose his canon (ha ha) here: Sticky Wages and the Macro Wars. 

 

O.K, we get it. Nominal wages are sticky. But it is important to understand precisely what he means by this. In particular, he does not just mean that nominal wages appear not to move very much in the data. We can all see that. What he means is that the reason they do not move is beyond the comprehension of standard economic theory. He makes this explicit here, where he says:

I’ve written quite a lot about sticky wages, aka downward nominal wage rigidity, which is one of those things that we can’t derive from first principles but is a glaringly obvious feature of the real world.

Well, it is my humble opinion that he is just plain wrong. We've known since at least Barro (1977) that spot wages are not "allocative" in job-worker relationships, where bargaining (and not any auctioneer) determines the terms of trade and how these terms evolve over time (I discuss this at length here).  In short, wages can "look sticky" empirically, even if they are not theoretically. Let me also refer you to this interesting paper by Eichenbaum, Christiano and Trabandt (2013). This latter paper belongs to a class of papers (see Hall and Shimer, in particular) who "microfound" price rigidities via bargaining theory. In a nutshell, the details of the bargaining process matter and this is something that is (deservedly) receiving a lot of attention by theorists. (I may be wrong, but I never see Krugman citing such work. Either he finds it uninteresting, or wrong, or ... ). 

 

But enough of Krugtron. As for Wren-Lewis, I think his main message is for young economists: do not to be led into thinking that every macroeconomic theory needs to be "microfounded." That's fair enough advice. But by the same token, young economists should also not feel threatened or bullied into thinking a priori that social phenomena are beyond the reach of economic theory--especially when such sermons are delivered by bitter Nobel-prize economists still suffering from the intellectual wedgies applied to them in their youth.