PrestoPundit

ECONOMIST EDMUND PHELPS

Posted by PrestoPundit on 03/14/2008

on uncertainty and the macroeconomy.   Quotable:

Friedrich Hayek began a movement to bring key points
of uncertainty theory into the macroeconomics of employment — a
modernist movement later resumed when Milton Friedman and I started the
“micro foundations of macro” in the 1960s.

In the 1970s, though, a new school of neo-neoclassical
economists proposed that the market economy, though noisy, was
basically predictable. All the risks in the economy, it was claimed,
are driven by purely random shocks — like coin throws — subject to
known probabilities, and not by innovations whose uncertain effects
cannot be predicted.

This model took hold in American economics and soon
practitioners sought to apply it. Quantitative finance theory became a
tool relied on by most banks and hedge funds. Policy rules based on
this model were adopted at the Federal Reserve and other central banks ..

Current experience is putting these claims to the test.

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