The Missing Motivations in Macroeconomics

"The Missing Motivations in Macroeconomics" was written by George A. Akerlof in 2005.

Background

At the end of the 1970's, Keynesian economics was on the decline because of an occurence of increased inflation and increased unemployment. These occurring simultaneously had seemed impossible under the idea of a simple (non-accelerationist) Phillips Curve. However, economic views were also changing because world views were changing.

Many felt that the simple ideas used in Keynesian economics, increased inflation means decreased unemployment, were too simple. These economist believed that macroeconomic relations should be derived from economic principles: behavior of profit maximizing firms and utility maximizing consumers. These thoughts had a significant impact on macroeconomics because they did not reproduce the standard macroeconomic models. They produced five neutrality results:

• independence of consumption and current income
• Modigliani-Miller Theorem
• natural rate theory
• inability to stabilize output in the presence of rational expectations
• Ricardian equivalence

The purpose of this article is to understand people's preferences including the norms that reveal how they feel they, and others, should and should not behave. Although this is generally an idea in sociology, economists look at statistical relations to understand people's judgments.

The Missing Motivation: Norms

Each neutrality is based on the idea that decision makers are also utility maximizers, the functions have been narrowly described. The functions of decision makers depend only on real outcomes. According to Vilifredo Pareto people have opinions how they and others should (and should not) behave, and they lose utility if they or others fail to meet these behavioral standards. "Such notions are central motivation in sociology, but they are absent from economists' representations of utility." These views are called norms.

The Five Neutrality Results

• Ricardian Equivalence

• Dependence of Consumption on Wealth, not Income

• The Modigliani-Miller Theorem

• Natural Rate Theory

• Rational Expectations