In search of search theory

I have previously suggested that there could well be an externality in the labour market that encourages unemployment. In case anyone is interested, my most recent material on this on the internet is here.

> The Economics Nobel (yes, yes, Bank of Sweden etc, I know)

Equivocations like this seems fairly common, but I don’t know how to interpret them. If you think it’s a Nobel price of similar prestige to the others (with a slightly different history, true), then just roll with it and omit the throat-clearing. If you think its corrupt bastardization by the Sveriges Riksbank then either say so, or if that’s off topic (probably it is here) then just don’t mention the “honor” at all.
This “a Nobel was awarded [but, I hear and give nod to you all you who think it’s not a real Nobel] ” stuff seems a bit cowardly.

The internet effects on job search are only slowly grinding through Australia as far as I can see. Sure, we now have job search sites and online application processes for low-paid jobs, but it’s still a very manual process and there is a high dependence on recruiters once you’re above the median wage. IMO, obviously.

Most of the job hunting I see (and have done) is still based on the old model – make a CV, send it in response to an ad. It still goes to a recruiter who still talks to me and the potential employer and blah blah blah. Just like the 1980’s. We’ve trimmed maybe 2-3 days off the process using cellphones and email, but even that is very hit and miss.

There’s only a very slow switch to using social media like LinkedIn to actually find candidates directly. That’s where the dramatic change in search should be. Rather than knowing other people in the industry and asking if they know anyone, or fishing using an ad or recruiter, the employer can find every single eligable person within a given area who is thinking of changing jobs, and ask them directly.

I don’t see low-paid work being vulnerable to search optimisation until there’s a shortage of potential employees in those jobs. That “search” cost is determined by enemployment levels since to be counted as unemployed those people have to be actively looking for work. So the cost is really set by governments that regard 4% unemployment as a disaster to be corrected by importing labour or shrinking the economy.

“If search models aren’t the right way to think about unemployment, what is the right way?”

General glut.

But since such a think is not permissible just about anything else will do in a pinch. Price only equilibrates demand and supply under a host of special conditions, which of course do not obtain in the actual political economy of labor.

The anonymous 1821 pamphlet, “An Inquiry into Those Principles Respecting the Nature of Demand, and the Necessity of Consumption…” explains everything.

Job search to me looks like it would be best modelled by queueing theory; there are a bunch of people looking for a job, and employers get to pick the entries from the queue according to their preferences. Which makes it kind of like a priority queue, assuming employer preferences between employees are reasonably correlated.

On that model, increased efficiency in the job search process corresponds to the employer being able to look more closely at a larger number of candidates at constant cost. Or in other words, a _lengthening_ of the queue.

This is the same effect as seen when cheaper RAM lead to routers being misconfigured with too-large buffers;

By basic maths (http://en.wikipedia.org/wiki/Queueing_delay):

The maximum queuing delay is proportional to buffer size. The longer the line of packets waiting to be transmitted, the longer the average waiting time is. The router queue of packets waiting to be sent also introduces a potential cause of packet loss. Since the router has a finite amount of buffer memory to hold the queue, a router which receives packets at too high a rate may experience a full queue. In this case, the router has no other option than to simply discard excess packets.

Translating the model back to being about humans should be straightforward.

Why, it’s almost as though google can’t find you a job which doesn’t exist. And, as though, with almost endlessly extended unemployment benefits, you had options other than taking a job!

Seriously, part of the problem is that both ends of the search are not looking for a perfect fit to the other, but to get a better deal than that perfect fit. So, the whole process isn’t as transparent as you’re making it out to be.

An interesting natural experiment is that they, not long ago, stopped extending the unemployment benefits. In theory, this should cause unemployment to go down. Did it?

The Internet has the potential for being an efficient search methodology, but it often isn’t used that way. Nobody wants an efficient market except economists. Efficient markets occur, to the extent they exist, despite the best efforts of sellers, not because of them. (And employers, although formally buyers, are sellers as a practical matter, in all but the tightest of labor markets.) As Alan @ 13 pointed out, the Internet is usually devoid of price information. Just ask the ghost of Steve Jobs about labor monopsony, or any HR professional on truth serum about withholding information from employees.

Maybe internet has helped companies set up schemes to find people that fit in any given box they like to define. But it didn’t help the unemployed to have a chance to explain that although they don’t quite fit that list, they might be a great person for that job. Especially in the longer run .. as job specifications won’t stay the same for ever.

Its been decades since the private sector has been able to create enough jobs to absorb new labor market entrants.

Explosive growth of world wide population in the late twentieth century, meaning alot new labor markets entrants each year worldwide for decades than the economy can really absorb, plus the world hitting peak liquid fuels production in 2005 and its resulting effect on growth, plus growing automation, and people wonder why there are declining real wages and increased unemployment. I remember reading predictions in the 1970s that this would happen. Countries with low birth rates and low rates of immigration, such as Japan, have been able to limit the effects, but of course can’t escape the increased automation and the resource constraints on growth.

Having done a job search in 2012, I am not so sure about the premise of increased efficiency. In my field (programming), there’s a huge proliferation of job sites for posting both resumes and job offerings, which creates a huge amount of noise. Companies are completely inconsistent in what they ask for. Some require you to upload a resume and then fill out a custom application on some terrible web app that repeats what you just sent them. Then there’s the problem of companies whose requirements are just lies: they ask for 10 years of iPhone development experience. And as a searcher, your incentive is to throw your resume at them, because there’s no way for them to signal seriousness–over half my interviews were for positions where I had not fully matched their requirements.

There’s some efficiency to being able to submit job applications from my living room, but as soru points out, this can just increase the load on the employer to screen applications.

In the end, I got a job because a friend of the family sent my resume to a friend of hers. Anecdotally, these kind of network effects still seem to have a huge influence, which doesn’t fit with the premise that searching has gotten more efficient.

Brett Bellmore 07.10.14 at 10:48 am

” Why, it’s almost as though google can’t find you a job which doesn’t exist. And, as though, with almost endlessly extended unemployment benefits, you had options other than taking a job!”

Coherence never has been your strong suite, has it now?

Thanks, Layman. I don’t expect Brett to learn from that, but in his favor, that merely puts him at a Chicago-macro level of honesty :)

As with other commenters, I don’t think you have a smoking gun here. In fact, I think you’re just plain wrong. There’ s been plenty written about the problems with internet job search. There is very little evidence that it is helping. Until you establish otherwise, you haven’t proven anything.

Not to say that the search based theories are correct. Just that job search experiences in an internet search age says nothing about it one way or the other.

Where are you getting the idea that we’re not creating enough jobs? During boom conditions (like the late 1990s), we were and are – unemployment was below 4%, labor force participation was ticking upward, and that was all happening at the same time as a massive increase in illegal migration from Mexico for work.

My points are hardly inconsistent: Some people can’t find jobs because the jobs they need aren’t there to find. Other people ‘can’t’ find jobs, because the difference between unemployment and having a job isn’t enough to motivate them to get a job. Both contribute to the high rate of unemployment, they don’t have to represent the same unemployed people.

My personal opinion is that the government shouldn’t pay people to not work. But maybe the government could reasonably be the employer of last resort, as with the CCC.

Brett #28: “Where are you getting the idea that we’re not creating enough jobs?”

Because the employment-to-population ratio hasn’t budged. In the U.S. the unemployment rate has dropped predominantly because people stop applying for benefits, so they aren’t counted as unemployed. The inverse of this graph would be the unemployment-to-population ratio. Here is the U.S. evidence:
http://research.stlouisfed.org/fred2/series/EMRATIO

In the same way that “search is not really about searching,” the entire edifice of New Keynesian economics (a la Mankiw) surely has the same problem. The line was always “menu costs are not really about menu costs” (i.e. the direct cost of printing new price lists) yet that’s how the models were always motivated. In the same way that the Internet should have lowered search costs, it should have lowered the direct costs of price adjustments, the supposed 2nd order benefits of changing prices (compared to the cost) then disappears and the whole story about sticky prices is gone.

@Lee Arnold

Because the employment-to-population ratio hasn’t budged. In the U.S. the unemployment rate has dropped predominantly because people stop applying for benefits, so they aren’t counted as unemployed.

The actual growth rate in the economy isn’t fantastic, though – real GDP growth has been below 3% for the past two years, and it’s way down from the 4+% growth we had from 1996-2000. You can see that with this FRED graph as well.

That was my point. There’s no broader “lack of jobs” crisis beyond the fact that we’re in a weakly growing economy. The trend line on labor force participation rate mostly matches that.

This is all very erudite, and I feel my limits here. But…John, have you ever worked in private industry? Because search isn’t the problem and the internet only helps a little, any HR manager will tell you that.

The risk of failed hires and the difficulty of letting people go are big factors at work here. It’s hard to hire new people, and it’s expensive when a hire doesn’t work out. Conversely, it’s hard to let people go.

Look, let’s say a business has enough extra business that they need to create a new position. First, the company looks around internally for someone they can promote. The advantage there is that they’ve got someone who is already a known quantity, who they know they can work with. If necessary, that person’s position can be filled by a more junior hire—less expensive and less risk. If they can’t fill the position that way, they start the process for an outside hire. The job is posted and the hiring manager and HR look around for someone outside the company they already know to hire.

You can kind-of see that search is the least problem here. In hard times, job seekers will search very hard. Demand is the problem.

academic macroeconomics is in a bad way

Does this mean you’re feeling more positive about heterodox economics?

“There’s no broader “lack of jobs” crisis beyond the fact that we’re in a weakly growing economy.”

I think it’s a bit more serious than that. I doubt we’ll see the job participation rate in the US improve to pre-2008 levels for many years. For that to happen:

– The number of jobs created has to exceed the long term trend in population growth; that requires some 3 million new jobs per year or 250,000 per month;
– On top of that, we need the jobs to fill the gap between the current labor participation rate (about 63%) and the target (about 67%). With 150 million people in the potential labor force, that’s another 6 million jobs just to recover our losses. To close that gap in 5 years requires 100,000 new jobs per month. However, CBO forecasts that the labor force participation rate will not improve by 2021.
– The last year in which we achieved anything like this growth (350k per month) was 1994.

With US businesses focused on extracting greater productivity (and profits) from relatively fewer employees, I think this is the new normal. And M. Picketty has done a good job of convincing me that real per-capita growth rates of 3 or 4 % are an aberration.

” Keeping the unemployed out of prison does not create nearly as many jobs.”

How does paying people unemployment, which they then spend on good and services not create jobs?

When I rethink it, that may be wrong. It’s a complicated thing that’s hard to measure, and I was trying to imagine how it could go. When somebody gets arrested they provide jobs for the legal system, but maybe not all that much. Then after maybe a year or so, if they wind up in maximum security it costs something like $50,000/year to keep them there. That’s an old number, it might be different now. I don’t think it’s very many people who get $50,000/year in unemployment compensation, but I could be wrong. I guess I could look that up.

OK, as of 2010 the goal was to provide half the employment income. That would be $50,000 for a $100,000/year job. But in practice unemployment checks were about 40% of the goal. That’s enough to say it’s mostly less. However, lots and lots of people don’t wind up in maximum security.

http://www.lao.ca.gov/PolicyAreas/CJ/6_cj_inmatecost
This is an estimate for California in 2008-9. $47,000 per inmate. California cost is likely to be high, but then costs have likely risen considerably since 2008. The breakdown appears not to include anything for prison construction, only maintenance. There are various ways this number could be wrong in either direction but I’ll go with it for now.

Mean annual wage was $46,440 in May 2013. So we spend as much on behalf of each inmate as the average worker gets as gross income, considerably more than unemployment benefits. And the ones that wind up in prison were likely making less than average pay before they lost their jobs.

I’m not sure whether it matters that unemployment insurance is yet another insurance scam. Employers and employees pay into the fund, and then when the inevitable unemployment comes some money comes back. If employers instead just gave the money to their employees while they worked, the employees could save it or spend it, and probably spending would be higher than it is.

But then, there’s no particular reason to think businesses would give that money to their employees rather than keep it for themselves, maybe put it into T-bonds or give it to owners to put into T-bonds. When we look at what would inevitably happen if we didn’t do it this way, I lack confidence I know what the alternative would be.

Some thoughts:

– while the searching technology improved, the reservation wage may have gone up. E.g. recent college grads who can live at home with their parents with a fair amount of amenities as opposed to decades ago when this option was less palatable. Unemployment benefits were also extended in length in US.

– I am not sure that search was used to explain cyclical fluctuations. What is the reference here? I have always thought of search as explaining mainly the structural part of unemployment, not the cyclical one. After all, as you say, to explain cyclical unemployment you still need an exogenous shock.

– The above point also explains the problem with search in macro. If search is the main tool to explain unemployment and search can mainly explain the structural part, cyclical unemployment falls off the picture. It is stunning to me how many mainstream and otherwise talented macro-economists just can’t bring themselves to recognize the involuntary component of unemployment, which seems pretty standard in a keynesian approach. Instead the focus becomes the utility maximization of the unemployed so that the unemployed are always choosing to remain such.

– Higher uncertainty increases unemployment if the mean of the wage distribution remains the same but not necessarily otherwise. A higher variance won’t make you wait longer for a better offer if the expected value of that offer has become lower, as it happens in recessions. You may have just to settle for a so and so job.

– It is a nice post, I wish there were more wonkish posts here.

“If employers instead just gave the money to their employees while they worked, the employees could save it or spend it, and probably spending would be higher than it is.”

Of course, employees who didn’t save it, or didn’t save enough, and then lost their jobs, would starve. Every alternative scheme to avoid social safety nets eventually runs into this question, what to do when personal responsibility falls short. The answer is either “eff those lazy people” or “have a social safety net”. Maybe you choose the former, I don’t know. But if you don’t, then the proper realm of debate is over the form of the safety net, not whether it exists at all.

All of the recoveries in the US postwar period have a striking regularity:

http://informationtransfereconomics.blogspot.com/2014/07/remarkable-recovery-regularity-and.html

I can’t imagine a story that involves the internet** (having only existed for the last couple of recessions in the US) has much to do with how quickly the unemployment rate falls unless every effect of the internet exactly cancels (increased queue size per comments above, reduced search costs and times per John’s original post). Occam’s razor would suggest that you could just leave the internet out of any explanation.

** In place of internet, you could put unemployment benefits, government spending, inequality … or any of the other factors that have changed since the 1940s to today.

Of course, employees who didn’t save it, or didn’t save enough, and then lost their jobs, would starve. Every alternative scheme to avoid social safety nets eventually runs into this question, what to do when personal responsibility falls short.

Brett Belmont is concerned that when society takes too good care of people, they won’t take good care of themselves. So if they enjoy living on unemployment they won’t start looking for work until the unemployment money is about to run out.

This doesn’t make sense to me when I think of it from the point of view of an unemployed person. I can hope to get 40-50% of what I was paid at my last job, but often it’s less. This is not a lot of money. It’s pleasant not to have to work, but there’s the worry what happens next. The longer I don’t have a job, the harder it will be to get one. It’s bad for people who fall into depression, who get up and play video games or something, eat a pizza and go back to bed, don’t wash don’t shave feel worse and worse with that sense of dread growing…. I don’t want to be him.

But thinking as an employer it makes perfect sense. If my employees think they’ll starve if I fire them, then they will be *good* employees. If they’re desperate for work from the first day they lose some other job, then I can hire them cheap and they’ll be grateful. Anything that makes my employees less scared is a moral hazard for them. What they need to do is whatever I want them to, and anything which gives them the illusion of freedom is evil. If you pay them to not work, then they won’t work. It’s as simple as that. Maybe a very few of them will starve, but those will serve as an example to the rest and all the people who do the right thing as a result more than make up for them.

Speaking for myself, I think people are answering the wrong question. I don’t want people to be that desperate unless we have a famine or something. And when people get stuff that isn’t wages, that isn’t them mooching off society.

I think we should give the basics to everybody, just for existing. Particularly with our high-fixed-cost low-variable-cost automated stuff, what it costs society to double production is far less than what it cost to set up the production lines and make the first 50%. It just isn’t so expensive to do that.

And we can offer people reasonable rewards to work. If we can produce all the stuff people want with 40% or 50% or 60% of the workforce working, then that’s fine. They value their leisure more than they value what we’d give them to work more than they do. No problem.

If we come up with ways to produce more stuff with less work, that’s fine too. Fewer people get special rewards for working, more people get more stuff, it’s fine.

The economy is here to serve us and not so much the other way round.

What happens if there’s a crisis and we can’t be sure the economy will produce enough of something essential, like food? We can come up with plans to get more, and ask people to help out, and maybe offer rewards starting with social recognition but others too. If too many choose not to, if they’d rather have their leisure along with a chance to starve, then OK, them’s the breaks.

We do not have a responsibility to survive by working cheaper than machines. The economy is here to serve us, and we should cherish it according to how well it serves us.

Mind, if you have a lot of capital you probably want other people to want capital. Which explains a lot of things.

@59 This seems to be a situation where the interests of CEO’s and companies diverge. CEO’s, the one’s who only care about themselves, want, above all else, lower marginal income tax rates. This puts them in political alliance with the crazies. So, to keep the crazies happy, they basically have to agree with the rest of the crazy platform, which includes a plank strictly opposed to the minimum wage. Anyone with a brain can see that Wallmart would profit from a higher minimum wage in a way that is questionable if they unilaterally raise wages. But then the crazies come out.

This became starkly obvious when I considered the fact that Sears, which should try anything at this point, is not loudly calling for sales tax on Internet transactions? Why not? Because it is in the interest of Sears, but not in the interest of CEO’s generally.

Why doesn’t competition between unemployed and employed workers work quickly to reduce wages to the point where demand equals supply and where there is no involuntary unemployment?

Because when wages go down, so does demand. That requires wages to go down more.

Given perfect competition, all the workers would find themselves making less than a living wage. The first of them to starve would make things easier for the remainder.

Given more people than the economy needs, the Iron Law of Supply and Demand requires that the supply of people must drop to meet the demand for labor.

No sane person advocates this sort of thing. One reason is that if you tell a bunch of people that the economy doesn’t need them so they should starve — they should let the economy work them to death to get the last little bit of value out of them — they will be irate. They may likely get violent.

This is not a viable economic theory because it incites too much violence against its proponents.

The more I think about it, the more it bothers me that Sears and the whole Chamber of Commerce are not beating down the doors of Congress and demanding that Amazon pay sales tax. It really is the poison injected by Ronald Reagan. What else could explain it?

I pay sales tax on Amazon purchases; I live in California. As I understand the current state of law, a State can collect if the seller has a physical-presence in the state, and California enforces that rule. A giant business like Amazon has a physical presence in many states, and so, they really couldn’t avoid sales tax in very many places. I would think Amazon would actually benefit competitively vis a vis much smaller rivals, although, of course, Amazon store-fronts a great many smaller rivals, so maybe that’s a wash. Afaik, Amazon does not have to collect sales tax on the pass-thru sales, if Amazon is not fulfilling the order. The proposed reforms I know of seek to exempt small mail-order houses in any case.

#66

Bruce Wilder, it sounds like you have some sort of complaint.

Why doesn’t competition between unemployed and employed workers work quickly to reduce wages to the point where demand equals supply and where there is no involuntary unemployment?

I’ll try to say it simply: Two women, one job. Any woman without a job starves.

Woman A gets the job for $50/hour.
Woman B offers to do the work for $35/hour, and she’s capable of doing it. The boss agrees.
Woman A offers to do the work for $20/hour and gets the job.
Woman B offers to do the work for $15/hour.
A $10
B $8
A $5
B $3
A $2
B three meals a day
A two meals a day
B one meal a day

If they can’t organize, if they can’t make an agreement with each other that one works and both eat, so they give the employer one bid with no competition, then they lose.

This is how it works when there are two bidders who both must win — or else. They bid until the one with the fewest resources can’t bid any more, and loses.Then the winner takes the prize along with whatever she has left.

What keeps that happening today is mostly social structure. To some limited extent it takes time to learn how to do a job, so there’s a limit to how fast you can hire and fire. Also whenever you hire there’s a chance the new employee won’t be able to do the work, and then you lose until you can get somebody new. It doesn’t matter how cheap a bargain you get if you don’t get the work done. You have to spend time around some of your employees and it’s no fun if they despise you. It’s no fun if all your wife’s friends tell her she should despise you. If various of your employees look for sneaky underhanded ways to sabotage you that won’t be pinned on them, they can cost you a lot more than their pay.

So instead of paying below-starvation wages, it makes sense to pay people enough to get by and a little more. Keep them unless they do something wrong, they know you could replace them with cheaper people but you don’t, you pay more than you have to, and they feel pathetically grateful and do their very best for you.

So without the “friction” (you usually don’t fire somebody until you’ve had time to see whether they can do the job etc) and ignoring the social factors, when there are more people competing for jobs than there are jobs and the people have no alternatives, wages will quickly fall. If workers find some better choice than accept very low wages, then wages stop falling. Failing that, wages will keep falling until enough of the competitors die off. When supply of workers has fallen to meet demand, then there is no more involuntary unemployment.

Of course it’s oversimplified, but it’s economics so what would you expect?

I think of other search areas – has the Internet reduced the number of unmarried people? Even with eHarmony and Match.com and Tinder, people get married at later ages. Well, maybe Tinder has something to do with it… Effect of Internet on search (for work, for love, for …) is complicated.

“The problem seems not be, as search models assume, that employers and potential workers don’t know about each other. Rather, it’s that employers can’t easily use the threat of new hires at lower wages to drive down the wages of existing workers (of course, this happens, but it’s clearly costly and risky in terms of worker morale). ”

Is it even the case that workers themselves could negotiate a position they would not previously have been given for lower wages? Though a standard assumption in economic theory, this seems absurd in reality. If you’re right for the job, you get it at the wage being offered; if you’re not, you get nothing. And if demand increases, businesses hire more people at the going wage. As you imply – and as Keynes pointed out some time ago – there is no ‘labour market’ to speak of.

73: Michael D Roberts and G Carchedi are also in the “declining rate of profit” camp, although I don’t pretend to understand the nuances.

And I follow a link over at Thoma’s (one link per comment, Cacchetti and Schoenholz, “Is the Fed Behind the Curve”)

“Turning to the second possibility, it is now commonplace to argue that the neutral or equilibrium real interest rate has declined. Economists expect the real rate to reflect the marginal return on capital in equilibrium. To the extent that the trend rate of growth has slowed – as the FOMC and many observers (including ourselves) believe – the equilibrium real rate should be lower than it was prior to the crisis.”

And I wonder if a long-term declining real rate of return is completely ridiculous, although I am sure I am misunderstanding everything.

Why doesn’t competition between unemployed and employed workers work quickly to reduce wages to the point where demand equals supply and where there is no involuntary unemployment?

Because when wages go down, so does demand. That requires wages to go down more.

You state this as a certainty, but it is not.

For example if wages are $12, a firm might hire 1 person. If wages are $10, a firm might hire 2 people.

1) Internet searching has limitations and flaws not obvious to some. It’s easy to get a lot of stuff similar to what you want. It becomes increasing hard to find exactly what you want, at some point an old fashioned library might be better…even simply traveling through the shelves as I often have done, pre-judging books by their covers.

2) Searching seems a poor model of extended above trend unemployment. The Keynesian (and before) lack of demand seems like a much better explanation. Has that fallen completely out of macroeconomics fashion now? Pure superstition likely better than that enterprise then.

3) One of the worst ideas ever is that of economic equilibrium to which things return. Better would be a sense of history and a realistic view of the world we live in. Exponential growth cannot continue forever. But capitalist economies have relied on that from the beginning. Krugman gives the great bicycle analogy

http://krugman.blogs.nytimes.com/2014/05/19/demography-and-the-bicycle-effect/

From where we are now, I don’t see the bicycle righting itself ever again. Economists wave their hands and say things like “substitution” but I don’t see it. Those things which aren’t tied to the physical are optimally free.

Time to start thinking about how to build a decent communist society since it doesn’t require endless exponential growth. And how to get there in the least painful way.

@79
Right on layman.

Indeed more practically, before a company even thinks about hiring the frist guy a@10, theyve already started by paying some incumbent person some amount of overtime, or employed a part-time person or even a temp. The conversion to a bona fide new job @10 or any other price comes after the part time person was converted to full time and overtime is no longer efficient.

Most companies have built sufficient slack into existing work forces that there is some amount of flexibility before they need to even approach the labor market for the lengthy and messy task of hiring and usually training a new employee.

“Because when wages go down, so does demand. That requires wages to go down more.”

You state this as a certainty, but it is not.

Pardon me for the turn of phrase. Of course it is not a certainty. I didn’t even say it well enough to show what I meant, and what I meant depends on a whole collection of things that cannot be certain in the real world. And yet it can make sense to talk about tendencies and “drives” and such, and discuss whether our ideas about such things are all wrong.

For example if wages are $12, a firm might hire 1 person. If wages are $10, a firm might hire 2 people.

It looks like you’re saying that when wages go down, total employment might go up and so the total paid goes up.

Let me describe the model I’m working from, which of course is oversimplified and not in any way inevitable.

Why do wages go down? Because competition among workers has gone up, while competition among employers looking for workers has not gone up. Supply and demand. If employment goes up enough to threaten the safety cushion of unemployed, then wages will go up and not down.

Is production going up while employment is not going up? Probably not. Why would demand increase when employment does not increase, and wages do not increase? (Well, but it could happen. More exports. More government spending. More rich people buying lots and lots of stuff.) The old rule of thumb was that labor was about a third of costs. But of the other costs, for example you pay for raw materials but labor is a fraction of the other guy’s costs too. He pays for various things and labor is a fraction of the cost of the people he buys from. Summing the series, it would make sense to figure a rule of thumb of labor as maybe half the total cost, the rest being for rights and privileges and such. But then, total cost of human capital is likely to be more like 70% of operating expenses, so….

If labor costs across the whole economy aren’t going up, how is labor going to pay for more stuff? Why make more stuff unless somebody will buy it? When total labor costs go down, demand goes down some. But other demand might rise.

Wages go down. So people buy less. So less needs to be produced. Producing less, employers can lay off employees. Now there are more people looking for fewer jobs so it’s plausible that wages will go down more.

Of course you can argue it other ways. If there are lots of employers, they can go ahead and produce lots of product, and compete and drive down prices below cost. Lots of cheap stuff for people to buy. But the old rule of thumb was that you need at least eight competitors or they will do unconscious price-fixing collusion without even meaning to and certainly not in ways they can get caught and prosecuted for. When some of them get real big, they get economies of scale in demanding preferential treatment from suppliers and distributors, so the small competitors (who must offer price discounts due to being off-brands) don’t wind up very profitable and don’t get much opportunity to expand. Yet another rule-of-thumb, when there are four big competitors in an industry, the biggest one or two will probably do well. So there is usually far more competition among employee candidates for jobs than among employers for customers. So no, prices don’t go down. Instead production goes down, and prices stay up.

As people have been pointing out, this model is unrealistic about the job market. Even when there are a thousand resumes submitted for each job, that does not mean a thousand competitors because most of them are ignored. The actual competition for jobs is much less.

There’s a distinction between “special” jobs that are highly specific and require special arcane skills, versus more common jobs. So if you are expert in some weird computer language and a company has software written in that language that they need to translate into something that a regular code monkey can maintain, there may be only a dozen people in the world who have qualifications and documented experience, and only one who lives nearby. But if you want a job using a forklift on a loading dock, there’s usually somebody standing around they can choose if you want more than the going rate. One way, your only competitor has some high fixed costs tacked on. The other way, there are thousands of local job markets and you might get a job just by standing around at the right time and place. But if you offer to work at 3/4 the regular rate to get the job, they’re likely to think there’s something wrong with you. Is saving a few dollars worth working with somebody who has problems?

Since “the job market” doesn’t actually work like a free market, you can’t depend on it to get free-market results.

But if it did, then when there were more people who desperately needed work than there were jobs, the unskilled labor market and also any particular specialties that had more qualified specialists than needed, would find wages reduced to starvation levels. Supply and demand. Reduce the supply of labor by death until it is no larger than demand for labor. That’s how supply and demand works. That’s how it is supposed to work.

Thornton Hall @ 81: As a philosophy major who has been reading 2/3rds of Thoma’s links for about a year now, and as someone who has agreed with everything Krugman has said (that I understood) in his column, I came to the conclusion that something was deeply flawed in the academic discipline . . .

I read Thoma’s blog faithfully, following links (probably never more than half, though), for at least five years, before I ran, screaming soundlessly into the night. But, I was trained as an economist and worked as one for some years, so I had more to overcome.

I liked your blogpost very much. It deserves to become an internet classic. It is incisive and on point. I liked that you choose that particular quotation from Krugman:

So how do you do useful economics? In general, what we really do is combine maximization-and-equilibrium as a first cut with a variety of ad hoc modifications reflecting what seem to be empirical regularities about how both individual behavior and markets depart from this idealized case. And people using this kind of rough-and-ready approach have done really well since 2008, on everything from inflation to interest rates to the effects of austerity.

That was such a shameless display of the full horror, which is mainstream economic “reasoning”, yet Krugman fans (of which I admit I am one, too) seem too often not able to see it.

J Thomas @ 68: Of course it’s oversimplified, but it’s economics so what would you expect?

You’ve got me there.

Edit: 20th Century for “21st”

Witt@47: “At least in my experience, the MAJORITY of small businesses and nonprofits that I have dealt with either never publicly list their jobs at all, or list them only on their own websites (rather than CareerBuilder, Monster, Idealist, etc).”

Just so. The main result of listing on one of the big web sites is your HR person gets spammed by hundreds of eager desperate job-seekers.

Monster.com mainly gets job-seekers spammed and scammed.

It depends what type of jobs you are talking about. IT firms do post online, but not at the big sites; they’re more likely to list at boards where people they want hang out. Engineering disciplines naturally post at engineering society sites. In the trades there is still no substitute for good old-fashioned pavement pounding. And so on.

Manning’s neo-monopsonistic framework is a significant theoretical improvement on search models (although the empirical results have been mixed). The basic idea is that a higher wage –> more applicants and better matching. That is, according to a number of optimization functions.

As a sociologist, I’m a little skeptical of the way economists model search costs. Companies find employees in all sorts of ways: networks and word of mouth; recruiting at universities and technical schools, help wanted posters. I’ve seen little indication (anecdotally or in the literature) that labor markets are the best way to understand jobs, unemployment or wages. Yet one can be assured that we’ll continue to get variations on these models from economists regardless of what the data says!

@Tom Slee Can you give an example?

#81

The more I read about equilibrium analysis the more I couldn’t believe that anyone would begin to imagine it might say something interesting about human behavior. What was worse, I found out that in practice, nobody could point to an example of a equilibrium model that matched the data.

There was a time when equilibrium theory was useful in chemistry. It still has uses, but chemistry has moved on.

Economics started as interesting and useful fantasies. Nobody could watch the various shopkeepers, bankers, artisans etc doing their work — they wouldn’t stand for it. Lots of them had secrets. To get any sense of how it all fit together you had to imagine it.

People imagined feedback loops that tended to stabilize things. Watts’s steam engine governor came in 1788, compared to Adam Smith’s Wealth of Nations in 1776. The idea that things could be set up to naturally adjust themselves without requiring God’s active intervention was in the air.

It’s such a powerful idea that some people tend to get hypnotized by it. It’s so beautiful they think it has to be true. It explains everything. It must be happening all the time, optimizing everything.

Meanwhile, the discipline of economics has no grand projects. If engineers build dams that fail or steamships that blow up, people get the sense they might not quite know what they’re doing. After each war, surviving nations that feel like losers revise their military doctrine while the winners tend to sit tight. There is not really any failure mode for economics. People say that economists did not predict 2008, though lots of economists say they did predict it. But what were they supposed to do about it? It was nobody’s job to predict 2008….

If there was some big task that economists were responsible for, that teams of economists could do and then everybody could judge the result, that might give us some progress. While their most visible task is to make up stories to explain the economy that some people like, we can’t expect them to do much better than psychiatrists who make up stories to explain individual people that the people like.

Tom Slee @ 91

Unlearning Economics had a post yesterday, which addresses that point.

http://unlearningeconomics.wordpress.com/2014/07/10/the-illusion-of-mathematical-certainty/

J Thomas @ 96

Back in the day, to derive an equilibrium analysis, you had to find a constraint, such as a conservation law. That’s the way Euler did it. When economists find a constraint, they usually get it wrong, as when John Cochrane proclaims, “The money has to come from somewhere . . .”

I kinda forgive her, inasmuch as she appears to be the kind of libertarian who shows up for a ditch-digging job with a shovel rather than a bullhorn and a copy of Atlas Shrugged.

Thornton Hall at #92 asks, if I read correctly, for an example of the value of equilibrium analysis.

You might well already know this example, but George Akerlof’s “Market for Lemons” (there’s a PDF here) is a classic example of good equilibrium thinking. He shows that when one party to an exchange knows more about the quality of a good (used cars in his example) than the other party, the market for that good may have problems. It turns out (because Equilibrium!) that it the owner of a good used car cannot get the price that the car would justify, even if there are potential customers who would be prepared to pay it. One might think that the party with more information is in the better position, but it turns out in this case that’s not true – asymmetric information is a problem for both.

The cases where the model applies are open for debate — including whether the used car market itself is an example — but what the equilibrium analysis shows is a mechanism that would be difficult to tease out in other ways.

If you are really bored, I wrote a long piece about another of Akerlof’s ideas (an equilibrium analysis of identity) a couple of years ago here.

“…now we know how to design feedback systems in a variety of circumstances.”

I’ll let Jonathan Swift reply:

“So nat’ralists observe, a flea
Hath smaller fleas that on him prey;
And these have smaller fleas to bite ’em.
And so proceeds Ad infinitum.”

The feedback systems we design also generate unintended byproduct feedbacks whose consequences are not as well understood. Case in point: carbon emissions.

Thanks for the recommendations Thornton and bob.

Bob – the little(only because it’s dense and complicated) I’ve read of the ‘world systems school’ I liked a lot (primarily Arrighi) I’ve been meaning to read something by Samir Amin, anything specifically you would recommend ?

Thornton – I ordered that book you noted (it looks pretty good) and I liked your blogpost a lot. One thing though (bear in mind I’m not an economist/social scientist etc, so this is more a caveated observation rather than a definitive statement) but this:

“Notice what never happens: no one ever looks at the world without having already decided how it (the world) works.”

Afaict, most people who use quant methods in their research or try to model real life would respond (something along the lines of) “YOU cannot look at the world without having already decided how it (the world) works” .. ie even when you are using your own powers of observations backed up by deep historical/sociological expertise, you are still viewing the world through a specific prism (complete with your own biases, gaps in knowledge etc), or in other words your own mental model.
Perhaps a (specific) model might be flawed, but are you objecting to the fact that economists models don’t have *perfect* explantory/predictive power and so the entire enterprise is worthless, or just that their usefullness has been overstated ?

@107. Thanks Ronan! Bruce above recommended the blog of Lars P Syll. His post today is along the lines of “The Secret Sins Of Economics” that Bruce also mentioned, with the advantage of being in direct response to Simon Wren-Lewis, a prominent member of the Econoblogosphere (from whose blog, Mainly Macro, I find myself banned). Here’s a snippet:
And applying a “Lucas critique” on Lucas own model, it is obvious that it too fails. Changing “policy rules” cannot just be presumed not to influence investment and consumption behavior and a fortiori technology, thereby contradicting the invariance assumption. Technology and tastes cannot live up to the status of an economy’s deep and structurally stable Holy Grail. They too are part and parcel of an ever-changing and open economy. Lucas hope of being able to model the economy as “a FORTRAN program” and “gain some confidence that the component parts of the program are in some sense reliable prior to running it” [Lucas 1981:288] therefore seems – from an ontological point of view – totally misdirected. The failure in the attempt to anchor the analysis in the alleged stable deep parameters “tastes” and “technology” shows that if you neglect ontological considerations pertaining to the target system, ultimately reality kicks back when at last questions of bridging and exportation of model exercises are laid on the table. No matter how precise and rigorous the analysis is, and no matter how hard one tries to cast the argument in “modern mathematical form” [Lucas 1981:7] they do not push science forwards one millimeter if they do not stand the acid test of relevance to the target. No matter how clear, precise, rigorous or certain the inferences delivered inside these models are, they do not per se say anything about external validity.

Long story short. Yeah, I get the postmodern constructivist bs, like the man said (kicking a stone), “I refute it thus.” The question isn’t whether our world view shapes our perception (it does). The question is whether you allow for the possibility that your perception could change your worldview. By hammering at equilibrium no matter how often it fails to map our experience with the world, academic orthodox Econ simply refuses to notice a problem.

“…now we know how to design feedback systems in a variety of circumstances.”

The feedback systems we design also generate unintended byproduct feedbacks whose consequences are not as well understood. Case in point: carbon emissions.

Sure, it happens. But we’re better off with open-source systems designed for stability that get a lot of testing, than we are with commercial systems that are designed on purpose to be unstable.

Everybody knows that steam engines blow up, but nowadays they very seldom blow up inside their design specs. Partly by long experience, we mostly know what works.

Electronic circuits are inherently unstable in some ranges, but your computer chips work because they keep them within workable ranges and also run them slow enough to stabilize. If computer glitches happened often enough to worry about, we’d all be a lot more worried.

Afaict, most people who use quant methods in their research or try to model real life would respond (something along the lines of) “YOU cannot look at the world without having already decided how it (the world) works” .. ie even when you are using your own powers of observations backed up by deep historical/sociological expertise, you are still viewing the world through a specific prism (complete with your own biases, gaps in knowledge etc), or in other words your own mental model.

It’s a big long complicated process when you try to verify your model against the real world.

But the model itself is likely to be more consistent than it would be without the rigorous detail.

Like, a little while ago I wrote about the job market as if it was some sort of consistent market, and I made completely ad hoc implicit assumptions about how employers would deal with their own problems. I assumed without a second thought that when demand dropped that employers would reduce supply of their products. That’s like assuming that when the job market gets tight, a lot of job hunters just give up and don’t try to get jobs — which I didn’t assume.

If you have to explicitly say what your assumptions are you won’t necessarily make better assumptions, but at least you have more chance to think about them. That has to be a plus.

Plus the model will tell you about things that your assumptions predict that you may not have been thinking about. So for example if you assume that free markets optimize something, when you look at an actual model you might find that two different free markets are competing to optimise different things, each of them influencing the parameters for the other. One might be fast enough to determine the conditions the other must adapt to, and the other then slowly changes the environment of the first. Or they might do chaotic interference with each other. It’s easy to assume everything will work out, and then find that things you assumed away actually do interact given your assumptions, in ways you did not notice they would.

If the models give you a richer understanding of the consequences of your assumptions that’s a great big plus, independent of the relationship of your assumptions to reality. When you don’t really understand the consequences of your assumptions then it’s harder to tell how well they fit reality.

@114 I apologize for the snark. A fairer statement would be this: it seems like the problem solved by “seeing how asymmetric information causes problems in markets” would not exist, but for some crazy nonsense that you have to agree to as the price of admission to serious Econ journals. In other words, equilibrium provides partial guidance on how to get out of the (rabbit) hole dug by equilibrium.

I mean, ask any idiot on the street about the used car buying process and you’ll get a very good real world description of market failure.

@Tom Slee re: ‘Market for Lemons’

One thing that’s always struck me about that paper is the fact that used car markets don’t actually fall apart. In fact, I’m not sure of any markets that actually follow the mechanics outlined by Akerlof. For me, that’s a primary example of how a paper in economics can become ‘seminal’ without actually having evidence behind it.

UnLearningEcon #118 and Thorton Hall #116. I posted the Lemons paper as an example of a case where a bit of mathematics within a maximize+equilibrium framework gives a mechanism that has the benefits of being internally consistent (#91). If you then want to object that it has other problems (eg any idiot can see this, or it doesn’t correspond to the actual used car market), well OK, but that’s shifting the goalposts.

The benefit, to me, is that if the mechanism doesn’t fit a particular reality (eg used car market, and the market has at least been thin at various times) then at least we know where the problem lies — the assumptions. In fact, it cuts down the overall level of goalpost-shifting, which seems to me like a good thing.

It’s crazy to me that people are arguing about the merits of the lemons paper. The only way you can think that the conclusion of the paper is objectively obvious is if you are from a parallel universe with no Republicans in it. “Markets can solve all coordination problems in society” is the dominant idea of our age. Akerlof showed that this doesn’t work as soon as you have different quality goods trading in the same market, and then pointed out this case neatly explains several real-world examples. The only purpose of the math is to answer a certain kind of skepticism that the details can’t possibly work out.

A H: In the Lemons model, there is no trade for good quality used case. But that is not the same as a prediction that, in the real world, there will be complete market breakdown. Akerlof and everyone else knows that the real world is more complex than the very simple Lemons model: that’s why it’s a mode.

What Akerlof does say is “..there tends to be a reduction in the average quality of goods and also in the size of the market” (Para 2), and also “The automobile market is used as a finger exercise to illustrate and develop these thoughts. It should be emphasized that this market is chosen for its concreteness and ease in understanding rather than for its importance or realism”.

Sasha Clarkson #123: Akerlof does not take into account the factors you describe. In fact, he says “The usual lunch table justification for this phenomenon (excessive depreciation) is the pure joy of owning a ‘new’ car. We offer a different explanation.” So he’s not saying that what you call the irrational aspects don’t play a role, just that there are alternatives to think about.

One of the reasons I chose this as an example is because of the modesty of Akerlof’s goals, which contrasts with much of the economic imperialist approach to the social sciences.

And I agree with Walt at #124.

And finally, just in case anyone cares, I am not now nor have I ever been an economist, so I don’t speak for them and really don’t have a car—of any quality—in this race.

@Walt 124: you say a world with “Republicans” in it. But really you mean economists. That is the problem. The field confuses the obvious and then good guys like Akerlof and Krugman come in and get us close (but not all the way) to where we started.

One thing that never gets modeled: the opportunity cost of doing economics. What if we never went down the rabbit whole in the first place?

Tom Slee @ 126

So what is the point of the model in the paper?

The equilibrium model adds nothing that a more ad hoc approach couldn’t add. Say a heuristic based risk premium model.

http://www.deirdremccloskey.com/docs/graham/rosenberg.pdf

A H. To uncover a mechanism that is, along with other factors, at work in markets where quality is uncertain. To show that markets with asymmetric information will share a number of characteristics. To explain one economic role of guarantees, brand-names, chains, and licensing practices. To impose some order on our map of how the world works.

“That’s why I was horrified by Krugman’s cavalier “a variety of ad hoc modifications reflecting what seem to be empirical regularities about how both individual behavior and markets depart from this idealized case. . . . using this kind of rough-and-ready approach” — there’s no methodology there, and no recognition that a methodologically informed construction of an operational model might be necessary. And, the consequence is that there’s no real feedback going on. The “idealized case” — “maximization-and-equilibrium” — remains untouched by anyone’s encounter with the world.”

I have seen version of this criticism elsewhere (e.g. Dani Rodrik has made similar comments, which I’m too lazy to google up) and it’s a good one. But in a certain sense it’s futile. As far as I can tell, no one knows how. Krugman’s methodology is to apply his best judgement. The problems with this are obvious. But telling people they should do something they can’t do is not going to help.

To be useful it is necessary to produce actual results. For instance, if you think fiscal stimulus is called for, it is necessary not only to give a qualitative justification but a numerical estimate of how much reduction in unemployment will be produced by a given amount of stimulus. It that context, this (from Mr. Hall, above):

“equilibrium (demand equals supply) is probably not a good way to understand a dynamic, chaotic, system characterized by violent reversals.”

is pointless. Aside from its simplistic characterization of equilibrium, what economists actually do is to linearize non-linear models, fully aware of the possible pitfalls, and try to apply judgement to the results. No one here has proposed an alternative.

This procedure is not falsifiable (passing over the well known (at least philosophy circles) problems with falsifiability as a criterion) because you can generally tweak the parameters of the model to get more or less anything. And if tweaking the parameters won’t do it then changing the functional form probably will.

I’ve mostly enjoyed reading this thread because if the points made from actual experience. But I must say that there’s a self-congraduatory tone to some of it that makes me uneasy.

I wish I could say that it’s a good idea to remember that economists are not, on the whole, stupid, and they know what you know. On the whole this is true. OTOH, credentialed economists often do say thing that I believe are just crazy. For instance, there is a Youtube of Larry Summers saying that rules against sexual discrimination are unnecessary because market forces will eliminate it. He conspicuously failed to mention how long it would take. This strikes me as a claim that could only be made by someone who has run limits to infinity a few times too many. Examples could be multiplied easily and endlessly; I picked a Democrat to cite but Republicans are more productive and further off the wall.

So, what should actually be done? Sorry; if I knew that I would be smart. I spent several years studying Philosophy of Science. (For that reason I know what’s wrong with the falsifiability criterion in gory technical detail.) At the end I sometimes thought that I’d principally learned ways to avoid saying silly things. Avoiding being silly sounds easy; it’s not.

@Jonathan 136
Krugman has produced a version of this response. 
http://krugman.blogs.nytimes.com/2014/04/28/paradigming-is-hard/

Here is Krugman:
Specifically: we have a body of economic theory built around the assumptions of perfectly rational behavior and perfectly functioning markets. Any economist with a grain of sense — which is to say, maybe half the profession? — knows that this is very much an abstraction, to be modified whenever the evidence suggests that it’s going wrong. But nobody has come up with general rules for making such modifications.
…
Now maybe, someday, someone will find a way to do something truly new — integrate neuroscience into economics for real, not as a marginal research topic, or turn agent-based models into a useful tool. I’m for it! But merely noting the foolishness of some economists and calling for a new paradigm in the abstract won’t get us there.

The problem with the response is that it imagines a distinction between his “textbook” economics and those producing “foolishness”. But notice, he has already told us that there is no distinction: “nobody has come up with general rules for making such modifications.” On his own description of the field, all the work is done by the “ad hoc modifications”.

Policy makers say “How do we get from here to broadly shared prosperity?”

Mainstream academic economics says “Here’s this self driving car.”

After much criticism, folks like Krugman come in and say, “Ok, ok, it doesn’t drive itself. But put me behind the wheel and I’ll drive us where we want to go.”

But he’s answering the wrong question. Before the economists came along with a car, we were content to walk. We just needed directions. 

“No, no, no,” says Krugman, “this is the only car we have!”

But Krugman himself just explained that the car isn’t doing the work. 

When you read Krugman, he talks a lot about IS/LM, but the directions, the actual policy advice, comes not from the model, but from the ad hoc modifications. And where do they come from?

The ad hoc modifications are not Econ, they are history: at the end of the day, the navigation is simply a matter of following the lessons of the Great Depression and other crisies. 

But it’s a really fancy car and very expensive. Entire Universities are built for the purpose of maintaining it. We should just walk. But the UofC crowd will tell you: skilled workers will fight like crazy to protect their industry from change.

129: Well, yeah. Kliman is far from an exception in the school of orthodox Marxist economists, as anybody who followed my link to Michael Roberts can see.

The problem I have with the orthodox Marxists is their retention of models emphasizing industrial capital and wage labour; differences between constant and variable capital; differences between real and formal subsumption; between production and reproduction; between economics and politics.

IOW, all that classical economics categorization that connect them directly and sympathetically to mainstream economics as represented by DeLong, Krugman, Thoma, and Quiggin.

I wrote a column responding to this excellent post. http://equitablegrowth.org/research/value-search-matching-models-labor-market/

I like Thornton Hall’s snarky metaphor of the driver-less car, but I’m not at all sure that we can simply walk. If we walk, we still have to, more or less, walk together. Public policy requires a large measure of shared understanding.

The issue posed by the OP was whether search models, used in macroeconomic theory to model unemployment, should have any connection to the actual institutionalized technologies of employment search. This is classic Popper. Here’s an a priori analysis. Here’s an operational model measuring parameters and variables in a concrete situation. Should there be feedback from what we learn, operationally about the performance of institutions, to the idealized theory? What does that feedback say about what we keep or discard, modify or extend, in the theory?

From there, we meandered to Krugman’s loose marriage of “maximization-and-equilibrium” to seat-of-the-pants IS/LM analysis, as a way to argue macro policy. Alex Rosenberg, in the essay Thornton Hall linked to, upthread, argued that Krugman, by swearing ritual obeisance to “maximization-and-equilibrium” is conceding the legitimacy of his opponent’s arguments, thus ensuring that he can never win the argument.

Rosenberg’s position is that Krugman should exchange “maximization-and-equilibrium” for “uncertainty-and-reflexivity”. That cannot be a straight-up trade. There’s no axiomatic deductive system exemplifying “uncertainty-and-reflexivity” and I suspect there never will be — it is simply not possible. But, it certainly is possible to adopt “uncertainty-and-reflexivity” as one’s “vision” of how the economy works as a system, and to assemble analytic insights into the kind of mechanisms and behaviors the economy manifests. Ultimately, though, that would be an economics in which operational modeling, institutional and historical observation and interpretation would have much more weight. And, there would have to be an adherence to methodology in the operational modeling for that to work; the ad-hoc IS/LM analysis Krugman learned in undergraduate intermediate macro at Yale in 1972 could not be presented as ad-hoc “state-of-the-art”, nor could its efficacy be held to have no implication, constitute no Popperian test, for the “maximization-and-equilibrium” theory held by the orthodox faithful as revealed truth.

When you take the axiomatic, deductive idealization as your “first-cut”, the ad-hoc modifications become hand-waving about “frictions” when they should be serious investigations of mechanism. A classic example is the New Keynesian “sticky price” assumption, which is then attacked by conservatives as apostasy, a denial that prices adjust and resources are re-allocated. It is a fruitless, endless argument, in which no useful confrontation of concepts and/or fact takes place. The actual economy is organized around administrative hierarchies, and many “markets” (allowing a broad application of the metaphor) do not have a market-clearing equilibrium in price, so the convention that the economy can be modeled as behaving as if it is seeking a Walrasian general equilibrium appears highly questionable. And, developing a vision of how the economy works from laboring with such a model does not do much for anyone’s interpretive intuition, because there’s no correspondence between the abstractions and the observable, the kind of correspondence that would be worked out in operational models, operational models that would inevitably make the case for discarding “maximization-and-equilibrium”, a case the devotees do not want made.

It seems to me that the search theory, which is the subject of the OP, falls victim to the quicksand of this intellectual morass. Search theory seems to be an analysis of a mechanism, a way of elaborating a diffuse and formless friction into something more specific. But, if it is something specific, something operational, then there might be feedback from observable fact. “Feedback to what?”, you might ask. Well, to involuntary unemployment, the policy justification for Keynesian economics in all its flavors.

It’s probably impossible to get a coherent concept of “involuntary unemployment” into an axiomatic “maximization-and-equilibrium” model. That’s why the conservatives, who want to legitimate laissez-faire in the interests of plutocrats, insist on a methodology that features a privileged place for a model of that kind, and deprecation of operational modeling, open to “uncertainty-and-reflexivity”, where involuntary unemployment might emerge from the inevitable inefficiencies of 2nd best institutions, institutions that require public management. Why Krugman continues to play the mug in a mug’s game must be left as an exercise for the reader.

The coordination of society in an economy of specialization and trade requires a shared vision of how it works, and how it should work, and what it means when it fails to work, what our expectations should be of those assigned to continually reform and manage it, and what technical knowledge those assigned to reform and manage the economy, should have. Mainstream economics — at least the portions devoted to macroeconomics and financial theory — are failing us.

Neoclassical economics, with the axiomatic, deductive system that Paul Samuelson codified for it, is a powerful way to think, and, consequently, the basis for powerful rhetorical engines, capable of spewing out political argumentation and legitimating propaganda with ease. (witness the pitiful career of Matthew Yglesias or the vast chorus of neoliberalism) As a foundation for a scientific enterprise, its strong immunity to criticism and factual observation, makes it potentially paralyzing for a democratic society, which may be part of its continuing appeal for the powers-that-be.

Yes, I’m labeling a class of alternative vehicles as “operational” modeling, without getting into the merits of particular techniques or methods, to emphasize that whatever its content, it wouldn’t be pure theoretical analysis. I think economists would still do theoretical analysis; it just couldn’t assume the same doctrinal weight or immunity from criticism. Pursuing as a holy grail, a grand unified analytic model that resembles the economy, would be ruled out of court as an impossibility, and therefore, also as inappropriate as the basis of a legitimizing “vision” of a just ordering.

I don’t know think the point I want to make would be enhanced by exchanging an humble agnosticism for an enthusiasm for some investigatory technique, which I could never back up. I have Mark Buchanan’s book on my Kindle, and I like what little I’ve read so far; I’m not refusing to consider. I do think reflexivity poses a stronger challenge for economics than it does, say, for weather forecasting or biological sciences. No matter how complex a phenomenon a tornado may be, a tornado is not smarter than the forecaster, nor strategically aware of the forecaster (or other storms). That’s not by any means an insurmountable problem, and the behavior of a greedy genius may be a simpler and more predictable (institutionally channelled) form of malevolence than a tornado, but it does suggest a different explanatory style and ambition will be required.

Although it might seem, on many practical levels, a technical problem, I don’t think that’s why, despite the rising torrent of criticism against mainstream economics, criticism continues to seem “futile”, as Jonathan put it. Even acknowledging the immense difficulty of, say, DSGE modelling or some abstruse econometrics, economics, at its core, economics is easy, too easy.

That is, what Dani Rodrik has dubbed “1st best economics” — and, the kind of bad moral philosophy based on it that Thornton Hall’s blogpost cited — is easy to spin out. Once you’ve mastered Samuelson’s Foundations or Principles, or Friedman’s Chicago gloss on it, you’re probably a living example of the admonition that a little knowledge is a dangerous thing. Write, “If” and follow on with idle and ill-conceived, counterfactual speculation, rinse and repeat, with great moral confidence in the Freedom to Choose, wages equal to marginal product, or similar nonsense, and you’re good to go.

It’s the power of that easy, no-need-to-know-anything analysis combined with moral confidence — and believe me, the most corrupt and hypocritical conservative can be convinced that they are champions of a moral power to choose “freely” arrived at as the insight of the innocent in a college classroom he once was — that constitutes the foundational appeal of neoclassical economics. You can see it in the passionate rantings of John Cochrane. (Krugman’s occasional admonition that “economics is not a morality play” could be read as unwillingness to engage in a contest to shape economics, qua legitimating dogma. [Note to Paul: it most certainly is a morality play, if you know how to work it, loser])

1st best economics is known to be wrong, even by the standards of 1st best economics. The Theory of the Second Best is a canonical result of longstanding in mainstream economics. Wrongness doesn’t stop many, or even slow them down. Doing second-best economics requires an acquaintance with particular and uncertain institutional facts and an acceptance of moral ambiguities or shortcomings. It doesn’t make the practitioner feel good in quite the same easy way.

A better economics will be a self-consciously second-best economics, and it will need both professional standards and a moral narrative suitable as legitimating doctrine, as well as more powerful technique.

It will need a way to make sense of facts and distribute them to professionals, and not just in the stylized form stripped of context that is common now. Evolutionary biology shows that it can be done. Biologists often earn their degrees doing field work, becoming experts in mollusks or ants, tidal pools or isolated desert oases — very particular species or ecologies or whatever. But, the Darwinian hypothesis combined with classification and a deep tradition of investigating mechanisms now deepened by molecular genetics gives them a way to make claims on generality, and biologists do learn a remarkable amount about creatures and ecologies outside their personal ambit. I don’t think it’s possible to just transplant a misunderstanding of evolution to economics, and expect it to grow organically. Biology’s precedent is not a solution, just a way of outlining the problem.

You slip from this naive econ 101 to “mainstream economics” and to “neoclassical economics” as if they are the same thing (at least, that’s how your paras 3 to 5 read to me), and they just aren’t.

Let me try out some definitions, and see who they work for.

“Mainstream economics” consists of everything about economics that 90% of economists would both say they understand, and would not label as bullshit.

So Econ 101 is mainstream, 90% of economists will not call it bullshit even though they (for reasons which may vary among economists) consider it oversimplified and in many ways wrong.

Things labeled “Austrian School” are mostly not mainstream because less than 90% of economists agree.

Probably 90% of the details of “Austrian School” economics are mainstream when taken in isolation, because they really aren’t that weird, it’s only a few basic ideas and a few highly important derivations that are all that different from Econ 101.

A “Mainstream Economist” is somebody who gets called an economist and who mostly agrees with the mass of economists about what’s mainstream, and who does not publicly disagree with mainstream economics.

If you say “Mainstream economics is bullshit” then you are not a mainstream economist even if you fail to disagree with 99% of it in detail.

If you make a point of talking about the ways that Adam Smith was wrong, or Ricardo was wrong, or Samuelson was wrong, you are not a mainstream economist.

If you are an economist who fails to publicly disagree with mainstream economics, and whose own work is specialized in a way that less than 90% of economists would claim to understand, then you are a mainstream economist if you say you are, and you are not a mainstream economist if you say you aren’t. In this context being a mainstream economist is a lot like being a Christian. You are if you say you are, provided you don’t spout such controversial heresy that a lot of other Christians argue that you aren’t.

Say you teach Econ 101. You can’t just not-teach the old, outmoded stuff in the textbook. Future economists need to know about it, it’s part of the tapestry of fundamental ideas that economists must be aware of. You could say “This is all approximations that have been superceded by better things” like physicists do when they teach Newton or Special Relativity etc. A lot of people will believe it anyway.

Over time, the size of mainstream economics can only increase. There’s no way to throw any of it away, except to gradually forget it. Incompatible ideas can both be mainstream unless mainstream economists start publicly disagreeing about them. And 90% of economists won’t do that.

I say, just put it aside.

http://www.decisionanalyst.com/Services/operationresearch.dai

This link is to a private company that is attempting to make a profit doing economic modeling for customers. Each customer has specific needs, and the company attempts to meet those needs, providing also ways to measure how well they meet the need. They use operations research methods.

Eventually this sort of thing will deserve a new name. Maybe it will be called econology or possibly econometrics. It will be like astrology and astronomy, or alchemy and chemistry.

Did it do any good for astrologers to argue whether their discipline got real-world results? How scientific it was? The difference between mainstream and heterodox astrology? Not much.

Look for work that can contribute to a science of econology, an art, a craft, an engineering discipline of econology. Ignore economists except when they get usable results.

There was a time (extending at least into the 1980’s in the USA) when high government officials were influenced by astrologers. Probably they will be influenced by economists for centuries longer. Live with it.

@147 The absolute heart of the problem is the way “good guys” like Krugman and DeLong slip out of the net and combine sensible policy advice (informed by history, not models) with finger pointing at Chicago. There’s a fantastic “post-autistic” paper about how the flexible definition of “neoclassical” allows Econ an easy out. “You say Rational expectations is wrong so I point at this model that doesn’t use them. You say that model has a different problem and then I point to Simon Wren-Lewis, and so on.”

http://www.paecon.net/PAEReview/issue38/ArnspergerVaroufakis38.htm

And then something truly bizarre happens like Krugman disavowing “equilibrium economics”!!!!
And it remains true that Keynesians have been hugely right on the effects of monetary and fiscal policy, while equilibrium macro types have been wrong about everything.
http://krugman.blogs.nytimes.com/2014/07/14/aggregate-demand-aggregate-supply-and-what-we-know-wonkish/

Tom Slee @ 147

The problem is not that Krugman and Cochrane have different outlooks or views; its that their differing views are not open to systematic reconciliation, because no one involved appears to have a methodology worthy of the term.

Thornton Hall @ 150, 151

It is not like Krugman’s macroeconomics is particularly sophisticated or informative; at best, it is a series of analytic sketches, without much grounding. Krugman’s macro rarely leaves James Tobin’s Intermediate Macro class, Yale circa 1972. That’s a pretty confined space.

In taking a swipe at “equilibrium macro” for failing to predict, Krugman is once again failing to appreciate either the methodology or politics involved. The macroeconomics of RBC and the New Classical theorists was always about what Deirdre McCloskey termed, proving qualitative theorems. They never wanted to predict recessions; they merely wanted to show that recessions were Pareto-efficient adaptations to changing circumstances. They wanted to undermine the case for policy intervention or management.

Krugman’s macro can predict only in a very limited sense, and since it is ungrounded seat-of-the-pants prediction, it is not like there’s an expansive view of the economy gaining credibility. Chris House is right that not even having a pre-2007 view of the financial sector integrated with the New Keynesian ad-hoc-ery is something of a fatal weakness.

In the back-and-forth on inflation and deflation, I don’t see any notice taken of the Winter-Spring 2008 global commodity price spike, which made a mess of Bernanke’s attempt to foam the runway with liquidity ahead of the economy’s recessionary landing. It was the brief bit of deflation that inevitably followed the bursting of the commodity bubble that triggered the crisis. (Using YoY inflation can make that bit of deflation disappear from some series and create other distortions; and it’s a prime example of why “core inflation” is not always the index of choice.) That global price spike indicated a policy constraint lurking in the shadows that might be a little more relevant than a Philips Curve formulated when the AFL-CIO represented one-quarter of the workforce.

Whatever it is that Paul Krugman and Brad DeLong are doing, in additional to lacking a discernible methodology, it is not that rich in interconnected systemic or historic detail. It’s not anywhere near the standards of Minsky’s John Maynard Keynes or James Galbraith’s The Predator State