Fed economist questions conventional wisdom
Check out this from senior Federal Reserve economist Jeremy Rudd:
Mainstream economics is replete with ideas that “everyone knows” to be true, but that are actually arrant nonsense. For example, “everyone knows” that:
• Aggregate production functions (and aggregate measures of the capital stock) provide a good way to characterize the economy’s supply side;
• Over a sufficiently long span—specifically, one that allows necessary price adjustments to be made—the economy will return to a state of full market clearing; and,
• The theory of household choice provides a solid justification for downward-sloping market demand curves.
None of these propositions has any sort of empirical foundation; moreover, each one turns out to be seriously deficient on theoretical grounds.
