Nov 1 • 1HR 11M

Why the Economy is Unpredictable

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Larry Kotlikoff
Economics can make a massive difference - collectively and personally. Listen in as we chat with some of the most influential leaders in economics across the globe.
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History's most famous economics line is President Roosevelt's, The Only Thing to Fear is Fear Itself.

The statement, supported by rich theory and clear facts, makes a mockery of economic self-styled soothsayers, no matter their media standing. The reason? Fear, particularly collective panic, is not predictable. This leaves the economy driven as much by psychology as by fundamentals.

If the public jointly comes to believe A will happen, it will make A happen. Same with B, C, D, and...Economists call this multiple equilibria -- multiple positions at which the economy can land if everyone thinks that everyone thinks this will happen. Examples of self-fulfilling prophecies: If I think Joe is laying off his workers because he thinks I'm laying off my workers and his workers are my customers and my workers are his customers, Joe and I can easily coordinate on firing each other's customers as the best way to survive. Or if I'm raising my prices because I think my competitors are raising theirs by 10 percent because they think I'm raising mine by 10 percent. The bottom line is economic unpredictability, with booms, busts, and inflations triggered by enough talking heads pronouncing the same unfounded nonsense at the same time. The "Great" Recession is a case in point.

Roger Farmer is a wonderful, extraordinarily deep, macroeconomist and economic theorist who has devoted his career to studying the potential for multiple equilibria. In this extraordinary podcast, Roger takes us through the history of economic thinking about this problem. It includes John Maynard Keynes' animal spirits, the sunspot theory of Karl Shell and David Cass, Peter Diamond's Nobel Prize for multiple equilibrium in labor markets, and Roger's own extensive work on the subject.

Roger is a British/American economist. He is currently a Professor at the University of Warwick and is a Distinguished Emeritus Professor and former Chair of the Economics department at the University of California, Los Angeles. Roger has received numerous awards and is a member of numerous honorific societies. He's also the author of three books that explain the economy's indeterminacy and how policymakers can respond.


Economic Matters - The podcast is hosted by Laurence Kotlikoff and moderated by Alex Kotlikoff.

Laurence Kotlikoff is a Boston University Economist, a NY Times Best Selling Author, President of maxifi.com, and Author of Money Magic.

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