Arnold Kling on Patterns of Sustainable Specialization and Trade

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🗓️ 7 February 2011

⏱️ 69 minutes

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Summary

Arnold Kling of EconLog talks with EconTalk host Russ Roberts about a new paradigm for thinking about macroeconomics and the labor market. Kling calls it PSST--patterns of sustainable specialization and trade. Kling rejects the Keynesian approach that emphasizes shortfalls in aggregate demand arguing that the aggregate demand approach masks the underlying complexity of the recalculations that periodically take place in a dynamic economy. Instead, Kling invokes the mutual exploration between entrepreneurs and workers for profitable opportunities that pay well using the workers' skills. This exploration takes time, involves trial and error, and can have false starts because businesses sometimes fail or employees are difficult to find or match with employment opportunities. Kling applies these ideas to the current crisis to explain why labor market recovery is so sluggish and what might policies might improve matters.

Transcript

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0:00.0	Welcome to Econ Talk, part of the Library of Economics and Liberty. I'm your host Russ Roberts
0:13.9	of George Mason University and Stanford University's Hoover Institution. Our website is econtalk.org
0:21.2	where you can subscribe, find other episodes, comment on this podcast, and find links to
0:26.5	another information related to today's conversation. Our email address is mail at econtalk.org. We'd
0:33.6	love to hear from you. Today is February 1st, 2011, and my guest is Arnold Kling, economist,
0:43.6	author, and blogger at Econ Log, part of the Library of Economics and Liberty, as are we here
0:49.6	at econtalk. Arnold, welcome back to econ talk. Great to be here, Russ. Arnold, you've been writing
0:55.0	a number of interesting posts at econlog trying to imagine and flesh out the beginnings of a new
1:00.2	paradigm for macroeconomics. Those insights are what I want to talk about today. So our roadmap is
1:06.2	to begin with what you think is wrong with the current paradigm for macroeconomics and what might
1:10.8	replace it. Okay, so a paradigm is kind of like a language, and I think I want to sit out front
1:20.6	because sometimes people are looking for some decisive experiment to choose between
1:28.1	paradigms, and I think it doesn't work out that way. So you can say just about anything in
1:37.5	English and say just about anything in French, so you wouldn't say that English is true or
1:43.2	French is false or whatever. That's kind of the level at which a paradigm functions. And the
1:50.6	traditional paradigm in macroeconomics, or over the last, certainly since Hicks put it down,
1:58.2	translated Keynes into this scheme of things, is aggregate demand and aggregate supply.
2:06.7	So that's the language that people use. And I want to switch to a language that uses comparative
2:15.9	advantage as kind of its main core. And so that's what I'm trying to do. So your question is
2:24.4	sort of what's wrong with the existing demand supply story? Yeah. Well, I think there have been
2:33.1	troubling aspects to it since certainly the 1970s. When a lot of ad hoc adjustments had to be made
2:46.4	to make the aggregate demand aggregate supply story work, there are longstanding complaints about
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