Towards a behavioral macroeconomics: a short review of George Akerlof

*
George A. Akerlof was awarded the 2001 Nobel Prize in economics, along with A. Michael Spence and Joseph E. Stiglitz, for his analyses of markets with asymmetric information. This recognition derives directly from his pioneering and influential article on “the market for lemons” (Akerlof 1970). According to Akerlof (2001a), the study of asymmetric information

“.. was a very first step toward the realization of a dream. That dream was the development of a behavioral macroeconomics in the original spirit of Keynes’ General Theory. Macroeconomics would then no longer suffer from the ad hockery of the neoclassical synthesis, which had over-ridden the emphasis in The General Theory on the role of psychological and sociological factors, such as cognitive bias, reciprocity, fairness, herding, and social status. My dream was to strengthen macroeconomic theory by incorporating assumptions honed to the observation of such behavior.” (365)

This concern with resurrecting the “animal spirits” that imbue Keynes’ General Theory – which has been a distinctive and enduring characteristic of Akerlof’s work (see Akerlof and Shiller 2009) – derives from his early interest to build “a theory that is more closely linked to substantial policy issues and less tied to the official (competitive general equilibrium) model and its assumptions” (Akerlof 2001b). Akerlof relates his gradual engagement with this academic viewpoint to his interest in history, which he claims has informed his research agenda, as well as to his short – albeit intense – involvement in journalism, and to the experiences he had while working in India.

Akerlof sees the development of behavioral macroeconomics as contributing novel and useful answers to questions which the New Classical synthesis has failed, in his view, to explain. It does so by replacing traditional utility-maximizing assumptions with empirical observations from psychology and sociology.

In his analyses of unemployment, Akerlof has been one of the proponents of the “efficiency wage” theory (Akerlof 1982, Akerlof and Yellen 1990), and has brought into his models concepts such as reciprocity (akin to the anthropological analysis of gift exchange), fairness and adherence to social norms.

In a similar vein, Akerlof has also devised ways to incorporate research and concepts from psychology (money illusion, loss aversion, herding, rules of thumb, cognitive parsimony, salience and hyperbolic discounting) into macroeconomic models that account for the effects of governmental intervention in the economy (Akerlof and Yellen 1985a and b), for observed regularities between unemployment and inflation (Akerlof, Dickens and Perry 1996, 2000) and to an analysis of saving behavior (Akerlof 1991).

More recently Akerlof has been doing research which relates poverty and self-destructive behavior to the identity of individuals of historically excluded minorities, such as African Americans in the U.S. (Akerlof and Kranton 2000).

REFERENCES

Akerlof 1970. “The Market for 'Lemons': Quality Uncertainty and the Market Mechanism,” Quarterly Journal of Economics; 84, pp. 488–500.

Akerlof 1982. “ Labor Contracts as Partial Gift Exchange,” Quarterly Journal of Economics, 97, pp. 543–69.

Akerlof 1991. “Procrastination and Obedience,” American Economic Review, Papers and Proceedings 81, pp. 1–19.

Akerlof 2001a. Behavioral Macroeconomics and Macroeconomic Behavior, Nobel Prize Lecture, December 8, 2001.

Akerlof 2001b. Autobigraphy at http://nobelprize.org/

Akerlof, William T. Dickens and George L. Perry 1996. William T. Dickens and George L. Perry, “The Macroeconomics of Low Inflation,” Brookings Papers on Economic Activity:1, pp. 1–59.

Akerlof, William T. Dickens and George L. Perry 2000. ”Near-Rational Wage and Price Setting and the Long-Run Phillips Curve,” Brookings Papers on Economic Activity:1, pp. 1–44.

Akerlof and Rachel E. Kranton 2000. “Economics and Identity,” Quarterly Journal of Economics, 115, pp. 715–53.

Akerlof and Robert J. Shiller 2009. Animal Spirits. How Human Psychology Drives the Economy, and Why It Matters for Global Capitalism, Princeton and Oxford: Princeton University Press.

Akerlof and Janet L. Yellen 1985a. “A Near-rational Model of the Business Cycle, with Wage and Price Inertia,” Quarterly Journal of Economics, 100, pp. 823–38.

Akerlof and Janet L. Yellen 1985b. “Can Small Deviations from Rationality Make Significant Differences to Economic Equilibria?” American Economic Review, 75, pp. 708–20.

Akerlof and Janet L. Yellen 1990. “The Fair Wage-Effort Hypothesis and Unemployment,” Quarterly Journal of Economics, 105, pp. 255–83.