New Macroeconomic Therory

So many honest "mistakes" have been made by the government that is at worst "results of limited information." How have different theories of macroeconomics affected our nation? In our current time, the government has been racking their brains on how to fix our issues with debt and recession. Our leaders have tried so many different theories that just don't seem to be working. Classical economists obeyed the rules of Say's law of markets that production is the sole source of demand. They believe a balance of supply and demand clear markets quickly. New Keynesian theories depend on the stickiness of wages and prices will answer to the existence of involuntary unemployment and why monetary policy has such a strong influence on economic activity. Politicians base their decisions on those two primary models and since strict adherence to either has resulted in failure, an introduction to more contemporary innovations is necessary.

One great economist, who won the Nobel Peace Prize with the paper "War and Peace", in 2005, was Dr. Robert John Aumann of The Hebrew University of Jerusalem. As he states in his paper, "An economy is a game: the incentives of the players interact in complex ways, and lead to surprising, often counter-intuitive results. But as it turns out, the economy really works that way." (Aumann) When it comes to Game Theory, economists look at the networking of different groups with one another. The study of this theory is very similar to games from poker to tennis and from child rearing to takeovers. They are studied for conflict and cooperation. There is one common factor of all these games and that is interdependence.

Within Game Theory there are two main categories: non-cooperative and cooperative. A detailed model of all the moves available to the players in a game is considered non-cooperative theory. Cooperative theory looks at model situations as a whole, unlike non-cooperative. There are three other categories: decision theory, general equilibrium theory, and mechanism design theory.

With the decision theory, similar to solitaire, is the theory of a one-person game, or, single player decision making based on their preferences and beliefs. It is a hazardous alternative that is extensively accepted by the importance of its numerical useful function. (Levine) Many factors can determine this theory however most of the attention falls with money income. Decision theory has a broad array of purposes, from individual choice predictions to being a single ingredient in a much larger model. The second category within game theory is general equilibrium theory. This consists of an arrangement of trade and production, or economic policies as a whole. It can also take in hand tax policy, trade policy, and the role of international trade agreements. Finally, there is mechanism design theory. This is closely indistinguishable to game theory. Although game theory takes the rules of the game as a given, mechanism design questions the rules and what the consequences of the rules are. Some such examples are minimum wage, wage agreements, and compensation. "To identify an optimal mechanism, for a given goal function (such as profit to a given seller or social welfare), the researcher must first delineate the set of feasible mechanisms, and then specify the equilibrium criterion that will be used to predict the participants' behavior."(Royal Swedish Academy of Sciences)

Another new concept is Nassim Taleb's anti-fragility. Take for instance a package to be shipped marked "FRAGILE - HANDLE WITH CARE". That package is fragile, and mishandling it may cause the contents to be damaged or break entirely. Any other package that is not fragile would be considered robust. Shaking it around or dropping it is unlikely to damage the contents because it is resistant to mishandling. The idea of anti-fragility is something else entirely. There is no word for it in the English language. The contention is that it is the opposite of fragile, and the idea of robustness does not describe it. If something is anti-fragile the outside of the package would read "PLEASE MISHANDLE". The contents of the package, for whatever reason, actually increase in value through being shaken or dropped. This idea has recently become part of economic study as categorized in an interview with Nassim Taleb, who is originating the idea as it applies to economics. (Taleb)

As the U.S. economy progressed beyond the industrial stage, the assumptions of the effectiveness of ‘laissez faire' behavior with regard to government intervention in the economy lost some validity. The models presented by John Maynard Keynes found a place in our fiscal policy in the 1930's in response to severe, long term economic depression. However, it has been more than 70 years since those models were