In May 2010 I wrote a post with the title "the orthodox loss of faith". Please read it (or re-read it). It's a short post, and it would take me as long to repeat what I said there. And I can't recapture today how pessimistic I felt just over two years ago.
If "orthodox" means "that which we teach our grad students", then Michael Woodford is as orthodox as they come. Two weeks ago Michael Woodford said that monetary policy can be used and should be used to increase Aggregate Demand, notwithstanding the Zero Lower Bound. And today the US Fed announced a "QE3", with a very different communications policy, which goes at least part of the way towards doing what Michael Woodford (and others) would want the Fed to do.
Does this mean that the orthodox have recovered their faith? If so why? And, more importantly, why did they ever lose it in the first place? What new empirical or theoretical findings could explain why beliefs seemed to change, and then change back again?
I don't have a good answer to that question.
But I do have one rather disquieting thought. It is a commonplace to note that the business cycle seems to be reflected in waves of optimism and pessimism. Might those same waves of optimism and pessimism extend to macroeconomists' beliefs in the efficacy of monetary policy? (And how come Scott Sumner seems to be immune?)
Oh, never mind. We're winning!
Worthwhile Canadian Initiative 
rsj: “But if you are offering generally unpleasant work and need to pay higher wages as a result, then that is supply-demand, right?”
Yes. “Compensating differentials”.
Nick, I don’t think you got my point. The disutility of repetitive work increases with the amount of time that you have to do it. Workers most definitely were not lining up to Ford’s factories to work there for 2 years. They were lining up to work there for 6 weeks. But he needed people to work for 2 years — to reduce turnover — so he had to raise the wage up until people were willing to stick to a repetitive and dangerous job even as the disutility of doing that job increased.
Should be Bowley ratio – the ratio that is conserved in Bowley’s law.
From Wikipedia:
“Bowley’s law is an observation in econometrics that the proportion of Gross National Product from labor is constant.[1] It is named for Arthur Bowley, the statistician who first observed it. It was first observed based on economic data in Britain from the late 19th and early 20th centuries.[2] Bowley’s Law has long been both an empirical and theoretical point of contention between rival theories of macroeconomic (functional) distribution.[3]”
I referred to it in this post here on 3AUG12
http://worthwhile.typepad.com/worthwhile_canadian_initi/2012/08/can-we-understand-agent-based-models.html?
cid=6a00d83451688169e20167690a6ed3970b#comment-6a00d83451688169e20167690a6ed3970b
drawing attention to this post of the same day
http://worthwhile.typepad.com/worthwhile_canadian_initi/2012/08/can-we-understand-agent-based-models.html?cid=6a00d83451688169e2017616fac9a5970c#comment-6a00d83451688169e2017616fac9a5970c
where Geoff Willis is plugging a very interesting paper of his on a sort of Thermodynamic model of the economy
http://www.econodynamics.org/sitebuildercontent/sitebuilderfiles/bullets
The question is why does Bowley’s law work?
Thhe important point, however, is that the recovery is not restoring the pre-recovery wage spectrum. There’s a hole in the middle.
as above:
“ Lower-wage occupations constituted 21 percent of recession job losses, but fully 58 percent of recovery growth.
Mid-wage occupations constituted 60 percent of recession job losses, but only 22 percent of recovery growth.
Higher-wage occupations constituted 19 percent of recession job losses, and 20 percent of recovery growth.”
Then there’s this
“Firm startups account for only 3 percent of employment but almost 20 percent of gross job creation,” the authors write. “[T]he fastest growing continuing firms are young firms under the age of five,” the authors conclude.
In this study, which relies on data from the Census Bureau, the authors confirm that smaller companies created more jobs than larger companies during 1992-2005. But the importance of firm size depends very much on the assumptions one makes about the base year of the analysis, the number of employees used to define “small”, and other factors. The real driver of disproportionate job growth, they find, is not small companies, but young companies. It is the startup firms that generate the surge of jobs that earlier research attributed to small companies.”
http://www.nber.org/digest/feb11/w16300.html
and the fact I cited above that
“U.S. [stock market] listings have decreased every single year since 1997 with no rebound at all”
I believe there’s a relationship. The decline in middle paying jobs began in 2000. We’re not forming near as many of the sorts of companies that would have provided the missing jobs.