Questioning Conventional Economic Thinking with Professor Dan Murphy

Professor Dan Murphy’s introduction to the Darden classroom was not exactly what he expected: “They’re jumping on the desks, pounding the walls. They start doing these chants, and I’m thinking, ‘Where the heck am I? What am I supposed to do right now? It sounds like a riot’s about to start in here.’”

At the conclusion of his first semester teaching, Murphy received more evidence that Darden was different: a standing ovation that lasted “a decent amount of time. It was very endearing. It feels like the students appreciate what we do, and the faculty here appreciate the students.”

Murphy came to Charlottesville from Ann Arbor, Michigan, where he earned his Ph.D. in economics and public policy. There, he became immersed in macroeconomics when he found himself questioning some of the field’s basic assumptions. “I had slightly different ways of perceiving the world than the models that we were being taught at the time,” he remembers. “So I tried to work on ways to incorporate what I thought were more realistic assumptions and explore the implications.”

Murphy questioned the notion that responsive markets, where prices and markets adjust to changes in the macroeconomy, eliminate the need for government stabilization policy. If a market were perfectly responsive, the theory goes, the rationale for government intervention completely disappears. In this view of the world, the need for government intervention is proportional to the “stickiness” of wages and prices.

Yet a simple thought experiment led Murphy to realize that even responsive markets can still produce excess capacity. “My experience from various service-sector jobs was that people preferred to be busy rather than idle on the job. For example, barbers are glad to provide the next haircut, up until they hit capacity of 40 hours a week. My work demonstrated that once this insight is incorporated into a model of the macroeconomy, prolonged recessions can occur even if prices and wages fully adjust to firms’ and workers’ desired levels in response to changes in the macroeconomic environment.”

Indeed, the act of changing from one mode of production to another, more efficient mode has a cost to the people who live and work to create the economy. “Anything that might transition us from working in one sector to another sector takes time because people don’t immediately transition into the productive parts of the economy. That’s sort of a microfoundation for my work on wage and price stickiness.”

Murphy’s ability to connect his models to human behavior is particularly useful in the Darden classroom, where students will need the ability to connect theory to practice. “I think at its best, macroeconomics derives aggregate implications from individual human behaviors. You observe how people behave, and then you filter out information and decide what to put into your model. The model yields predictions for the types of actions that can mitigate recessions and maximize social welfare.”

“It’s the same when we present a framework to the students,” he adds. “It’s my job to convey what can be technical and obscure in a tangible way. It’s a fun challenge, and I really enjoy that part of the job.” Murphy’s work led to a new model that foresaw rapidly increasing inflation as the United States economy emerged from the COVID-19 pandemic.

“The simple explanation is that people saved a lot, and all of those savings became additional spending in the future. And we had a supply disruption, too,” he says. “It’s not surprising when you think about it that way, but to put it into a macroeconomic theory, into math, we needed a different modeling framework than people are traditionally used to working with. We were the first ones that actually formalized that.”

New Research Challenging Old Assumptions

Murphy’s research at Darden continues his tendency to question and refine conventional macroeconomic theory. On the relationship between interest rates and housing, he’s discovered that low interest rates don’t always benefit low-income people and reduce inequality. “Some of my work suggests that if you keep interest rates low, the rise in home prices can actually increase housing inequality,” he says. “It counterweights the prevailing notion that monetary policy should lean expansionary if you care about inequality.”

Recently, he’s been considering the consequences of property taxes. “There are a lot of benefits to living in dense areas, and there’s a consensus that property taxation is not very efficient. It disincentivizes you from improving your home or building denser structures.”

One alternative, however, is to tax land, not property. But land taxes are rarely implemented, perhaps due to a lack of evidence of their effects. “I’m working with a co-author on showing the empirical benefits of taxing land, rather than properties. Our evidence so far seems to show that, all else equal, land taxes lead to higher density, higher economic outcomes, higher diversity and higher wage growth within a county.”

Murphy clearly likes to think differently and has a wide range of projects and interests, making him a perfect fit for Darden’s individualized and human-centric approach to business education — even if he’s not quite ready to jump on a desk.