A History of Macroeconomics<\/u>, by Michel De Vroey.\u00a0 Cambridge University Press, 2016.<\/p>\n
De Vroey\u2019s book reads like a travelogue recounting his life journey as a macroeconomist, and his considered response to key texts he encountered along the way.\u00a0 Always thoughtful and penetrating, he stimulates this reader to reflect anew on how we got to where we are today, and what might lie ahead. \u00a0In 1981, I commenced my own life journey as a macroeconomist, beginning in my final undergraduate spring semester by reading Keynes\u2019 General Theory<\/u>, and then continuing on in the fall as a Masters student by reading Malinvaud\u2019s Theory of Unemployment Reconsidered<\/u> as well as Lucas and Sargent\u2019s newly published reader Rational Expectations and Econometric Practice<\/u>. \u00a0Thirty five years later, De Vroey offers me the chance to revisit the texts on which I spent my youthful energies, and to reconsider the decisions I made about where to position myself in the intellectual turmoil then raging.<\/p>\n
The book is an unapologetically internal<\/u> history of macroeconomics, focused mainly on understanding the internal logic of the books and papers that made a difference.\u00a0 But it is not Whig history\u2014no triumphal account of the inexorable progress of knowledge.\u00a0 Quite the contrary, a central theme of the book concerns the demise of a specifically Marshallian approach to economic thinking that DeVroey clearly favors, and that he detects not only in Keynes but also in Friedman, Clower, Leijonhufvud, and Phelps, the last of whom he characterizes as \u201cthe only one who really delivered\u201d (p. 148) on the goal of explaining unemployment.<\/p>\n
\u201cDelivering\u201d, for De Vroey, means providing an internally<\/u> coherent theoretical account.\u00a0 From this point of view, the fundamental problem of macroeconomics is that the urtext that started it all off, Keynes\u2019 General Theory<\/u>, didn\u2019t actually deliver, and it didn\u2019t deliver because the Marshallian framework that Keynes used to develop his ideas has no real place in it for involuntary unemployment.\u00a0 Similarly, those who followed after Keynes made progress only to the extent that they deviated from the trade technology assumed by Marshall.\u00a0 De Vroey\u2019s quotation of Clower and Leijonhufvud\u2019s list of the \u201cmain constitutive features\u201d of their own effort to reconstruct macroeconomics reads like De Vroey\u2019s own wish list:<\/p>\n
\u201c[The new trade technology] (1) lacks a central information-processing and bill-collecting agency; (2) has, instead, middlemen trying to coordinate production and consumption activities in each output market separately; (3) makes the management of stocks of inventories essential to the coordination of these activities; and (4) has the system potentially subject to the commercial crises associated with expansions and contractions of the volume of bank and non-bank credit\u201d (p. 116).<\/p>\n
But that\u2019s not the road we have travelled, at least not yet.<\/p>\n
Instead we got the dynamic stochastic general equilibrium (DSGE) program, which had its theoretical origins in Lucas\u2019 \u201cExpectations and the Neutrality of Money\u201d (1972) and its empirical origins in the Real Business Cycle (RBC) work of Kydland and Prescott.\u00a0 For a while the Keynesians tried to fight it off, defending the traditional IS-LM formulation of Keynes\u2019 message, but it didn\u2019t work.\u00a0 Today, what De Vroey calls Second-Generation New Keynesian modelling is more or less a direct continuation of the Lucas program. \u00a0\u201cNew Keynesian modeling is no more directly explanatory of reality than RBC modelling.\u00a0 This is the price to pay for having given the priority to internal consistency\u201d (p. 334).<\/p>\n
De Vroey clearly regrets the direction that macroeconomics has taken, but he also clearly admires the edifice that has been constructed.\u00a0 By construction, it is definitely an internally coherent theoretical account of something.\u00a0 The problem is that the internal coherence has been purchased at the price of external incoherence\u2014the models have little connection to external reality.\u00a0\u00a0 Indeed, they operate, so De Vroey insists repeatedly, mostly as a kind of political philosophy. \u00a0\u201cIn an age when expertise is so valued, macroeconomists should refuse to play the part of experts and admit that their social usefulness is of the same subdued variety as that of political philosophers\u201d (p. 380).\u00a0\u00a0 From a methodological standpoint, it is simply illegitimate to use these models to pronounce on policy.\u00a0 Lucas comes in for praise for appreciating this inherent limitation, while those who followed after Lucas come in for criticism for ignoring it.<\/p>\n
In a past age, the so-called \u201cneoclassical synthesis\u201d operated to create intellectual space for macroeconomics, which consisted of pragmatic theories of deviation from equilibrium, separate from the theory of long run equilibrium (e.g. Solow growth theory).\u00a0 There never really was a synthesis, in the sense of an internally coherent theory linking the short run with the long run, just a division of labor.\u00a0 But with Lucas, that separate space for macroeconomics came under attack and by now it has essentially vanished.\u00a0 Formerly macroeconomics was about explaining unemployment; today it is entirely about the properties of equilibrium models.\u00a0 Pragmatic policy-oriented macroeconomics, of the style exemplified by Okun\u2019s posthumous Prices and Quantities<\/u> (1981), survives only in policy schools and the voices of public intellectuals.\u00a0 \u201cAgainst Lucas\u2019s newly defined standards, it was definitely sub-standard\u201d (p. 217).\u00a0 \u201cWith macroeconomics as it stands after the Lucasian revolution, making a theoretical case favoring Keynesian conclusions amounts to fighting with one hand tied behind one\u2019s back:\u00a0 the task is not impossible but it is difficult\u201d (p. 376).<\/p>\n
How did it all come to this?<\/p>\n
De Vroey suggests that the rot began all the way back at the very beginning, when some early enthusiasts for Keynes shunted the Keynesian train onto the Walrasian track.\u00a0 Some of the most fascinating pages of De Vroey\u2019s travelogue trace the steps by which this was done\u2014by Hicks, Modigliani, Klein, and Patinkin (Ch. 2-3).\u00a0 Every one of them thought, of course, that he was \u201cdelivering\u201d.\u00a0 But the Walrasian framework has no more place in it for involuntary unemployment than does the Marshallian framework, not the original version put forth by Walras himself, not the modern general equilibrium version of Arrow and Debreu, and not even the so-called non-Walrasian equilibrium versions of Dreze, Benassy, and Malinvaud.\u00a0\u00a0 In the end, the internal logic of the Walrasian general equilibrium framework inevitably prevails, and that\u2019s why we got new classical macroeconomics, real business cycles, and DSGE. \u00a0\u201cModels have a life of their own that may evolve independently from the motivation and vision of those who created them\u201d (p. 203). \u00a0De Vroey\u2019s focus on internal history thus leads him to emphasize a kind of inexorable internal dynamic driving that history.<\/p>\n
One question begged by De Vroey\u2019s account is why those who wanted to build on Keynes chose to do so in a Walrasian frame.\u00a0 For the early Keynesians, as DeVroey points out (pp. 299-300), Walras was mainly connected with social engineering and the socialist calculation debate.\u00a0 As such, the Walrasian model represented a kind of normative goal, and the burning question was whether socialist planning, or free markets, or some hybrid with aggregative management (such as Keynes) could best achieve that normative goal.\u00a0 De Vroey suggests that Lange was an important source of Walrasianism for Modigliani, Patinkin, and Klein.\u00a0 In my own work, I have drawn attention instead to the role of Marschak (Mehrling 2002, 2010, 2014).\u00a0 Whatever the origin, the important point is that Walras was brought in for a reason.\u00a0 Even more, that reason is arguably the origin of the idea of the neoclassical synthesis, even though Samuelson\u2019s coinage of the actual phrase did not come until 1955 (p. 46).<\/p>\n
As a sometime historian of macroeconomics myself, I have some sympathy with this general line of argument, though I would put the emphasis somewhat differently.\u00a0 For me, the central problem with the Walrasian framework is the lack of any place in it for money, sometimes called the Hahn Problem after Hahn\u2019s 1965 essay which was directed toward Patinkin but applies more generally.\u00a0\u00a0 As De Vroey observes (p. 3), Keynes was a money guy, and before the General Theory<\/u> he wrote the Treatise on Money<\/u> (1930), which notably was organized around the quantity equation, not<\/u> the Marshallian frame that De Vroey emphasizes.\u00a0 The tepid reception of that earlier book is what led Keynes to try again with the General Theory<\/u>.\u00a0\u00a0 As I read Keynes, his policy ideas always come from his practical experience, as investor and statesman, and his books are attempts to translate those ideas into scientific language that will convince his economist colleagues.\u00a0 The problem is that the decision of his early followers to translate his ideas into a Walrasian frame wound up importing the Hahn Problem into the very center of macroeconomics, though at the time none of them realized it. \u00a0What I have called \u201cmonetary Walrasianism\u201d (Mehrling 1997) became the postwar orthodoxy not only of the Keynesians but also of monetarists such as Friedman, and it was only with the turn toward microfoundations that the Hahn Problem really began to bite.\u00a0 As DeVroey points out, even Lucas (1972) had a Friedman-like quantity theoretic frame that included money, and it was not until Kydland and Prescott that money was finally eliminated.\u00a0\u00a0 It took a while for the internal logic of the model to play out.<\/p>\n
I thus have a certain sympathy with internal history driven by the internal logic of mental frameworks.\u00a0 But more generally I think that a full understanding of the history of macroeconomics requires more than that.\u00a0 I conclude by drawing attention to two bits of outside influence that seem to me quite important for the story.<\/p>\n
The first is the influence of the American institutionalist tradition, a tradition that was generally antagonistic to Marshall, on the early American Keynesians (Mehrling 1997, especially 130-136 on Alvin Hansen).\u00a0 De Vroey refers frequently to the \u201cpragmatism\u201d of the early Keynesians, but to my mind he does not adequately appreciate the way that, in the American scene, pragmatism operated as a scientific<\/u> methodology.\u00a0 What American institutionalist Richard T. Ely called the \u201clook and see method\u201d is in fact characteristic of most of pre-Keynesian American economics, stemming from the writings of Charles Sanders Peirce and John Dewey, among others.\u00a0 What looks like eclecticism to a European sensibility is in fact, at least at its best, a disciplined attempt to find the appropriate theoretical framework for a particular problem.\u00a0 From this point of view, the significant methodological breach represented by Lucas was not so much a shift away from Marshall, as De Vroey argues (Ch. 10), but rather a shift away from pragmatism.<\/p>\n
The second is the influence of the new field of finance on macroeconomics.\u00a0\u00a0 The idea that prices move to keep markets in equilibrium at every point in time, short run as well as long run, was foundational for modern finance before it became foundational for modern macroeconomics.\u00a0 In fact, as I have suggested elsewhere, it showed the way (Mehrling 2010).\u00a0\u00a0 Way back at the beginning, the idea to understand \u201cLiquidity Preference as Behavior toward Risk\u201d (Tobin 1958) linked the IS-LM model conceptually with developments in asset pricing.\u00a0 \u00a0Today the Euler equation characterizing intertemporal optimization lies at the heart of both modern finance and modern macroeconomics:<\/p>\n
U\u2032(Cit<\/sub>) = Et<\/sub>[\u03b4U\u2032(Cit<\/sub>+1<\/sub>)Rjt<\/sub>+1<\/sub>].<\/p>\n For finance, this equation is about how asset prices Rjt<\/sub>+1<\/sub> depend on time and risk preferences, the equation is called the \u201cconsumption CAPM,\u201d and the asset in question is typically equity or long-term bonds. But the same equation can be used to talk about the intertemporal fluctuation of income, and as such is at the core of both real business cycle theory and its New Keynesian variants. In this application, the asset is typically capital, or a rate of interest.\u00a0 \u00a0From this point of view, the significant methodological breach represented by Lucas was not so much a shift toward Walras as it was a shift toward finance.<\/p>\n At the end of the book, De Vroey reaches beyond his internalist historical frame and reflects a bit on the likely effects of the \u201c2008 Recession\u201d on the future of macroeconomics.\u00a0\u00a0 Certainly the DSGE models had little to say about the cause of the recession or possible policy response to it.\u00a0 \u201cAs a matter of construction, DSGE models \u2026 exclude the possibility of integrating important pathologies into the workings of the market system, and certainly any collapse in the trading system of the extent that we have experienced\u201d (p. 387).\u00a0 One consequence has been an increased interest in returning to Keynes, but De Vroey thinks there is no going back.\u00a0 Developments in macroeconomics will continue to respect the methodological strictures that Lucas and his followers have established.\u00a0 Indeed, currently economists are hard at work trying to integrate a financial sector into the DSGE framework.\u00a0 \u201cAt this juncture, it is however still difficult to gauge whether a mere integration of the financial sector within the existing framework will suffice, or whether a more radical reorientation of macroeconomics will see the light of day\u201d (p. 388).<\/p>\n If I read him right, the radical reorientation that De Vroey has in mind would involve something like what Phelps did.\u00a0 Specifically, Chapter 14 \u201cReacting to Lucas:\u00a0 Alternative Research Lines\u201d has a kind of wistful road-not-travelled feel, drawing our attention to search-theoretic work that De Vroey himself thinks showed promise for a possible alternative direction. \u00a0But no one picked it up, and in particular that no one developed an empirical program that would allow researchers to apply the theory to practical problems.\u00a0 Maybe, but I\u2019m not convinced.<\/p>\n For me the problem with all these search-theoretic models is that they emphasize market failure in the labor market, which they view as a kind of special case.\u00a0 But the global financial crisis that led to the 2008 Recession was not a breakdown in labor matching.\u00a0 It was a breakdown in wholesale money markets worldwide, the fundamental infrastructure that supports trading in all markets.\u00a0 \u00a0The more general Clower-Leijonhufvud wish list seems to me very much in line with what I have been calling the \u201cMoney View\u201d, which I consider to be the natural implicit theory for people whose lives bring them into contact with money markets.\u00a0\u00a0 Making that implicit theory explicit would provide foundations for a possible macroeconomics.<\/p>\n \u00a0<\/strong><\/p>\n References<\/strong><\/p>\n Hahn, Frank.\u00a0 1965.\u00a0 “On Some Problems of Proving the Existence of an Equilibrium in a Monetary Economy,” in Hahn and Brechling, editors, Theory of Interest Rates<\/u>.<\/p>\n Mehrling, Perry.\u00a0 1997.\u00a0 The Money Interest and the Public Interest:\u00a0 American Monetary Thought, 1920-1970<\/u>.\u00a0 Harvard Economic Studies #162.\u00a0 Cambridge:\u00a0 Harvard University Press.<\/p>\n Mehrling, Perry.\u00a0 2002.\u00a0 “Don Patinkin and the Origins of Postwar Monetary Orthodoxy.” European Journal of the <\/u>\u00a0History of Economic Thought<\/u> 9 No. 2 (Summer):\u00a0 161-85.<\/p>\n Mehrling, Perry.\u00a0 2010.\u00a0 \u201cA Tale of Two Cities.\u201d \u00a0History of Political Economy<\/u> 42 No. 2:\u00a0 201-219.<\/p>\n Mehrling, Perry.\u00a0 2014.\u00a0 \u201cMIT and Money.\u201d\u00a0 In MIT and the Transformation of American Economics<\/u>, edited by E. Roy Weintraub.\u00a0 History of Political Economy<\/u> (supplement).\u00a0 Duke University Press.<\/p>\n Tobin, James.\u00a0 1958.\u00a0 \u201cLiquidity Preference as Behavior Towards Risk.\u201d\u00a0 Review of Economic Studies<\/u> 25 (February):\u00a0 65-86.<\/p>\n","protected":false},"excerpt":{"rendered":" A History of Macroeconomics, by Michel De Vroey.\u00a0 Cambridge University Press, 2016. De Vroey\u2019s book reads like a travelogue recounting his life journey as a macroeconomist, and his considered response to key texts he encountered along the way.\u00a0 Always thoughtful and penetrating, he stimulates this reader to reflect anew on how we got to where […]<\/p>\n","protected":false},"author":15789,"featured_media":0,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":[],"categories":[1],"tags":[43,33,7],"_links":{"self":[{"href":"https:\/\/sites.bu.edu\/perry\/wp-json\/wp\/v2\/posts\/140"}],"collection":[{"href":"https:\/\/sites.bu.edu\/perry\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/sites.bu.edu\/perry\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/sites.bu.edu\/perry\/wp-json\/wp\/v2\/users\/15789"}],"replies":[{"embeddable":true,"href":"https:\/\/sites.bu.edu\/perry\/wp-json\/wp\/v2\/comments?post=140"}],"version-history":[{"count":1,"href":"https:\/\/sites.bu.edu\/perry\/wp-json\/wp\/v2\/posts\/140\/revisions"}],"predecessor-version":[{"id":141,"href":"https:\/\/sites.bu.edu\/perry\/wp-json\/wp\/v2\/posts\/140\/revisions\/141"}],"wp:attachment":[{"href":"https:\/\/sites.bu.edu\/perry\/wp-json\/wp\/v2\/media?parent=140"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/sites.bu.edu\/perry\/wp-json\/wp\/v2\/categories?post=140"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/sites.bu.edu\/perry\/wp-json\/wp\/v2\/tags?post=140"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}