center for the history of political economy summer school june 2012 1 history of modern...
TRANSCRIPT
Center for the History of Political Economy Summer School June
2012 1
History of Modern MacroeconomicsLecture 3.3. Macroeconometrics and
the New Economics (1930-1950)
Kevin D. HooverDepartment of EconomicsDepartment of Philosophy
Center for the History of Political EconomyDuke University
Center for the History of Political Economy Summer School June
2012 2
Ragnar Frisch
Inventor of important terminology: microeconomics/macro-
economics econometrics
Influential in development of: dynamic economics econometric (empirical)
methods Creator of modern professional
institutions Founder of Econometric Society First editor of Econometrica
Ragnar Frisch (1895-1973), Nobel Laureate (1969)
Center for the History of Political Economy Summer School June
2012 3
Contrasts and Complementarities Between
Frisch and Keynes micro vs. macrodynamics
econometrics pragmatism and
aggregation dynamics
pervasive micro analysis system properties and
emergence against econometrics
Frisch
Keynes
Center for the History of Political Economy Summer School June
2012 4
Frisch: Dynamics and the Macro/Micro Distinction
“micro-dynamic analysis is an analysis by which we try to explain in some detail the behaviour of a certain section of the huge economic mechanism, taking for granted that certain general parameters are given . . .”
“macro-dynamic analysis, on the other hand, tries to give an account of the fluctuations of the whole economic system taken in its entirety.”
Macro not built on micro; micro presupposes macro.
Center for the History of Political Economy Summer School June
2012 5
Frisch: The Economic Pragmatist
“it is always possible to give even a macro-dynamic analysis in detail if we confine ourselves to a purely formal theory . . . Such a theory, however, would only have a rather limited interest” for actual business-cycle problems.
“We may perhaps start by throwing all kinds of production into one variable, all consumption into another, and so on, imagining that the notions ‘production,’ ‘consumption,’ and so on, can be measured by some sort of total indices.”
Center for the History of Political Economy Summer School June
2012 6
Keynes on Dynamics
“The real task of [monetary] theory is to treat the problem dynamically, analysing the different elements involved, in such a manner as to exhibit the causal process . . . and the method of transition from one position of equilibrium to another.”
Treatise on Money
Center for the History of Political Economy Summer School June
2012 7
Keynes and the Centrality ofMicroeconomic Analysis
All the main Keynesian functions analyzed microeconomically:o consumption functiono labor supplyo labor demando liquidity preferenceo investment
Center for the History of Political Economy Summer School June
2012 8
An Illustration: Keynes on Liquidity Preference
Speculative demand for moneyo normal rate of interest—individual and
heterogenouso hold bonds if market rate above normal
expected capital gain; hold money if market rate below normal expected capital loss
o market rate = rate at which market is divided into balanced groups of bulls and bears
o no aggregation; market rate = some particular agent’s normal rate
Center for the History of Political Economy Summer School June
2012 9
Another Illustration: Keynes on the Labor Market – 1
Labor demand: standard firm optimization problem
Labor supply: not principally money illusion but a relative efficiency-wage argument:o “the struggle for money-wages is . . . essentially a
struggle to maintain a high relative wage . . .” General Theory
o Kevin Hoover, “Relative Wages, Rationality, and Involuntary Unemployment in Keynes’s Labor Market,” History of Political Economy 1995.
Center for the History of Political Economy Summer School June
2012 10
Another Illustration: Keynes on the Labor Market – 2
Defines unemployment not by aggregative version of individual situation: real wage > marginal disutility of labor but by market test:
“Men are involuntarily unemployed if, in the event of a small rise in the price of wage-goods relatively to the money-wage, both the aggregate supply of labour willing to work for the current money-wage and the aggregate demand for it at that wage would be greater than the existing volume of employment. “
No reference to aggregate labor-supply function.
Center for the History of Political Economy Summer School June
2012 11
Keynes vs. Frisch: Role of Theory
Frisch: macro system a giant machine
approximated by coarser simplifications; the “economic engineer”; models as
mechanical analogues.
Keynes: economy organic; macro properties
emergent; the “economic physician”; models as
diagnostic tools
Center for the History of Political Economy Summer School June
2012 12
Frisch’s Vision: Two Versions of the Tableau Economique
François Quesnay 1759
Ragnar Frisch 1933
Center for the History of Political Economy Summer School June
2012 13
Keynes’s Vision: Mandeville’s Fable of the Bees
“the gay of tomorrow are absolutely indispensable to provide a raison d'être for the grave of to-day” (Keynes, General Theory, pp. 105-106).
Center for the History of Political Economy Summer School June
2012 14
Keynes vs. Frisch: Aggregation and Econometrics
Frisch: aggregation pragmatically necessary for econometrics;
Keynes: against econometrics; despite introducing terms such as aggregate supply and aggregate demand, aggregates do not drive dynamics
Center for the History of Political Economy Summer School June
2012 15
Frisch: The Economy as Machine: A Simple Pendulum as an Analogue of
the Business Cycle
Center for the History of Political Economy Summer School June
2012 17
Propagation and Impulse Mechanisms
Center for the History of Political Economy Summer School June
2012 18
Jan Tinbergen and Applied Macroeconometrics
Trained as physicist Created first modern
econometric models: Smaller Dutch model Larger U.S. model
Two-volume study of U.S. business cycles for the League of Nations (1939) methodology and
application object of Keynes’s
attack on econometricsJan Tinbergen (1903-1994)
Center for the History of Political Economy Summer School June
2012 19
Jan Tinbergen
Socialist
In 1950s director of the Dutch Central Planning Bureau
Jan Tinbergen (1903-1994), Nobel Laureate (1969)
Center for the History of Political Economy Summer School June
2012 20
Keynes Meets Frisch and Tinbergen – 1: The Cowles
Commission Cowles Commission for Research in Economics founded in 1932 by Alfred Cowles
Moved to Chicago in 1939 Early research:
Econometric methodology (especially structural macromodels)
General equilibrium models
Center for the History of Political Economy Summer School June
2012 21
Keynes Meets Frisch and Tinbergen – 2: Hicks
Value and Capital (1939): Keynes in light of Walras
Dynamics of type Frisch thought impractical
Formal analysis of aggregation
The IS-LM ModelSir John R. Hicks (1904-89), Nobel Laureate (1972)
Center for the History of Political Economy Summer School June
2012 22
Klein and the Aggregation Program
Keynesian
Walrasian
Econometrician
Socialist
Lawrence Klein (1920- ), Nobel Laureate (1980)
Center for the History of Political Economy Summer School June
2012 23
Keynes and Bretton Woods
Bretton Woods (NH) Resort
Keynes and Harry Dexter White (U.S. Delegate)
Keynes and the Soviet Delegate
Center for the History of Political Economy Summer School June
2012 24
Making the Economy Work - 1
Lord Beveridge (1879-1963)
Center for the History of Political Economy Summer School June
2012 25
Making the Economy Work - 2
Harry S. Truman (1884-1972, President 1945-53)
Alvin Hansen (1887-1975), American popularizer of Keynes