Carlaw and Lipsey on Whether History Matters

About six months ago,  I mentioned a forthcoming paper by Kenneth Carlaw and Richard Lipsey, “Does history matter? Empirical analysis  of evolutionary versus stationary equilibrium views of the economy.”  The paper was recently published in the Journal of Evolutionary Economics.  The empirical analysis undertaken by Carlaw and Lipsey undermines many widely accepted propositions of modern macroeconomics, and is thus especially timely after the recent flurry of posts on the current state of macroecoomics by Krugman, Williamson, Smith, Delong, Sumner, et al., a topic about which I may have a word or two to say anon.  Here is the abstract of the Carlaw and Lipsey paper.

The evolutionary vision in which history matters is of an evolving economy driven by bursts of technological change initiated by agents facing uncertainty and producing long term, path-dependent growth and shorter-term, non-random investment cycles. The alternative vision in which history does not matter is of a stationary, ergodic process driven by rational agents facing risk and producing stable trend growth and shorter term cycles caused by random disturbances. We use Carlaw and Lipsey’s simulation model of non-stationary, sustained growth driven by endogenous, path-dependent technological change under uncertainty to generate artificial macro data. We match these data to the New Classical stylized growth facts. The raw simulation data pass standard tests for trend and difference stationarity, exhibiting unit roots and cointegrating processes of order one. Thus, contrary to current belief, these tests do not establish that the real data are generated by a stationary process. Real data are then used to estimate time-varying NAIRU’s for six OECD countries. The estimates are shown to be highly sensitive to the time period over which they are made. They also fail to show any relation between the unemployment gap, actual unemployment minus estimated NAIRU and the acceleration of inflation. Thus there is no tendency for inflation to behave as required by the New Keynesian and earlier New Classical theory. We conclude by rejecting the existence of a well-defined a short-run, negatively sloped Philips curve, a NAIRU, a unique general equilibrium, short and long-run, a vertical long-run Phillips curve, and the long-run neutrality of money.

UPDATE:  In addition to the abstract, I think it would be worthwhile to quote the three introductory paragraphs from Carlaw and Lipsey.

Economists face two conflicting visions of the market economy, visions that reflect two distinct paradigms, the Newtonian and the Darwinian. In the former, the behaviour of the economy is seen as the result of an equilibrium reached by the operation of opposing forces – such as market demanders and suppliers or competing oligopolists – that operate in markets characterised by negative feedback that returns the economy to its static equilibrium or its stationary equilibrium growth path. In the latter, the behaviour of the economy is seen as the result of many different forces – especially technological changes – that evolve endogenously over time, that are subject to many exogenous shocks, and that often operate in markets subject to positive feedback and in which agents operate under conditions of genuine uncertainty.
One major characteristic that distinguishes the two visions is stationarity for the Newtonian and non-stationarity for the Darwinian. In the stationary equilibrium of a static general equilibrium model and the equilibrium growth path of a Solow-type or endogenous growth model, the path by which the equilibrium is reached has no effect on the equilibrium values themselves. In short, history does not matter. In contrast, an important characteristic of the Darwinian vision is path dependency: what happens now has important implications for what will happen in the future. In short, history does matter.
In this paper, we consider, and cast doubts on, the stationarity properties of models in the Newtonian tradition. These doubts, if sustained, have important implications for understanding virtually all aspects of macroeconomics, including of long term economic growth, shorter term business cycles, and stabilisation policy.
UPDATE (12/28/12):  I received an email from Richard Lipsey about this post.  He attached two footnotes (1 and 5) from his article with Carlaw, which he thinks are relevant to some of the issues raised in comments to this post.  Footnote 1 explains their use of “Darwinian” to describe their path-dependent approach to economic modeling; footnote 5 observes that the analysis of many microeconomic problems and short-run macro-policy analysis may be amenable to the static-equilibrium method.

1 The use of the terms Darwinian and Newtonian here is meant to highlight the significant difference in equilibrium concept employed in the two groups of theories that we contrast, the evolutionary and what we call equilibrium with deviations (EWD) theories. Not all evolutionary theories, including the one employed here, are strictly speaking Darwinian in the sense that they embody replication and selection. We use the term, Darwinian to highlight the critical equilibrium concept of a path dependent, non-ergodic, historical process employed in Darwinian and evolutionary theories and to draw the contrast between that and the negative feedback, usually unique, ergodic equilibrium concept employed in Newtonian and EWD theories.

 5 Most evolutionary economists accept that for many issues in micro economics, comparative static equilibrium models are useful. Also, there is nothing incompatible between the evolutionary world view and the use of Keynesian models – of which IS-LM closed by an expectations-augmented Phillips curve is the prototype – to study such short run phenomenon as stagflation and the impact effects of monetary and fiscal policy shocks. Problems arise, however, when such analyses are applied to situations in which technology is changing endogenously over time periods that are relevant to the issues being studied. Depending on the issue at hand, this might be as short as a few months.

16 Responses to “Carlaw and Lipsey on Whether History Matters”

  1. 1 Diego Espinosa December 23, 2012 at 10:36 am

    From reading the abstract, the paper would seem to cast doubt over whether its appropriate to rely on historical output gap analogies in cases where initial conditions were substantially different.

  2. 2 Jonathan M.F. Catalán December 23, 2012 at 12:23 pm

    I sympathize with a lot of the arguments in the Carlaw and Lipsey paper, but I wonder if there can be too much emphasis on the shortcomings of “stationary” models. What I mean is that “stationary” models oftentimes do have valuable insights, but that they need to be complimented with dynamic theories of long-run change.

  3. 3 Mike Sax December 23, 2012 at 7:26 pm

    It’s funny that you should “go here” right now David, as I’m in the middle of reading Steve Keen’s “Debunking Economics”-the “economics” he has in mind is the Neoclasscial school.

    He argues that this is the real problem: that mainstream Macro has no idea of a dynamic economy or any genunine uncertainty. In this though all the actors in the current dispute more or less also believe in the static, general equilbrium models-even “New Keynesians” like Krugman as well as a Krugman hater like Stephen Williamson.

    He argues that comparative statics is a deadend. Regarding Phillips he argues that Phillips basically has been misread, that he was never about any simpleminded tradeoff between inflation and unemployment.

  4. 4 Becky Hargrove December 24, 2012 at 8:01 am

    The path by which equilibrium is reached however has tremendous effect on the path overall. Even so we can be fooled by history in the parts of the model that we are looking at, especially when capital use is defined as a static element. Plus, to call path dependency Darwinian also implies that the path is not possible to make amenable to all, which is true if economic growth incrementality is not allowed. It is too tempting to capture wealth growth in sizable chunks which also lead to predictable cycles, but then the predictability of the cycles create their own problems. They are what can make an equilibrium appear static when in fact it becomes set up for longer curves of “breakdown” as the growth “chunks” (what is required to set up business, services, livability or work) tend to become defined in terms too large for many economic actors.

    David, here’s wishing you and your family a most Merry Christmas and a Happy New Year.

  5. 5 Greg Ransom December 24, 2012 at 10:25 am

    Throughout his career Hayek used the metaphor of a stream with multiple branches flowing in and out and moving in one direction.

    Vague and unfocus reference to “Darwin” or to “evolution” isn’t particularly helpful.

    Darwin identified a particular design without a designer problem and a particular causal mechanism.

    Without those, you don’t have anything that is Darwin in any causal explanatory sense.

    See particularly Ernst Mayr on all this.

  6. 6 Greg Ransom December 24, 2012 at 10:30 am

    What we really need are economists with basic competence in Darwin’s explanatory strategy, and in the general topic of selection mechanisms of the sort developed by a number of philosophers of biology.

    I’ve never seen one.

    Skills in the conceptual mechanics of various aspects of the Darwinian explanatory program would clarify much and eliminate a great deal of hand waving reference to “evolution” and to “Darwin”.

  7. 7 Ogallalaknowhow December 24, 2012 at 11:37 am

    Veblen and the Institutionalists’ concept of “circular cumulative causation” seems to me a better starting point to make the same points than references to Darwinism that might leave a bitter taste for some.

    “Where Darwin’s theory of natural selection is based on the principle of evolution, the theory of human development, which presupposes Darwin’s theory, is based on the vicious-circle principle. And where the principle of evolution came to constitute the core of biology, the vicious-circle principle is intended to constitute the core of human ecology.”

    Sebastian Berger (2009), The Foundations of Non-Equilibrium Economics: The principles of circular cumulative causation

    Regards and Merry Xmas

  8. 8 Joshua Wojnilower December 25, 2012 at 9:28 am

    Thanks for directing us towards this paper. It’s a fascinating topic that certainly deserves to be considered from various perspectives. It’s unfortunate that history has become marginalized in economics during recent years/decades. Hopefully the recent crisis and current studies will push the discipline back in the other direction (

  9. 9 David Glasner December 26, 2012 at 9:34 am

    Diego, I think that’s correct. Estimating the output gap is certainly a very tricky business, and you can’t rely on historical analogies.

    Jonathan, Yes, I think that’s correct, and I don’t think that Carlaw and Lipsey would say that we have nothing to learn from stationary models. Given the very meager state of our knowledge, we can’t afford to ignore models just because they’re not perfect.

    Mike, I agree with Keen about mainstream macro, but probably would disagree with him about what to replace it with. I don’t reject comparative statics, but as I pointed out in my next post, comparative statics is very restrictive in its assumptions as well. For sure Phillips did not believe in an unemployment-inflation tradeoff. It now seems that even the classic Samuelson Solow paper on the the Phillips curve recognized that the tradeoff was dependent on expectations not adjusting in response to the policy.

    Becky, I am not sure how literally Carlaw and Lipsey meant their reference to Darwin to be taken. I think all they meant was that history creates irreversible changes in the environment in which economic activity takes place and induces further adaptations to that economic environment. The result is path dependence. I wouldn’t press the Darwin analogy beyond that. Thanks so much for your good wishes. All good wishes to you and yours as well.

    Greg, As I just said to Becky, I am not sure how literallly Carlaw and Lipsey meant their reference to Darwin to be taken. As I am not an expert on Darwin (and you have my express authorization to quote me on that), I will make no comment on whether their reference to Darwin was either unfocused or unhelpful.

    Ogallalaknowhow, Thanks for your reference to Veblen and the Institutionalists and for the link to Berger. Thanks for your good wishes. I wish you and yours a happy new year.

    Joshua, History (including the history of economics) is very important and economists need to study it more carefully.

  10. 10 GDF January 8, 2013 at 6:27 am

    David, what is your opinion of the work of Ulrich Witt’s approach to evolutionary economics? I’ve seen Earl Thompson had mixed opinions when he reviewed him in this issue of GBER..

  11. 11 David Glasner January 10, 2013 at 6:43 pm

    GDF, sorry, I have not read Witt’s work. I read the piece by Thompson to which you link a few years ago, and like all his work, it was original and highly thought-provoking. But much of his work outside macroeconomics and monetary theory is just too eccentric for my taste..

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About Me

David Glasner
Washington, DC

I am an economist in the Washington DC area. My research and writing has been mostly on monetary economics and policy and the history of economics. In my book Free Banking and Monetary Reform, I argued for a non-Monetarist non-Keynesian approach to monetary policy, based on a theory of a competitive supply of money. Over the years, I have become increasingly impressed by the similarities between my approach and that of R. G. Hawtrey and hope to bring Hawtrey's unduly neglected contributions to the attention of a wider audience.

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