Steve Williamson recently plugged a new book by Kartik Athreya (Big Ideas in Macroeconomics), an economist at the Federal Reserve Bank of Richmond, which tries to explain in relatively non-technical terms what modern macroeconomics is all about. I will acknowledge that my graduate training in macroeconomics predated the rise of modern macro, and I am not fluent in the language of modern macro, though I am trying to fill in the gaps. And this book is a good place to start. I found Athreya’s book a good overview of the field, explaining the fundamental ideas and how they fit together.
Big Ideas in Macroeconomics is a moderately big book, 415 pages, covering a very wide range of topics. It is noteworthy, I think, that despite its size, there is so little overlap between the topics covered in this book, and those covered in more traditional, perhaps old-fashioned, books on macroeconomics. The index contains not a single entry on the price level, inflation, deflation, money, interest, total output, employment or unemployment. Which is not to say that none of those concepts are ever mentioned or discussed, just that they are not treated, as they are in traditional macroeconomics books, as the principal objects of macroeconomic inquiry. The conduct of monetary or fiscal policy to achieve some explicit macroeconomic objective is never discussed. In contrast, there are repeated references to Walrasian equilibrium, the Arrow-Debreu-McKenzie model, the Radner model, Nash-equilibria, Pareto optimality, the first and second Welfare theorems. It’s a new world.
The first two chapters present a fairly detailed description of the idea of Walrasian general equilibrium and its modern incarnation in the canonical Arrow-Debreu-McKenzie (ADM) model.The ADM model describes an economy of utility-maximizing households and profit-maximizing firms engaged in the production and consumption of commodities through time and space. There are markets for commodities dated by time period, specified by location and classified by foreseeable contingent states of the world, so that the same physical commodity corresponds to many separate commodities, each corresponding to different time periods and locations and to contingent states of the world. Prices for such physically identical commodities are not necessarily uniform across times, locations or contingent states.The demand for road salt to de-ice roads depends on whether conditions, which depend on time and location and on states of the world. For each different possible weather contingency, there would be a distinct market for road salt for each location and time period.
The ADM model is solved once for all time periods and all states of the world. Under appropriate conditions, there is one (and possibly more than one) intertemporal equilibrium, all trades being executed in advance, with all deliveries subsequently being carried out, as time an contingencies unfold, in accordance with the terms of the original contracts.
Given the existence of an equilibrium, i.e., a set of prices subject to which all agents are individually optimizing, and all markets are clearing, there are two classical welfare theorems stating that any such equilibrium involves a Pareto-optimal allocation and any Pareto-optimal allocation could be supported by an equilibrium set of prices corresponding to a suitably chosen set of initial endowments. For these optimality results to obtain, it is necessary that markets be complete in the sense that there is a market for each commodity in each time period and contingent state of the world. Without a complete set of markets in this sense, the Pareto-optimality of the Walrasian equilibrium cannot be proved.
Readers may wonder about the process by which an equilibrium price vector would actually be found through some trading process. Athreya invokes the fiction of a Walrasian clearinghouse in which all agents (truthfully) register their notional demands and supplies at alternative price vectors. Based on these responses the clearinghouse is able to determine, by a process of trial and error, the equilibrium price vector. Since the Walrasian clearinghouse presumes that no trading occurs except at an equilibrium price vector, there can be no assurance that an equilibrium price vector would ever be arrived at under an actual trading process in which trading occurs at disequilibrium prices. Moreover, as Clower and Leijonhufvud showed over 40 years ago (“Say’s Principle: What it Means and What it Doesn’t Mean”), trading at disequilibrium prices may cause cumulative contractions of aggregate demand because the total volume of trade at a disequilibrium price will always be less than the volume of trade at an equilibrium price, the volume of trade being constrained by the lesser of quantity supplied and quantity demanded.
In the view of modern macroeconomics, then, Walrasian general equilibrium, as characterized by the ADM model, is the basic and overarching paradigm of macroeconomic analysis. To be sure, modern macroeconomics tries to go beyond the highly restrictive assumptions of the ADM model, but it is not clear whether the concessions made by modern macroeconomics to the real world go very far in enhancing the realism of the basic model.
Chapter 3, contains some interesting reflections on the importance of efficiency (Pareto-optimality) as a policy objective and on the trade-offs between efficiency and equity and between ex-ante and ex-post efficiency. But these topics are on the periphery of macroeconomics, so I will offer no comment here.
In chapter 4, Athreya turns to some common criticisms of modern macroeconomics: that it is too highly aggregated, too wedded to the rationality assumption, too focused on equilibrium steady states, and too highly mathematical. Athreya correctly points out that older macroeconomic models were also highly aggregated, so that if aggregation is a problem it is not unique to modern macroeconomics. That’s a fair point, but skirts some thorny issues. As Athreya acknowledges in chapter 5, an important issue separating certain older macroeconomic traditions (both Keynesian and Austrian among others) is the idea that macroeconomic dysfunction is a manifestation of coordination failure. It is a property – a remarkable property – of Walrasian general equilibrium that it achieves perfect (i.e., Pareto-optimal) coordination of disparate, self-interested, competitive individual agents, fully reconciling their plans in a way that might have been achieved by an omniscient and benevolent central planner. Walrasian general equilibrium fully solves the coordination problem. Insofar as important results of modern macroeconomics depend on the assumption that a real-life economy can be realistically characterized as a Walrasian equilibrium, modern macroeconomics is assuming that coordination failures are irrelevant to macroeconomics. It is only after coordination failures have been excluded from the purview of macroeconomics that it became legitimate (for the sake of mathematical tractability) to deploy representative-agent models in macroeconomics, a coordination failure being tantamount, in the context of a representative agent model, to a form of irrationality on the part of the representative agent. Athreya characterizes choices about the level of aggregation as a trade-off between realism and tractability, but it seems to me that, rather than making a trade-off between realism and tractability, modern macroeconomics has simply made an a priori decision that coordination problems are not a relevant macroeconomic concern.
A similar argument applies to Athreya’s defense of rational expectations and the use of equilibrium in modern macroeconomic models. I would not deny that there are good reasons to adopt rational expectations and full equilibrium in some modeling situations, depending on the problem that theorist is trying to address. The question is whether it can be appropriate to deviate from the assumption of a full rational-expectations equilibrium for the purposes of modeling fluctuations over the course of a business cycle, especially a deep cyclical downturn. In particular, the idea of a Hicksian temporary equilibrium in which agents hold divergent expectations about future prices, but markets clear period by period given those divergent expectations, seems to offer (as in, e.g., Thompson’s “Reformulation of Macroeconomic Theory“) more realism and richer empirical content than modern macromodels of rational expectations.
Athreya offers the following explanation and defense of rational expectations:
[Rational expectations] purports to explain the expectations people actually have about the relevant items in their own futures. It does so by asking that their expectations lead to economy-wide outcomes that do not contradict their views. By imposing the requirement that expectations not be systematically contradicted by outcomes, economists keep an unobservable object from becoming a source of “free parameters” through which we can cheaply claim to have “explained” some phenomenon. In other words, in rational-expectations models, expectations are part of what is solved for, and so they are not left to the discretion of the modeler to impose willy-nilly. In so doing, the assumption of rational expectations protects the public from economists.
This defense of rational expectations plainly belies betrays the methodological arrogance of modern macroeconomics. I am all in favor of solving a model for equilibrium expectations, but solving for equilibrium expectations is certainly not the same as insisting that the only interesting or relevant result of a model is the one generated by the assumption of full equilibrium under rational expectations. (Again see Thompson’s “Reformulation of Macroeconomic Theory” as well as the classic paper by Foley and Sidrauski, and this post by Rajiv Sethi on his blog.) It may be relevant and useful to look at a model and examine its properties in a state in which agents hold inconsistent expectations about future prices; the temporary equilibrium existing at a point in time does not correspond to a steady state. Why is such an equilibrium uninteresting and uninformative about what happens in a business cycle? But evidently modern macroeconomists such as Athreya consider it their duty to ban such models from polite discourse — certainly from the leading economics journals — lest the public be tainted by economists who might otherwise dare to abuse their models by making illicit assumptions about expectations formation and equilibrium concepts.
Chapter 5 is the most important chapter of the book. It is in this chapter that Athreya examines in more detail the kinds of adjustments that modern macroeconomists make in the Walrasian/ADM paradigm to accommodate the incompleteness of markets and the imperfections of expectation formation that limit the empirical relevance of the full ADM model as a macroeconomic paradigm. To do so, Athreya starts by explaining how the Radner model in which a less than the full complement of Arrow-Debreu contingent-laims markets is available. In the Radner model, unlike the ADM model, trading takes place through time for those markets that actually exist, so that the full Walrasian equilibrium exists only if agents are able to form correct expectations about future prices. And even if the full Walrasian equilibrium exists, in the absence of a complete set of Arrow-Debreu markets, the classical welfare theorems may not obtain.
To Athreya, these limitations on the Radner version of the Walrasian model seem manageable. After all, if no one really knows how to improve on the equilibrium of the Radner model, the potential existence of Pareto improvements to the Radner equilibrium is not necessarily that big a deal. Athreya expands on the discussion of the Radner model by introducing the neoclassical growth model in both its deterministic and stochastic versions, all the elements of the dynamic stochastic general equilibrium (DSGE) model that characterizes modern macroeconomics now being in place. Athreya closes out the chapter with additional discussions of the role of further modifications to the basic Walrasian paradigm, particularly search models and overlapping-generations models.
I found the discussion in chapter 5 highly informative and useful, but it doesn’t seem to me that Athreya faces up to the limitations of the Radner model or to the implied disconnect between the Walraisan paradigm and macroeconomic analysis. A full Walrasian equilibrium exists in the Radner model only if all agents correctly anticipate future prices. If they don’t correctly anticipate future prices, then we are in the world of Hicksian temporary equilibrium. But in that world, the kind of coordination failures that Athreya so casually dismisses seem all too likely to occur. In a world of temporary equilibrium, there is no guarantee that intertemporal budget constraints will be effective, because those budget constraint reflect expected, not actual, future prices, and, in temporary equilibrium, expected prices are not the same for all transactors. Budget constraints are not binding in a world in which trading takes place through time based on possibly incorrect expectations of future prices. Not only does this mean that all the standard equilibrium and optimality conditions of Walrasian theory are violated, but that defaults on IOUs and, thus, financial-market breakdowns, are entirely possible.
In a key passage in chapter 5, Athreya dismisses coordination-failure explanations, invidiously characterized as Keynesian, for inefficient declines in output and employment. While acknowledging that such fluctuations could, in theory, be caused by “self-fulfilling pessimism or fear,” Athreya invokes the benchmark Radner trading arrangement of the ADM model. “In the Radner economy, Athreya writes, “households and firms have correct expectations for the spot market prices one period hence.” The justification for that expectational assumption, which seems indistinguishable from the assumption of a full, rational-expectations equilibrium, is left unstated. Athreya continues:
Granting that they indeed have such expectations, we can now ask about the extent to which, in a modern economy, we can have outcomes that are extremely sensitive to them. In particular, is it the case that under fairly plausible conditions, “optimism” and “pessimism” can be self-fulfilling in ways that make everyone (or nearly everyone) better off in the former than the latter?
Athreya argues that this is possible only if the aggregate production function of the economy is characterized by increasing returns to scale, so that productivity increases as output rises.
[W]hat I have in mind is that the structure of the economy must be such that when, for example, all households suddenly defer consumption spending (and save instead), interest rates do not adjust rapidly to forestall such a fall in spending by encouraging firms to invest.
Notice that Athreya makes no distinction between a reduction in consumption in which people shift into long-term real or financial assets and one in which people shift into holding cash. The two cases are hardly identical, but Athreya has nothing to say about the demand for money and its role in macroeconomics.
If they did, under what I will later describe as a “standard” production side for the economy, wages would, barring any countervailing forces, promptly rise (as the capital stock rises and makes workers more productive). In turn, output would not fall in response to pessimism.
What Athreya is saying is that if we assume that there is a reduction in the time preference of households, causing them to defer present consumption in order to increase their future consumption, the shift in time preference should be reflected in a rise in asset prices, causing an increase in the production of durable assets, and leading to an increase in wages insofar as the increase in the stock of fixed capital implies an increase in the marginal product of labor. Thus, if all the consequences of increased thrift are foreseen at the moment that current demand for output falls, there would be a smooth transition from the previous steady state corresponding to a high rate of time preference to the new steady state corresponding to a low rate of time preference.
Fine. If you assume that the economy always remains in full equilibrium, even in the transition from one steady state to another, because everyone has rational expectations, you will avoid a lot of unpleasantness. But what if entrepreneurial expectations do not change instantaneously, and the reduction in current demand for output corresponding to reduced spending on consumption causes entrepreneurs to reduce, not increase, their demand for capital equipment? If, after the shift in time preference, total spending actually falls, there may be a chain of disappointments in expectations, and a series of defaults on IOUs, culminating in a financial crisis. Pessimism may indeed be self-fulfilling. But Athreya has a just-so story to tell, and he seems satisfied that there is no other story to be told. Others may not be so easily satisfied, especially when his just-so story depends on a) the rational expectations assumption that many smart people have a hard time accepting as even remotely plausible, and b) the assumption that no trading takes place at disequilibrium prices. Athreya continues:
Thus, at least within the context of models in which households and firms are not routinely incorrect about the future, multiple self-fulfilling outcomes require particular features of the production side of the economy to prevail.
Actually what Athreya should have said is: “within the context of models in which households and firms always predict future prices correctly.”
In chapter 6, Athreya discusses how modern macroeconomics can and has contributed to the understanding of the financial crisis of 2007-08 and the subsequent downturn and anemic recovery. There is a lot of very useful information and discussion of various issues, especially in connection with banking and financial markets. But further comment at this point would be largely repetitive.
Anyway, despite my obvious and strong disagreements with much of what I read, I learned a lot from Athreya’s well-written and stimulating book, and I actually enjoyed reading it.
Uneasy Money 
David, A few days ago I ordered the book and will be getting it this week. From reading your review I was regreting having spent some money on it. But, at the end you alleviated my misgivings:
“Anyway, despite my obvious and strong disagreements with much of what I read, I learned a lot from Athreya’s well-written and stimulating book, and I actually enjoyed reading it.”
Hope I´ll be able to enjoy it too!
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Reblogged this on MERCIAR BUSINESS CONSULTING.
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David,
Thanks for another insightful post. I’ve read the first third of “Big Ideas in Economics,” and it’s lucid and learned, though, like you, I have some substantive reservations. Here’s a one: Kartik argues that many, if not most, real-world markets look pretty Walrasian. This seems puzzling because the prices on Amazon.com, which meets most of Kartik’s criteria for a Walrasian clearinghouse, don’t look Walrasian. I checked the prices offered for a new copy of “Big Ideas in Economics,” including shipping, on Amazon.com. There were 25 offers. The lowest price was $23.99, the highest price was $75.81, the mean price was $49.65, the median was $46.32, the Amazon Prime price (with free 2-day shipping) was $35.11, and the standard deviation was about $14. Since all of these books are new hardbacks, and all of the prices include $3.99 for standard shipping (leaving aside the Amazon Prime offer), this dispersion of prices doesn’t seem consistent with a competitive equilibrium (to me at least).
I suppose one possible explanation of this wide dispersion in prices could be differences in “reputation” across the sellers. Amazon.com reports the percentage of positive ratings, and the number of ratings, for each seller. Maybe someone would prefer to buy the book for $72.04 from Murray Media, with 96% positive ratings, rather than buying it for $38.46 from Pbshopus, which “only” has 95% positive ratings. But, if so, one must wonder why the same person wouldn’t buy the book for $23.99 from Ehood Books, with a 99% positive rating. On this particular day, the prices offered by sellers with high positive ratings (un-weighted by the number of ratings) tended to be lower than the prices offered by sellers with a relatively low percentage of positive ratings. I’m sure someone reading this comment can explain why this degree of price dispersion is consistent with Walrasian competitive equilibrium, and I look forward to reading it.
p.s. I paid the Amazon Prime price of $35.11, and am glad I bought the book.
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I think you are not giving the kernel of truth to rational expectations its due…prices need not ever be correct as long as their error cannot be exploited by modelers, traders and forecasters…although perhaps I am overlyconflating efficient markets with rational expectations
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I think I’ll wait for the movie or , even better , the Simpsons episode.
After all , “economics is hard” :
http://economistsview.typepad.com/economistsview/2010/06/dont-let-fed-economists-tell-you-otherwise.html
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It sounds as if everything covered by Athreya is to be found in “Microeconomic Theory” by Mas-Colell, Whinston and Green. If that’s the case I think buyers will have a right to be annoyed. Would it not be appropriate to change the title from Big Ideas in Macroeconomics to “Standard Topics in Microeconomics”?
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David, the book does seem worth reading, though I find it ironic that such a kind and favorable review appeared on a blog, given Kartik’s earlier insistence (deservedly mocked at the time) that most economics blogging is done by ill-informed hacks who ought to be ignored, so that well-trained experts such as himself are left in peace to make progress in the field:
http://rajivsethi.blogspot.com/2010/06/on-blogs-and-economic-discourse.html
Responses to that notorious essay by Sumner, DeLong, Rowe, Avent, Cowan and Kling are all worth a look.
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Marcus, Well, I hope that you will not think that I gave you bad advice. Let me (us) know what you think.
dmerciar, Thanks.
Greg, Very astute observation. Reputation might plausibly account for a small dispersion of prices, but I can’t believe that dispersion as large as what you are reporting could be explained in that way. That’s what I paid too.
alek, I think that RE is making a stronger claim than just randomness of pricing. If that were all there is to RE, then Keynes’s beauty contest theory of stock prices would qualify as an RE theory.
Marko, A hard science, perhaps? Thanks for the link. I wasn’t aware of that prior outburst, which took place before I started blogging. I can only wonder whether if I had seen it earlier I would have even started this blog.
Kevin, Do Mas-Colell, Whinston and Green (which I must admit I haven’t read) defend rational expectations? At any rate at $35.11 on amazon, Athreya’s book is almost $100 cheaper than Mas-Colell et al.
Rajiv, Well, as I mentioned in response to Marko above, I wasn’t aware of Athreya’s attack on the blogosphere. I tried not to be at least somewhat positive in the review and tried to avoid any personal attack, though I couldn’t resist remarking on the methodological arrogance that is sometimes on display in Athreya’s book. But perhaps he learned a lesson and kept the arrogance at least partially under wraps.
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David, related:
http://rogerfarmerblog.blogspot.com.br/2014/02/macroeconomics-and-animal-spirits.html
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Kevin, Do Mas-Colell, Whinston and Green (which I must admit I haven’t read) defend rational expectations? At any rate at $35.11 on amazon, Athreya’s book is almost $100 cheaper than Mas-Colell et al.
They don’t defend anything. It’s definitions, theorems, proofs all the way down. You don’t exactly read it, it’s more of an endurance test. But they do give a precise definition of rational expectations (too wordy to quote here) in Ch 19: General Equilibrium Under Uncertainty. Books which do that are few and far between. I’m sick of just-so stories along the lines of “agents can’t be systematically fooled”, which show up in far too many accounts. RE is a slippery concept and it’s to their credit that they insist on grasping it firmly.
As to the price, I got mine for €5 when a local bookshop suffered an existence failure. (As Frank Hahn pointed out years ago, it’s discontinuities like that that undermine the argument for deflation as a remedy for slumps.) I’ll buy Athreya’s book if it’s offered at a similar discount.
My point though, insofar as I have one, is that Athreya seems to be peddling micro in a macro wrapping, which seems wrong to me. But I guess he thinks that true macro is really micro under the skin.
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Marcus, Many thanks. Farmer is an interesting (and very smart) guy. He works with a continuum of equilibria each corresponding a more or less optimistic set of expectations. That is a formalization of Keynesian animal spirits. I am not totally happy with that because I don’t think people have correct expectations most of the time, but it’s better than rational expectations with a unique equilibrium.
Kevin, You are exactly right in characterizing what Athreya’s version of macroeconomics amounts to. That’s exactly how Steve Williamson would put it. I was hinting at that as well in my review, but didn’t say it explicitly.
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Well, this entire discussion has me lost. When I studied Econ 2, a computer was something that used Fortran cards. The gas lamps, however, had been replaced by electric ones.
I do not know what walruses have to so with inflation….
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Great and insightful post, I enjoyed the review of the book since it encompasses a small review of current trends in macro theorizing as well, I share certainly most of your objections to the current state of macro. I apologize for this long post, but I have a lot of questions and comments that I would like to get some other views about it.
I believe that David Laidler has written some good papers (‘Axel Leijonhufvud and the Quest for Micro-foundations, 2006’ and ‘The Monetary Economy and the Economic Crisis Laidler, 2011’ ) in which he highlights the main ‘problems’ behind modern macro, specifically the assumptions of the Walrasian auctioneer and the dangers of modelling its fully efficient epistemological role into which the institution of money is supplanted by this unrealistic entity, having therefore severe implications into actually fully understanding money’role in sustaining coordination (and sometimes generating discoordination when it is ill supply). I also believe that the work of Horwitz complements very well with the Laidler’s papers.
I have however one reservation regarding your post you talk about the possibilities of following a more fruitful path of research for macro from Hicks in which models can take into account divergent expectations and the temporary equilibrium that might develop at some point in time are evolving and hence not steady states, this sounded a little like Schackle’s view if divergent expectations that actually helps to achieve coordination; however I agree with your statement that those models might be more helpful that the current ones in understanding real economic fluctuations, however I see the fundamental problem in trying to see macroeconomic phenomena from a microeconomic foundation that is inherently unrealistic from the very beginning. I think a rather more fruitful path for macro will be as to Laidler also recommended, a different understanding of coordination, and hence to start from a reevaluation and a reformulation of equilibrium to a Hayek-Schackle-Leijonhufvud redefinition of equilibrium as a process of plan consistency, market process of adapting expectations and dynamic adjustments of economic actions and plans. Having a notion of the economy as a market process into which money prices and money help to achieve higher degrees of coordination and plan consistency (when money is rightly supply), through the fact that dynamic disequilibrium market process are sustain in money prices which allow economic actors to learn, confute and reformulate their plans and expectation as to make them more plausible and hence intertemporally coordinate better (but not perfectly) the economy. What are your thoughts on this? .
As always great post I wish you might be encourage in writing a paper about Rational Expectations and the problems with the assumptions in modern macro and the dangers of neglecting money and money demand
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Benjamin, As I said, it’s a new world.
Pablo, Thanks. I also admire and usually agree with Laidler’s papers and his criticisms of modern macro, and in truth, much of what I am saying is derived from his work.
About plan consistency as a way of thinking about equilibrium, that is also how I think of it, and I don’t see any inconsistency between Hicksian temporary equilibrium and a plan consistency view of equilibrium.
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Dr. Glasner, would you mind giving me references about Hicksian temporary equilibrium, primary and secondary sources? I am working on a paper on intertemporal equilibrium and plan consistencies and coordination so i think I will have to read Hicks before adventuring me to write any further , many thanks
Pablo
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Unless I am utterly failing to understand your point, I think you use the word ‘belied’ in a way exactly the opposite of its meaning. “This defense of rational expectations plainly belies the methodological arrogance of modern macroeconomics.” ‘Belies’ means ‘disguises’ or ‘obscures’, with a negative connotation of ‘lies about’. You want ‘betrays’ (in the sense of ‘unintentionally reveals’) or possibly ‘displays’. Yes?
Other than that, I must say that those were rather a lot of words, with rather a lot of weight behind them, wasted on a book which sounds from all descriptions like it wasn’t worth the effort. Alas that a lot of people will read it and think that it is.
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Hi David,
A belated thank you for your review of my book. I found it thoughtful and it reflected an obviously-good-faith to hear out modern macroeconomists, as represented by me, describe their M.O. So I certainly owe you a thoughtful response. I will try do so when time permits, and hopefully be able to say more precisely what I agreed and disagreed with.
For now, I’ll say this.
First, the things that you worry are missing, are missing for a reason: I wanted to show how the analyses of the many things you would define as macro as dealt with (to vary degrees of satisfactoriness) in work that uses or blends the various types of models I describe in detail. I had no intention of asserting what consensus opinions of all the hot-button issues of the day were among macroeconomists. Now *that* would be worthy of the admonishment of “methodological arrogance.” :).
Second: When you say: “Chapter 3, contains some interesting reflections on the importance of efficiency (Pareto-optimality) as a policy objective and on the trade-offs between efficiency and equity and between ex-ante and ex-post efficiency. But these topics are on the periphery of macroeconomics, so I will offer no comment here.” I disagree. This line of conversation is important for macroeconomic policymaking, especially ex-ante vs. ex-post efficiency.
Third: I share your discomfort, believe it or not, with the handling of expectations. I just don’t think we have any viable competitors yet, but I wouldn’t want to rule one out. Many flowers ought to bloom here–but one probably doesn’t want to use them in applied settings (macro) before a whole lot of discussion.
More later, I hope. Thanks again for reading it, and putting pen to paper to let others, including me, know what you think.
Best Regards
Kartik
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I was going to read through Kartik’s comment @2:19, but then remembered his earlier advice that members of the general public like myself need to recognize that we are simply being “had by the bulk of the economic blogging crowd”, and so I decided to pass.
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Pablo, I think that Hicks introduced the idea of temporary equilibrium in Value and Capital (1939?). He again discussed it in Capital and Growth (1965?). I remember preferring the earlier discussion to the later one, but can’t remember why. I think the secondary literature more frequently cites the later one. There is a lot of discussion of temporary equilibrium. Arrow and Hahn I think discuss in their 1972 treatise on GE theory. Grandemont wrote several pieces about it. For purposes of application to macro analysis, I would recommend Thompson’s unpublished paper “A Reformulation of Macroeconomic Theory” which I have written about several times on this blog. A PDF is available on Thompson’s web page at the UCLA econ department. In the same vein there is a classic paper by Foley and Sidrauski which if think was published in JPE in 1971. Rajiv Sethi has written about the Foley Sidrauski paper on his blog.
Fred, Yep, you’re a careful reader, and are exactly right. Thanks. Well, for better or worse what Arthreya is describing is the way that macroeconomics is now done in just about all the leading research centers, so on that account alone, it cannot be a waste of time to get a better grasp of what is being done. Kartik can’t be blamed for reporting accurately the way that macroeconomics is now being done. Whether people buy into it or not – and if they are younger scholars looking to start or advance their careers, they haven’t much choice but to buy into it, do they? – is up to them. My main criticism of modern macro is not that it is wrong, but the conceit that it is the only scientific approach to doing macroeconomics and that everything else is worthless babbling beneath the dignity of real scientists to even acknowledge.
Kartik, Thanks for your friendly and thoughtful response. I tried to not to be overly critical and to address issues that trouble me in a constructive spirit, so that it would be possible to engage in a conversation. So I look forward to hearing from you again in more detail.
I am not sure that I follow entirely your explanation of why you left out certain topics. But I think that by doing so, you may have left the impression that these topics are of no concern to modern macroeconomics, which I gather was not your intention.
About Pareto-optimality, again it is a question of emphasis. I think that there was a certain lack of balance in a presentation that devotes a chapter to Pareto-optimality and hardly mentions any of the traditional topics of interest in macroeconomic discussions.
I am glad that we agree on letting many flowers bloom. But the consensus that you describe in modern macro seems to rule that out. That’s the methodological arrogance that I find so troubling.
JP, Well, maybe he is rethinking his attitude to blogs, and maybe you should let bygones be bygones. Just a thought.
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Serious science estimates the stuff it talks about. Massive amounts of time, money and energy are used to do this. Think about the Higgs-particle. The Science breakthrough’s of the years are almost invariably either awarded to new measurements or findings or to new machinery or methods to measure or find something. Same for the Nobels. And theory and measurement develop on concordance. Not so in economics. At least – not so in ‘modern’ macro economics. This strand of thinking does, to my knowledge, not have an independent research program to estimate directly, for instance, macro ‘utility’ or to finally identify the intertemporal contracts in one way or another. There is no set of data which is conceptual consistent with these models, no economic ‘Higgs particle’. Which, of course, does not mean that there hasn’t been enormous progress in the macro-measurement of unemployment, interest rates, inflation, money (flow-of-funds!), debt, sectoral balance sheets, mood variables and whatever. But these are not based upon the supposed behaviour of representative consumers and companies but upon the acts of real people and companies and theories and concepts which are consistent with these acts. Which might be the reason why Kartik had to omit such variables from his book. It’s indeed a different world, not the world we are able to estimate and measure.
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A late comment, but I noticed this:
“In the Radner economy, Athreya writes, “households and firms have correct expectations for the spot market prices one period hence.”
Ah! A testable hypothesis! 🙂
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