John Cochrane, Meet Richard Lipsey and Kenneth Carlaw

Paul Krugman wrote an uncharacteristically positive post today about John Cochrane’s latest post in which Cochrane dialed it down a bit after writing two rather heated posts (here and here) attacking Alan Blinder for a recent piece he wrote in the New York Review of Books in which Blinder wrote dismissively quoted Cochrane’s dismissive remark about Keynesian economics being fairy tales that haven’t been taught to graduate students since the 1960s. I don’t want to get into that fracas, but I was amused to read the following paragraphs at the end of Cochrane’s second post in the current series.

Thus, if you read Krugman’s columns, you will see him occasionally crowing about how Keynesian economics won, and how the disciples of Stan Fisher at MIT have spread out to run the world. He’s right. Then you see him complaining about how nobody in academia understands Keynesian economics. He’s right again.

Perhaps academic research ran off the rails for 40 years producing nothing of value. Social sciences can do that. Perhaps our policy makers are stuck with simple stories they learned as undergraduates; and, as has happened countless times before, new ideas will percolate up when the generation trained in the 1980s makes their way to to top of policy circles.

I think we can agree on something. If one wants to write about “what’s wrong with economics,” such a huge divide between academic research ideas and the ideas running our policy establishment is not a good situation.

The right way to address this is with models — written down, objective models, not pundit prognostications — and data. What accounts, quantitatively, for our experience?  I see old-fashioned Keynesianism losing because, having dramatically failed that test once, its advocates are unwilling to do so again, preferring a campaign of personal attack in the popular press. Models confront data in the pages of the AER, the JPE, the QJE, and Econometrica. If old-time Keynesianism really does account for the data, write it down and let’s see.

So Cochrane wants to take this bickering out of the realm of punditry and put the conflicting models to an objective test of how well they perform against the data. Sounds good to me, but I can’t help but wonder if Cochrane means to attribute the academic ascendancy of RBC/New Classical models to their having empirically outperformed competing models? If so, I am not aware that anyone else has made that claim, including Kartik Athreya who wrote the book on the subject. (Here’s my take on the book.) Again just wondering – I am not a macroeconometrician – but is there any study showing that RBC or DSGE models outperform old-fashioned Keynesian models in explaining macro-time-series data?

But I am aware of, and have previously written about, a paper by Kenneth Carlaw and Richard Lipsey (“Does History Matter?: Empirical Analysis of Evolutionary versus Stationary Equilibrium Views of the Economy”) in which they show that time-series data for six OECD countries provide no evidence of the stylized facts about inflation and unemployment implied by RBC and New Keynesian theory. Here is the abstract from the Carlaw-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.

Cochrane, like other academic macroeconomists with a RBC/New Classical orientation seems inordinately self-satisfied with the current state of the modern macroeconomics, but curiously sensitive to, and defensive about, criticism from the unwashed masses. Rather than weigh in again with my own criticisms, let me close by quoting another abstract – this one from a paper (“Complexity Eonomics: A Different Framework for Economic Thought”) by Brian Arthur, certainly one of the smartest, and most technically capable, economists around.

This paper provides a logical framework for complexity economics. Complexity economics builds from the proposition that the economy is not necessarily in equilibrium: economic agents (firms, consumers, investors) constantly change their actions and strategies in response to the outcome they mutually create. This further changes the outcome, which requires them to adjust afresh. Agents thus live in a world where their beliefs and strategies are constantly being “tested” for survival within an outcome or “ecology” these beliefs and strategies together create. Economics has largely avoided this nonequilibrium view in the past, but if we allow it, we see patterns or phenomena not visible to equilibrium analysis. These emerge probabilistically, last for some time and dissipate, and they correspond to complex structures in other fields. We also see the economy not as something given and existing but forming from a constantly developing set of technological innovations, institutions, and arrangements that draw forth further innovations, institutions and arrangements.

Complexity economics sees the economy as in motion, perpetually “computing” itself — perpetually constructingitself anew. Where equilibrium economics emphasizes order, determinacy, deduction, and stasis, complexity economics emphasizes contingency, indeterminacy, sense-making, and openness to change. In this framework time, in the sense of real historical time, becomes important, and a solution is no longer necessarily a set of mathematical conditions but a pattern, a set of emergent phenomena, a set of changes that may induce further changes, a set of existing entities creating novel entities. Equilibrium economics is a special case of nonequilibrium and hence complexity economics, therefore complexity economics is economics done in a more general way. It shows us an economy perpetually inventing itself, creating novel structures and possibilities for exploitation, and perpetually open to response.

HT: Mike Norman


9 Responses to “John Cochrane, Meet Richard Lipsey and Kenneth Carlaw”

  1. 1 nickikt December 11, 2014 at 1:05 pm

    Im just a economic hobbiest but this complexity economics sound like something hayek would have said, specally later in his life, in ‘Hayek’s Challenge: An Intellectual Biography of F.A. Hayek’ the auther goes very deep into the methodology of hayek and how he more and more rejected the equillibrium economic idea, when he developed his cycle theory he clearly stated that he inteded to keep with it but more and more he went away from the idea.

    He proposed the thought experiment that a real general equillibrum would only happen if everybody know what everybody planned, because if you have more information about the future you would change your presant prices allready.

    He also argues that in a complex system theorys are very hard to prove, only lots of time, lots of testing and lots of thinking will eventually rule out some theorys because in complex system there is always some way of rationalising a theory.

    Have you read ‘Hayek’s Challenge’? Thoughts?

    I dont really have the technical background (or time) to go into modern complexity economics, but I would be intrested (if anybody has good information, blogs, easy papers please link).


  2. 2 nickikt December 11, 2014 at 2:47 pm

    Another question. I was just following soem links, reading a few comments, going down the rabbit hole. Specially about the ‘Big ideas in macro book’. There is a lot of talk about Walras and how everything, even today is based on Walras and what we have know is not so much better then Walras.

    Walras always screams ‘marginal theory of value’ to me, and I remember reading a bit of Menger a while back. My memory about this is not perfect, but is his idea of micro not closer to what you and other today talk about, compared to walrasian micro?

    Would we maybe need mengerian micro fundation instead of walrasian?


  3. 3 David Glasner December 12, 2014 at 10:58 am

    Nicki, I agree that complexity was certainly part of Hayek’s world view, and he became increasingly dissatisfied with equilibrium analysis as he got older. I haven’t read Hayek’s Challenge, but I know something about it, and the author Bruce Caldwell is certainly an excellent scholar and knows a lot about Hayek. One of Hayek’s best papers from his later years is “A Theory of Complex Phenomena” in which he developed many of the ideas you are mentioning. At least some modern complexity theorists, including Brian Arthur, recognize that Hayek was in some ways a forerunner, but I don’t think that they rely on his work that much. Menger certainly was an important figure in his own right, but it is not clear to me how going back to Menger would give you anything that you wouldn’t get by going back to Hayek.


  4. 4 charlie December 13, 2014 at 5:53 am

    The ritual obeisance to Hayek becomes tiresome. Allyn Young captured the idea of complexity far more insightfully and concisely in 1928, and someone could probably frame Adam Smith as the father of complexity if they wanted to.


  5. 5 David Glasner December 13, 2014 at 5:35 pm

    Charlie, Do you have a citation or link for Allyn Young’s 1928 contribution?


  6. 6 rhmurphy December 13, 2014 at 11:52 pm

    I believe this is what was being referenced regarding Allyn Young:

    I read Waldrop’s “Complexity” earlier this year, which featured Arthur prominently in a positive light. It left a very bad taste in my mouth. On several margins, not just complexity versus traditional neoclassical modeling, he takes positions (according to Waldrop) that makes it sound like he just viscerally dislikes neoclassical economics and works backwards to justify it. That is very uncharitable for me to say, I realize. One example is his distaste for attempts to perform CBA for environmental issues. Another is a blanket dismissal of a justification for diminishing return models, that they make empirical predictions (as opposed to “understanding”). At least at the time Arthur’s models offered no empirical predictions, just understanding.

    The increasing returns side of complexity economics peaked over a decade ago, I don’t want to revive it, But again perhaps that’s the result of my uncharitable interpretation of him following his statements contrary to my tertiary biases, biases which you may not share with me.


  7. 7 nickik December 15, 2014 at 11:37 pm


    I did not really point to menger, thinking we should go to it now. It was more about, what if economics had taken menger and not walras as the bases for much of there later work.


  8. 8 David Glasner December 18, 2014 at 5:40 pm

    RH, Thanks for the link; it’s a pretty famous paper, but I’ve never read it. Maybe it’s time that I should. I have read very little of Arthur’s work, so I can’t really comment about him one way or another, but the little bit that I have read recently seems to fit with my own negative views about modern macro, so I am giving him the benefit of the doubt.

    Nicki, Ok, fair enough. I guess the one thing that you could say is that economics would be a lot less mathematical than it is now if Menger had been followed instead of Walras. Sorry, I don’t think I can really speculate beyond that.


  1. 1 Traffic Jams and Multipliers | Uneasy Money Trackback on December 12, 2014 at 10:23 am

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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.

My new book Studies in the History of Monetary Theory: Controversies and Clarifications has been published by Palgrave Macmillan

Follow me on Twitter @david_glasner


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