Uneasy Money

Peter Howitt, whom I got to know slightly when he spent a year at UCLA while we were both graduate students, received an honorary doctorate from Côte d’Azur University in September. Here is a link to the press release of the University marking the award.

Peter wrote his dissertation under Robert Clower, and when Clower moved from Northwestern to UCLA in the early 1970s, Peter followed Clower as he was finishing up his dissertation. Much of Peter’s early work was devoted to trying to develop the macroeconomic ideas of Clower and Leijonhufvud. His book The Keynesian Recovery collects those important early papers which, unfortunately, did not thwart the ascendance, as Peter was writing those papers, of the ideas of Robert Lucas and his many followers, or the eventual dominance of those ideas over modern macroeconomics.

In addition to the award, a workshop on Coordination Issues in Historical Perspective was organized in Peter’s honor, and my paper, “Robert Lucas and the Pretense of Science,” which shares many of Peter’s misgivings about the current state of macroeconomics, was one of the papers presented at the workshop. In writing the paper, I drew on several posts that I have written for this blog over the years. I have continued to revise the paper since then, and the current version is now available on SSRN.

Here’s the abstract:

Hayek and Lucas were both known for their critiques of Keynesian theory on both theoretical and methodological grounds. Hayek (1934) criticized the idea that continuous monetary expansion could permanently increase total investment, foreshadowing Friedman’s (1968) argument that monetary expansion could permanently increase employment. Friedman’s analysis set the stage for Lucas’s (1976) critique of macroeconomic policy analysis, a critique that Hayek (1975) had also anticipated. Hayek’s (1942-43) advocacy of methodological individualism might also be considered an anticipation of Lucas’s methodological insistence on the necessity of rejecting Keynesian and other macroeconomic theories not based on explicit microeconomic foundations. This paper compares Hayek’s methodological individualism with Lucasian microfoundations. While Lucasian microfoundations requires all agents to make optimal choices, Hayek recognized that optimization by interdependent agents is a contingent, not a necessary, state of reconciliation and that the standard equilibrium theory on which Lucas relies does not prove that, or explain how, such a reconciliation is, or can be, achieved. The paper further argues that the Lucasian microfoundations is a form of what Popper called philosophical reductionism that is incompatible with Hayekian methodological individualism.

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4260708