Transcript TEST 1

History of Modern Macroeconomics
Lecture 3.3. Macroeconometrics and the New
Economics (1930-1950)
Kevin D. Hoover
Department of Economics
Department of Philosophy
Center for the History of Political Economy
Duke University
Center for the History of Political Economy
Summer School June 2012
1
Ragnar Frisch

Inventor of important
terminology:



Influential in development of:



dynamic economics
econometric (empirical) methods
Creator of modern professional
institutions

Ragnar Frisch (1895-1973),
Nobel Laureate (1969)
microeconomics/macro-economics
econometrics

Founder of Econometric Society
First editor of Econometrica
Center for the History of Political Economy
Summer School June 2012
2
Contrasts and Complementarities Between
Frisch and Keynes

Frisch




Keynes


micro vs. macrodynamics
econometrics
pragmatism and
aggregation
dynamics
pervasive micro analysis
system properties and
emergence
against econometrics
Center for the History of Political Economy
Summer School June 2012
3
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
4
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
5
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
6
Keynes and the Centrality of
Microeconomic Analysis

All the main Keynesian functions analyzed
microeconomically:
o
o
o
o
o
consumption function
labor supply
labor demand
liquidity preference
investment
Center for the History of Political Economy
Summer School June 2012
7
An Illustration: Keynes on Liquidity
Preference

Speculative demand for money
o
o
o
o
normal rate of interest—individual and
heterogenous
hold bonds if market rate above normal 
expected capital gain; hold money if market rate
below normal  expected capital loss
market rate = rate at which market is divided into
balanced groups of bulls and bears
no aggregation; market rate = some particular
agent’s normal rate
Center for the History of Political Economy
Summer School June 2012
8
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
o
“the struggle for money-wages is . . . essentially a struggle to
maintain a high relative wage . . .”
General Theory
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
9
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
10
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
11
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
12
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
13
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
14
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
15
Complex Pendulums
Center for the History of Political Economy
Summer School June 2012
16
Propagation and Impulse Mechanisms
Center for the History of Political Economy
Summer School June 2012
17
Jan Tinbergen and Applied
Macroeconometrics


Trained as physicist
Created first modern
econometric models:



Two-volume study of U.S.
business cycles for the
League of Nations (1939)


Jan Tinbergen (1903-1994)
Smaller Dutch model
Larger U.S. model
methodology and
application
object of Keynes’s attack on
econometrics
Center for the History of Political Economy
Summer School June 2012
18
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
19
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
20
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 Model
Sir John R. Hicks (1904-89), Nobel Laureate (1972)
Center for the History of Political Economy
Summer School June 2012
21
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
22
Keynes and Bretton Woods
Keynes and Harry Dexter White (U.S. Delegate)
Bretton Woods (NH) Resort
Keynes and the Soviet Delegate
Center for the History of Political Economy
Summer School June 2012
23
Making the Economy Work - 1
Lord Beveridge (1879-1963)
Center for the History of Political Economy
Summer School June 2012
24
Making the Economy Work - 2
Harry S. Truman (1884-1972, President 1945-53)
Alvin Hansen (1887-1975), American popularizer of Keynes
Center for the History of Political Economy
Summer School June 2012
25
Abba Lerner (1903-1982)
Center for the History of Political Economy
Summer School June 2012
26
Thanks

The End
Center for the History of Political Economy
Summer School June 2012
27