Dark Age in Macroeconomics? A History of Taught approach

(Or maybe the title should be: "Notes from the Phelps/Lucas Administration"; or "Notes to supplement our fading memories of the late 1970's".)

Is this a Dark Age in macroeconomics? In other words, have we collectively forgotten some (important) stuff that we used to understand?

I want to approach this question by looking at what was taught in the past to economics graduate students, so we can compare what is left out now to what was left out then.

I have a sample of one: my own lecture notes from grad school. I began my MA at UWO in 1977, and continued into the PhD. I took everything in macro/money that was offered. At the time, UWO was arguably the top Canadian department in macro/money (OK, Western grads would argue for; Queens grads would argue against), and would hold up well against anywhere in the world.

Macro 1 (David Laidler). Required course. Review and critique of ISLM (lags, stocks flows and the government budget constraint, are the IS and AD curves really demand curves? [no], the missing AS curve). Crowding out debate. Non-Walrasian macro (Barro and Grossman). Say's Law. Phillips Curve (up to Phelps and Friedman). Consumption function (Friedman/Modigliani). Demand for money. Investment demand.

Macro 2 (Michael Parkin). Required for those continuing to the PhD. (I can't resist quoting from the first page of my notes here: "Economics [is] Understand + Explain Phenomena using Rational models. How could Rational Behaviour [lead to] Disaster? Market Failure."). Review and critique of Neoclassical model of labour market. Lucas and Rapping (from the Phelps volume), and why their model was logically incoherent (Michael Parkin was right on this point). Mortensen's (also from Phelps volume) search theory of unemployment. Theories of implicit wage contracts (sticky wages). Theories of price adjustment (proto New-Keynesian). ISLM plus Phillips Curve (distinction between proto New-Keynesian and New Classical interpretations of Phillips Curve). Adaptive vs. Rational expectations. Policy Irrelevance Proposition ("[deviations of output from y* are] just noise, but obviously false").

Money 1 (Don Patinkin/Peter Howitt). Optional. Hume. Fisher. Lavington. Wicksell. Keynes' Tract, Treatise, and General Theory. Patinkin's Money interest and Prices. Are money and bonds net wealth? Commodity money. Solow/Swan growth model. Money and growth. Optimal quantity of money. Transactions costs. Baumol/Tobin and Miller/Orr models of demand for money.

Money 2 (Joel Fried). Optional. Microfoundations of money, Menger, Ostroy, Jones. Money in general equilibrium theory. Clower constraints. Transactions costs. Financial markets. Tobin. CAPM. Efficient Markets. Modigliani/Miller theorem. Term structure of interest rates. Tobin portfolio choice. Friedman and Monetarism. International finance. Dornbusch overshooting. Exogenous vs endogenous money. Canadian monetary policy.

Advanced Macro (Peter Howitt). Optional. (Lovely quote from the first page: "We are Aristotelian monks, trying to solve anomolies to stop future generations wasting their time doing the same thing.". Non-Walrasian disequilibrium theory (Clower, Leijonhufvud, Barro/Grossman, Malinvaud, Benassy, etc.). Stability. Catastrophe theory(!). Price adjustment under oligopoly. Optimal control theory. Inventories. Phelps/Winter price setting with transient monopoly power (from the Phelps volume, proto New-Keynesian).

(I learned some more money/macro in David Laidler's History of Thought class. But I was the only graduate student in that class, so I'm not going to count it. My colleague Calum Carmichael, who took the same course as an undergraduate, estimates that about one quarter of the Honours economics students took that class.)

I make the following observations:

1. The Phelps volume was clearly very influential in the late 1970's. This supports Paul Krugman's memory, and my own.

2. The beginnings of the split between New Classical and New Keynesian approaches was already apparent in the late 1970's. I saw several references to the distinction between Fisher and Phelps on the interpretation of the Phillips Curve. (Fisherian market-clearing with misperceptions vs Phelpsian disequilibrium price adjustment). This too supports Paul Krugman's memory.

3. We received a very broad education in short run macroeconomics and monetary theory. Probably much broader than today's students. That tends to support the Dark Age hypothesis.

4. But there is one glaring omission from our education: we did lots of short run business cycle theory but almost no long run growth theory. We briefly covered the Solow growth model, but only as a prelude to money and growth. There was no interest in growth theory per se! If growth theory is important, and it is, that directly contradicts the Dark Age hypothesis. We barely touched on half of macro! The late 1970's were the Dark Age, for growth theory.

Why did we ignore growth theory?

Growth theory wasn't on the agenda. It wasn't that growth was unimportant; just that there seemed to be nothing important to say about it. All the exciting policy debates were about inflation and unemployment, not long run growth. All the exciting theoretical developments were about inflation and unemployment, not long run growth. "Endogenous" growth theories (a stupid misnomer, because growth is endogenous in Solow too, just with an extremely simple functional relationship to the exogenous variables, namely g=n) came later.

Fiscal policy has been off the agenda for much the same reasons, until recently.

(5. We spent surprisingly little time on open economy macroeconomics as well, for a Canadian school.)

OK. Let's compare notes!

Update: Mark Thoma, who is from a slightly younger vintage than me, takes up the story in the early 1980's.

Comments

[Jim Sentance]

Hi Nick,

I guess I would have been doing mine about the same time, at Carleton with people you know, so maybe you can elaborate for others on my non-macroeconomist's vague memories.

MA Macro was fairly straightforward Dornbusch and Fisher type open economy Macro with Richard Brecher. Phd Macro Theory was scary - TK Rymes using Patinkin and channeling god know who. Macro Policy was more open economy stuff from Choudhri.

I'd agree completely on the growth theory just not being there.

[Nick Rowe]

Jim: that sounds about right. I don't remember growth theory being on the PhD macro comp exams in the early 1980's at Carleton. I remember having to teach myself Solow before teaching it to undergraduates.

Carleton had more emphasis on open economy macro I think, with Ehsan Choudhri especially. But I never took the two International courses at UWO. One was trade, but maybe the second was international finance? If so, that might explain why there was so little open economy macro: they left it for the more specialised course.

[Bill Woolsey]

Isn't Laidler unusual?

I was a graduate student between 1979 and 1987. Yeager was my unofficial dissertation advisor.

Have you been following Kling's macreconomics? I'm not imagining this, am I? MIT with Solow and then working on the Fed's macro models. Well, the most basic things I think I know about money-macro, he seems to ignore.

I studied Public Finance and Public Choice. I did take a seminar on money and banking. One semester we spent a lot of time on a Keynesian model that ended up with aggregate supply and demand. And I still have my copy of Patinkin.

I did take a seminar on Money and Banking at GMU in about 1984 (after I got interested in free banking and alternative monetary systems.) I had to present a paper, by Fama, I think, all about deposit insurance, moral hazard, how capital requirements could just result in more risk. Very appropriate for the growing S&L crisis.

But I read all the old stuff, Fisher, Hawtrey, Robertson, Mises, Marshal.. I don't think that is normal.

You know, Sumner puts me on his list of kooks that agree with him. lol.

[Pedro]

Almost 30 years later, I had Laidler and Fried as an undergrad. Laidler is the only professor I've had (up to 2nd-year PhD) that ever addressed free banking (in his Monetary Policy course).

[Kevin Milligan]

Since we're doing Grad School reminiscing now . . .

About endogenous growth theories coming 'later': I took a course from John Floyd at UofT in the mid 1990s. It was a course on open economy macro, but he did take the occassion to inform us that he had written an endogenous growth paper in the early 1970s well before the idea became popularized by Romer and Lucas. Alas, it was never published (although I did find reference to it here.)

[Mike Moffatt]

I studied Macro at Rochester (freshwater) in the early part of this decade, so it wasn't much different than it is now. I do remember thinking "these models make a bunch of bizarre assumptions and the results don't seem realistic either". But I've always been much more of a Micro guy and I only took Macro because I had to.

I was an undergrad at UWO in the mid 90's and had classes with pretty much everyone you mention, except Howitt who had left by that point (his son, however, was in my class).

Also, I really miss Joel Fried. A really terrific guy.

[DW]

It looks like you answered the big question near the end of the post. If people are focusing on the 'interesting' debates of the times, it is necessarily true that we're always in one of many possible 'dark ages' of macro at any given time?

The fact is that without an asset bubble popping and a subsequent real result (ie a Great Depression phenomenon), whatever the cause, Keynes had less to teach us. Now he's interesting again.

Calling it a 'dark age' is a bit of a stretch, I think. The information wasn't destroyed, it just wasn't interesting, so nobody talked about it.

[Greg Ransom]

Note well. Growth theory grew out of and was inspired by Hayek's work on production processes across time (see Hicks on this).

And essentially what "growth theory" did was take Hayek's marginalist / heterogeneous production processes work -- and shoved it in a one good box, making it compatible with Ricardo non-marginalist / classical economics distributions theory -- and incompatible with Menger, Bohm-Bawerk, Hayek and marginalist distribution economics.

Marginalist / heterogeneous production process economics was at the core of Bohm-Bawerk / Hayek monetary theory and cycle theory. The dark ages came when the economists betrayed marginalism and removed heterogeneous production -- the core of a functioning economy -- from their mental world.

Read Roger Garrison to see the difference between marginalist economics with heterogeneous production -- and economics without it.

[brendon]

I've been out of graduate school (SFU) for three years, I think I heard the name Keynes once in the entire duration of my masters. I now work in the private sector, providing econ commentary and forecasts and can say that almost nothing I learned in my graduate macro has been useful.

Contrary to your experience Nick, we did almost nothing but growth theory in Macro - start with Solow, move to Ramsey-Cass-Koopmans and overlapping generations, then to Endogenous growth theory. After that it was RBC, Lucas (that signal extraction stuff drove me nuts), MIU and CIA constraints and finally some new-keynesian pricing (taylor, calvo).

The PhD course, which I am glad I never took, was almost exclusively taught out of the Sargent and Lundquist text, which to me was almost completely incomprehensible.

The graduate curriculum at SFU was quite a shock for me, coming from a finance background and a pretty solid grounding in IS-LM which was almost universally derided by my professors (for an example, read just about any of David Andolfatto's recent posts).

[Matthew]

"...have we collectively forgotten some (important) stuff that we used to understand?"

Inevitably, graduate education in economics is heavily influenced by what is considered to be "good" economics research by the faculty teaching and writing in the field. More and more, faculty seem to be rewarded for elabourating obscure mathematical models that don't bear much relation to reality.

When I began my MA at UWO in 2002 it occured to me almost immediately that I had unknowingly signed up to do a degree in applied math rather than economics. I could't have had worse training for this - did my undergrad in econ and *gasp* political science at Dalhousie, which is one of the few PhD granting economics departments that has tried to keep math in some kind of skeptical perspective - and its reputation has suffered accordingly. At UWO I was seen as pretty third rate by the high priests of applied econometrics, etc. I'm still licking my wounds.

[Stephen Gordon]

It looks like you were on the losing side of the Economic Culture Wars.

[Matthew]

Thanks for the link. Cute, but a bit of a hatchet job.

I am not challenging the positivist foundations of economics - and I doubt Galbraith is either. My position really just boils down to not forgetting the social part of social science.

[Stephen Gordon]

More of a hatchet job than "faculty seem to be rewarded for elabourating obscure mathematical models that don't bear much relation to reality"?

[Matthew]

I don't think my statement is far off the mark. It certainly seemed to be the case at UWO when I was there. I would imagine the situation isn't much dfferent at the top departments in the US, where most of the faculty are trained.

Have you ever come accross this?:

http://unicast.org/enclosures/life-econ-crop.pdf

[David Chester]

You don't know me, I'm David Chester and I am a retired mechanical engineer who has been doing research in macroeconomics over many years as a sort of hobby.

What we really need is a macroeconomic theory that is so general as to cover the whole system whilst being sufficiently comprehensive as to show the technical aspects of where changes can affect things. You might think this is a tall order but I assure you it is entirely possible. The current ways of modelling the macroeconomics system are so poor as to be wasteful of effort. Either the models are too complex to understand or so small and limited as not to properly explain what is happenning. In particular I find Keynesian Theory to fall into this class of partial modelling, and it is false.

I have developed such a desirable theory, making it as "simple as possible but not too simple" (Einstein), which is useful as both a means for policy-exploration and teaching. It actually shows how the system WORKS rather than merely describes its various parts. It is being written in the form of a book of about 150 pages, with some mathematics and logical reasoning and very little statistics. The model which I use has a mechanical equivalent, an example of which I have built (and photographed).

I am interested in sharing this theory and its model with people who have the time and patience to give it some serious attention, when they will find that it is reactionary whilst not being revolutionary and it clearly makes the short-term equilibrium of the whole shebang into an exact science. It uses almost main-stream methods, particularly the matrix method of Wasley Leontief.

Please write to me at [email protected] for more information.