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(Download PDF) A History of Macroeconomics From Keynes To Lucas and Beyond 1St Edition Michel de Vroey Online Ebook All Chapter PDF
(Download PDF) A History of Macroeconomics From Keynes To Lucas and Beyond 1St Edition Michel de Vroey Online Ebook All Chapter PDF
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A History of Macroeconomics from Keynes to Lucas and Beyond
MICHEL DE VROEY
Université catholique de Louvain, Belgium
32 Avenue of the Americas, New York, ny 10013-2473, USA
www.cambridge.org
Information on this title: www.cambridge.org/9780521898430
© Michel De Vroey 2016
This publication is in copyright. Subject to statutory exception
and to the provisions of relevant collective licensing agreements,
no reproduction of any part may take place without the written
permission of Cambridge University Press.
First published 2016 (Version 2, with corrections, October 2016)
A catalog record for this publication is available from the British Library.
isbn 978-0-521-89843-0 Hardback
isbn 978-1-107-58494-5 Paperback
Cambridge University Press has no responsibility for the persistence or accuracy
of URLs for external or third-party Internet Web sites referred to in this publication,
and does not guarantee that any content on such Web sites is, or will remain,
accurate or appropriate.
To Jean Cartelier, Marie-Paule Donsimoni, Franco Donzelli, and
Laurent d’Ursel, who helped me shape my vision of economic theory
Contents
vii
viii Contents
Bibliography 389
Index 420
Figures
ix
x List of Figures
xi
Boxes
xii
Preface
The aim of this book is to trace the evolution of modern macroeconomics from
its inception to the present. A sufficient justification for this enterprise is
that modern macroeconomics, which originated with the publication of John
Maynard Keynes’s The General Theory of Employment, Interest, and Money
(Keynes 1936), has now existed long enough to make it worth assessing what
has happened over the past seventy years. An additional justification is that
during this period macroeconomics has undergone a radical change with the
dethroning of Keynesian macroeconomics and its replacement by dynamic
stochastic macroeconomics initiated by Robert Lucas. This revolution begs to
be assessed. In Axel Leijonhufvud’s words:
The main task for the history of economic thought of the second half of the twentieth
century must surely be to explain this 180-degree turn in the worldview of the represen-
tative [macro] economist. (Leijonhufvud 2006a: 35)
My book is primarily addressed to those macroeconomists, be they teachers or
students, who feel the need to go beyond the technicalities that provide their
daily bread and butter, and wish to ponder the origin of the kind of modeling
with which they are familiar. My wish is that it might be especially useful to
graduate students and young academics. Their training is often purely technical
and centered on the models of the day, as if there had been no useful past, and
as if no conceptual or methodological problems inherited from the past still
had an influence today. Of course, this book is also addressed to historians of
economics, be they doing internal history, as I do, or working from an external
history perspective. Finally, I hope that it will be useful to economists working
in other branches of the discipline who are curious to learn what has happened
in their neighbors’ yards.
xiii
xiv Preface
1
These include a few chapters of the General Theory; Hicks’s IS-LM paper; chapters XIII and XIV
of Patinkin’s Money, Interest and Prices; Clower’s 1965 article; Barro and Grossman’s 1971
article; Friedman’s 1968 Presidential Address; Lucas’s “Understanding Business Cycle” and
“Problems and Methods in Business Cycle Theory” articles; one or two new Keynesian pieces;
Prescott’s Nobel Prize lecture; and a few more recent pieces.
2
Leijonhufvud contended that there was a significant discrepancy between the content of the
General Theory (the Economics of Keynes) and what it became in the hands of Keynesian
economists.
Preface xv
and argued that involuntary unemployment was due to wage rigidity. This
proposition is the cornerstone of Keynesian macroeconomics, centered on the
IS-LM model. In the late 1960s and 1970s, Leijonhufvud and non-Walrasian
equilibrium economists (following Don Patinkin’s footsteps), on the one hand,
and Edmund Phelps and Milton Friedman, on the other, started to ques-
tion Keynesian macroeconomics in different ways and for different reasons.
Treading in Friedman’s and Phelps’s footsteps, Robert Lucas launched a more
radical attack against Keynesian macroeconomics. It led to a new approach,
DSGE macroeconomics. An occurrence that had all the trappings of a Kuhnian
scientific revolution, it sealed the fate of Keynesian macroeconomics. However,
the ascent of the DSGE program did not occur without resistance. Defenders of
Keynesian macroeconomics dismissed it on the grounds that it amounted to
replacing “messy truth by precise error” (Lipsey 2000: 76). Other economists,
who rallied under the ‘new Keynesian’ banner, tried to rescue some Keynesian
insights, while espousing the new equilibrium standard Lucas had imposed.
The new research program inaugurated by Lucas came to fruition with the
emergence of real business cycle (RBC) modeling initiated by Finn Kydland
and Edward Prescott. Bringing macroeconomics to the computer, it became
the be-all and end-all of the young researchers entering the profession in the
mid-1980s. Successive modifications of the inaugural RBC model brought
Keynes’s General Theory 7
not use this expression): but its origin had to be sought in other parts of
the economy than the labor market.4 Yet, Keynes’s decision to adopt an
interdependency perspective should not be interpreted as an adhesion to
the Walrasian general equilibrium approach.5 To him, the route to be
taken was to generalize Marshallian analysis.
e) Instead of joining the imperfect competition line of argumentation which
was emerging at the time in Cambridge, Keynes wanted to use the perfect
competition framework – presumably because he associated imperfect
competition with collusion, unions, and so on, whereas he wanted to
bring something deeper to the fore.
f) The remedy for involuntary unemployment which Keynes proposed
was a state-induced demand activation, combined with a policy of low
interest rates as well as some dose of income redistribution. To Keynes,
all these measures hardly amounted to introducing socialism. On the
contrary, their aim was to prevent it from arising and to preserve demo-
cratic capitalism. Hence, his characterization of his theory as “moderate
conservative” (Keynes 1936: 377).
g) After some wavering, Keynes decided to develop his argumentation
within the canons of existing theory, that is, Marshallian theory.6 That
is, his aim was to sustain his contentions with as minimal as possible
changes in this theory.
animal spirits
This analysis is my personal rational reconstruction of The General Theory.
Keynes himself did not spell out his project in these terms. Likewise, none of the
many accounts of what Keynes might have had in mind that can be found in the
literature is exactly like mine. Still, I am of the opinion that my presentation of
Keynes’s project can easily be reconciled with most of them.
I readily admit that it is incomplete. Indeed, it leaves aside what, in an article
reacting to some critics and published one year after his book, Keynes declared
to be its central message, namely, the radical uncertainty surrounding invest-
ment decisions (Keynes 1937). Keynes’s declaration is somewhat surprising as
4
For example, in his Appendix to chapter 19, where he criticized Pigou, Keynes wrote the
following: “I maintain that the real wage . . . is not primarily determined by ‘wage adjust-
ment’. . . but by other forces of the system . . . in particular the relation between the schedule of
the marginal efficiency of capital and the rate of interest” (1936: 278).
5
At the time, Walras’s views were hardly appreciated in Cambridge and, for better or worse,
Keynes did not think that Walras’s theory could be of any help for his own project. Clower quotes
an extract of a letter from Keynes to Georgescu-Rodan, dated December 1934: “All the same,
I shall hope to convince you some day that Walras’s theory and all the others along those lines are
little better than nonsense!” (Clower 1975, reprinted in Walker 1984: 190).
6
On Keynes’s Marshallian roots, see Clower ([1979] 1984), Leijonhufvud (1968, 1999) and
De Vroey (2011b).
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