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 - PowerPoint PPT Presentation

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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

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Title: 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


1
History of Modern MacroeconomicsLecture 3.3.
Macroeconometrics and the New Economics
(1930-1950) Kevin D. HooverDepartment of
EconomicsDepartment of PhilosophyCenter for the
History of Political EconomyDuke University
2
Ragnar Frisch
  • Inventor of important terminology
  • microeconomics/macro-economics
  • econometrics
  • Influential in development of
  • dynamic economics
  • econometric (empirical) methods
  • Creator of modern professional institutions
  • Founder of Econometric Society
  • First editor of Econometrica

Ragnar Frisch (1895-1973), Nobel Laureate (1969)
3
Contrasts and Complementarities Between Frisch
and Keynes
  • micro vs. macrodynamics
  • econometrics
  • pragmatism and aggregation
  • dynamics
  • pervasive micro analysis
  • system properties and emergence
  • against econometrics

Frisch
Keynes
4
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.

5
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.

6
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

7
Keynes and the Centrality ofMicroeconomic
Analysis
  • All the main Keynesian functions analyzed
    microeconomically
  • consumption function
  • labor supply
  • labor demand
  • liquidity preference
  • investment

8
An Illustration Keynes on Liquidity Preference
  • Speculative demand for money
  • normal rate of interestindividual 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
    agents normal rate

9
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
  • 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 Keyness Labor
    Market, History of Political Economy 1995.

10
Another Illustration Keynes on the Labor
Market 2
  • Defines unemployment not by aggregative version
    of individual situation real wage gt marginal
    disutility of labor but by market testMen 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.

11
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

12
Frischs Vision Two Versions of the Tableau
Economique
Ragnar Frisch 1933
François Quesnay 1759
13
Keyness Vision Mandevilles 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).
14
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

15
Frisch The Economy as Machine A Simple
Pendulum as an Analogue of the Business Cycle
16
Complex Pendulums
17
Propagation and Impulse Mechanisms
18
Jan Tinbergen and Applied Macroeconometrics
  • Trained as physicist
  • Created first modern econometric models
  • Smaller Dutch model
  • Larger U.S. model
  • Two-volume study of U.S. business cycles for the
    League of Nations (1939)
  • methodology and application
  • object of Keyness attack on econometrics

Jan Tinbergen (1903-1994)
19
Jan Tinbergen
  • Socialist
  • In 1950s director of the Dutch Central Planning
    Bureau

Jan Tinbergen (1903-1994), Nobel Laureate (1969)
20
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

21
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)
22
Klein and the Aggregation Program
  • Keynesian
  • Walrasian
  • Econometrician
  • Socialist

Lawrence Klein (1920- ), Nobel Laureate (1980)
23
Keynes and Bretton Woods
Keynes and Harry Dexter White (U.S. Delegate)
Bretton Woods (NH) Resort
Keynes and the Soviet Delegate
24
Making the Economy Work - 1
Lord Beveridge (1879-1963)
25
Making the Economy Work - 2
Harry S. Truman (1884-1972, President 1945-53)
Alvin Hansen (1887-1975), American popularizer of
Keynes
26
Abba Lerner (1903-1982)
27
  • Thanks
  • ??
  • The End
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