The thoroughly modern macroeconomics of Stephen D. Williamson (SDW), Part I
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First in a series. I’m reading his intermediate macro textbook (fourth edition). Cost me ten bucks (including shipping). It is somewhat of a novelty among intermediate texts because he adheres to a “Real Business Cycle” (RBC) perspective. SDW blogs here. What is RBC? That’s the subject of this series. The eminent MIT professor Robert Solow describes it archly:

The preferred model has a single representative consumer optimizing over infinite time with perfect foresight or rational expectations, in an environment that realizes the resulting plans more or less flawlessly through perfectly competitive forward-looking markets for goods and labor, and perfectly flexible prices and wages.

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To be fair, adherents to RBC would answer, our models get much more complicated than that; and they will, in time, provide more accurate predictions of the economy. Being able to predict is what ultimately matters anyhow.

The RBC folks can be a little sharp themselves. Here, for instance, the eminent Robert Barro contrasts his own “regular economics” with irregular Keynesian economics.

Here is RBC guru Edward Prescott, pulling rank:

I don’t know why Obama said all economists agree on [the need for a stimulus bill]. They don’t. If you go down to the third-tier schools, yes, but they’re not the people advancing the science…

And Prescott again:

It is an established scientific fact that monetary policy has had virtually no effect on output and employment in the U.S. since the formation of the Fed . . . 

I find the above a little breathtaking, purely in terms of arrogance. We’ll try  to get to the substance in this series. Full disclosure: I did well in my macro comprehensives in grad school, but that was in 1984. I’m trying to get up to date. After following DeLong and Krugman’s ongoing jihad against modern macroeconomcs’ “dark ages,” I thought it would be worthwhile to get the Full Monty “Real Business Cycle” (RBC) side of the story. As the quotes above should indicate, RBC is the mortal enemy of traditional Keynesian economics, and vice versa.

A few fun bits to get warmed up.

In the “Key Terms” section at the end of Chapter One, SDW defines the term “Keynesian” as “Describes macroeconomists who are followers of J.M. Keynes . . . ” By contrast, RBC theory is defined as “Initiated by Finn Kydland and Edward Prescott . . . ” So Keynesians are like children following a dead Pied Piper, RBC’s founders don’t have “followers.” They do the serious work.

On financial bubbles, or by SDW, “bubbles,” we get:

Some economists argue that the rapid increase in the price of housing up to 2006 was an asset price “bubble.”

By contrast:

Alternatively, according to the fundamental view, market prices of assets can always be explained (maybe through some hard thinking and research) by factors affecting supply and demand . . .

Get the difference, bubbleheads?

I’ll end by noting SDW’s principal exception to GDP as an indicator of well-being is its omission of household production, which is fine as far as it goes, though the failure to mention non-market environmental amenities up front is curious. As I said, we’re still in the throat-clearing phase of the book, so some suspension of judgment is called for.

Lastly, on unemployment, SDW lists four factors affecting it: aggregate economic activity, the structure of the population, government intervention, and sectoral shifts. The first one looks circular (As in “When more and more people are thrown out of work, unemployment results.” — Calvin Coolidge), but as noted above this is an introductory chapter so we will withhold judgment. The RBC view of unemployment is kind of notorious. We will unpack it at our leisure.


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The thoroughly modern macroeconomics of Stephen D. Williamson (SDW), Part I — 13 Comments

  1. “I did well in my macro comprehensives in grad school, but that was in 1984. I’m trying to get up to date.”

    Imagine if you’ve had *no* economic training like me.

    Anyway I’ve been watching the RBC-Austrian-glibertarians’ reaction to the housing-bubble-financial crisis with interest. Magical markets? No such things as bubbles? Now Yellen is concerning herself with financial instability.

    Maybe you will hit on this in coming posts on the textbook, but the baddies argue the problem is government interference: the Fed kept rates too low to long early last decade, but if they had been shackled by the Taylor rule (absent more demand from trade or government spending) things would have been much worse: higher unemployment, lowflation/deflation. Lost output, hysterisis, Lower potential output, etc.

    Arguably the Great Depression was caused by the government “leaving things alone” and letting the economy work things out on its own. Democratic society decided that wasn’t the best solution. So the baddies must continually rewrite history. I bet the text’s historical case studies are slanted to say the least. I bet important historical data points are “edited out” like a missing Troskyist in a Stalinist photograph.

  2. The old foundations were deemed empirically and theoretically unsound in the 1870s. Time passes. The old theory building inspectors die. Records gather dust in uncataloged archives. And voila! one can build a brand new theoretical skyscraper on those rickety old foundations.

  3. Only now they call those old foundations MICROfoundations — as if adding a cybernetic-sounding prefix makes it something computery and new.

  4. Prof. Prescott:
    “I don’t know why Obama said all economists agree on [the need for a stimulus bill]. They don’t. If you go down to the third-tier schools, yes, but they’re not the people advancing the science…”
    And again:
    “…Professor Prescott, also on the faculty of Arizona State University, wrote in an email.”

    It’s been a long while since I’d been in graduate school and paid any attention to tier rankings of the various schools. ASU is now better than a so called third tier school? Or is the good professor only blowing smoke? Or, possibly, chewing too many peyote buttons in the desert? This sounds like he’s howling at the moon; “It is an established scientific fact that monetary policy has….” Is there any aspect of economic thought that rises to the level of a scientific fact?

  5. Prescott himself won the sort-of Nobel Prize in economics. It’s interesting to imagine what Prescott’s colleagues at ASU thought of that remark.

  6. I suspect that when you hold an endowed chair funded by the Wm. P. Carey Foundation; http://www.wpcarey.com/WPC-Foundation.aspx; it is possible that your scientific and ideological perspectives may become enmeshed and mutually supportive. An academic in today’s market place of ideas can be well rewarded for having all the best ideas and the chutzpah to insist that those ideas are the only good ideas.

  7. If you go back 30 years – I was co-teaching a graduate seminar in macroeconomics with one of these RBC types (can you say the Odd Couple). One afternoon when we were dividing up the sessions, he quipped to me “we don’t teach ISLM at my school … do they still teach blood leaching at your school”. And this was on the heels of the 1982 recession.

  8. “I suspect that when you hold an endowed chair funded by the Wm. P. Carey Foundation; http://www.wpcarey.com/WPC-Foundation.aspx; it is possible that your scientific and ideological perspectives may become enmeshed and mutually supportive. ”

    True, but don’t forget the self-selection factor.

  9. I don’t think the self selection process and the filtration process can be separated. Those who believe are those who will be selected because of their demonstration of those beliefs. That’s the filtration process, which in turn reinforces the belief system in the minds of those selected. “I am what I think that you think I am.”

  10. Read Williamson in conjunction with the critical works of Phil Mirowski. As I understand it, he argues that not just macro (DSGE and ISLM alike) have no solid foundation but nothing survives of neoclassical econ project once sieved through the filter of philosophy of science. Even supply and demand is a fail.

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