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.
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.”
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.