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From Disequilibrium to equilibrium macroeconomics: barro anD Grossman’s traDe-oFF between riGor anD realism Documents de travail GREDEG GREDEG Working Papers Series
GREDEG WP No. 2019-17 https://ideas.repec.org/s/gre/wpaper.html
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From Disequilibrium to Equilibrium Macroeconomics: Barro
and Grossman’s Trade-off between Rigor and Realism1
GREDEG Working Paper No. 2019-17
During the 1970s, Keynesian macroeconomics was challenged by the New Classical
Economics of Robert Lucas. This involved a battle between disequilibrium and equilibrium
macroeconomics. My article contributes to explain why the equilibrium approach came to
dominate. My case study is Robert Barro and Herschel Grossman. In 1971, Barro and Grossman
elaborated the basic disequilibrium model. In 1976, they wrote the first book on disequilibrium
macroeconomics – i.e., Money, Employment, and Inflation. However, at the end of the 1970s,
they came to advocate for equilibrium models à la Lucas (1972, 1975). My article traces how
JEL Codes: B21, B22, B23, E1, E3.
Keywords: business cycle, non-neutrality of money, disequilibrium macroeconomics,
1 Université Côte d’Azur, CNRS, GREDEG, France. Correspondence may be addressed to Romain Plassard, Groupe de Recherche en Droit, Économie et Gestion, Université Côte d’Azur, 250 rue Albert Einstein, CS 10269, 06905 Sophia Antipolis Cedex, France; e-mail : [email protected] I would like to thank Paul Dudenhefer, Kevin Hoover, and Roy Weintraub for their comments on earlier drafts of this essay. I am also indebted to the participants of the HOPE seminar of Duke University, to the participants of the 2018 Summer Institute on the History of Economics, and to the participants of the nHice workshop. My final thanks go to the staff of the John Hay Library (Brown University) for their help with the Herschel I. Grossman Papers.
1. The reasons to jump on Lucas’s bandwagon
The 1970s marked a period of profound change in macroeconomics. After long years of
domination, Keynesian macroeconomics was challenged by the New Classical Economics of
Robert Lucas (1972, 1975). This involved a battle between two modelling strategies. On one
side, macroeconomists considered that market prices varied too slowly to ensure a continuous
equilibrium on markets. This led them to model how individuals and markets behaved, under
rationing constraints. New classical economists, on the other side, assumed that price variations
occurred instantaneously and ensured equilibrium on markets. This led them to model how
economies behaved when individuals realized their optimization plans. My article contributes
to explain why the equilibrium approach came to dominate the field. My case study is Robert
Barro and Herschel I. Grossman.
Until the mid-1970s, Barro and Grossman contributed to the development of
disequilibrium macroeconomics. In 1971, they elaborated the basic disequilibrium model. In
1976, they wrote the first book on disequilibrium macroeconomics, Money, Employment, and
Inflation. However, at the end of the 1970s, Barro and Grossman came to advocate for
equilibrium models. In two articles published in 1979, they claimed that Lucas had identified
the good approach to macroeconomics (Barro, 1979: pp. 55-56; Grossman, 1979a: p. 68). Why
did they privilege equilibrium over disequilibrium macroeconomics?
Several explanations may be considered. Opportunism is a possibility. With the ascent
of New Classical Economics, Barro and Grossman were likely to publish more and to get better
positions if they developed equilibrium models. This might explain why they chose to jump on
Lucas’s bandwagon. Such a decision could also have been motivated by politics. Barro and
Grossman were against policy activism.2 Coincidence, equilibrium models à la Lucas made
strong cases against fiscal and monetary policies. Accordingly, Barro and Grossman might have
preferred equilibrium macroeconomics because it strengthened their political views. Last but
not least, Barro and Grossman’s decision may be due to some sort of superiority of equilibrium
2 During a conference “On the Stability of Contemporary Economic System” (1975), Grossman claimed that “if we could somehow devise a system where monetary creation [was] stabilized, we could then have a stabilized rate of inflation. That [seemed] to be the practical lesson to learn. The immediate policy prescription which [followed] from that [was] to remove monetary and fiscal policy from the discretion of government and to transfer the power to some highly level of constitutional authority, which would stabilize monetary and fiscal behavior” (1975: p. 457). Barro was on the same page (1979: p. 57).
vis-à-vis disequilibrium macroeconomics – e.g., the strength of its microfoundations, its
capacity to assess economic policy or its internal consistency.
These explanations are probably not mutually exclusive.3 However, my article does not
intend to grasp Barro and Grossman’s decision in all its complexity. Its goal is to discuss the
validity of one explanation. I am interested in determining whether, and to what extent, they
preferred equilibrium macroeconomics because it offered a better framework than
disequilibrium macroeconomics. This simplifies the historical analysis. No need, for instance,
to explain the relationship between the choice of models and politics. Besides, it allows to
address the relevance of the standard narrative in the history of macroeconomics. When
macroeconomists trace the history of their field, they insist on the progress made since the
1970s (Mankiw, 1990; Blanchard, 2000; Woodford, 2003). The history of macroeconomics is
thus depicted as a process in which macroeconomists replace one approach by another, because
it does a better job.4 Does this logic apply to Barro and Grossman’s case?
So far, historians have privileged that explanation. According to Roger Backhouse and
Mauro Boianovsky (2013), Barro and Grossman failed to complete their disequilibrium
program of microfoundations. This would explain why they stopped investigating
disequilibrium macroeconomics. The same argument was formulated by Michel de Vroey, in
his History of Macroeconomics. From Keynes to Lucas and Beyond (2016). The problem with
these historical analyses is twofold. They don’t explain why Barro and Grossman were seduced
by equilibrium macroeconomics. Then and more importantly, none of the three historians
reconstructed the path that led Barro and Grossman to privilege equilibrium over disequilibrium
By contrast, I trace how and why Barro and Grossman came to advocate for equilibrium
macroeconomics. To do so, I make an extensive use of the archival documents left by
Grossman, at Brown University. Then, I portray the intellectual context in which Barro and
Grossman were involved. Last but not least, I focus on the way Barro and Grossman built and
3 According to Barro (1979), equilibrium macroeconomics offered a better framework than disequilibrium macroeconomics. This was because unlike disequilibrium macroeconomics, equilibrium macroeconomics was based on sound microfoundations (p. 56). Then, Barro stressed that “the non-market-clearing approach [made] government policy activism much too easy to justify” (p. 56). Finally, when Barro advocated for equilibrium macroeconomics, he was Lucas’s colleague at the University of Chicago. Jumping on his bandwagon could thus have been viewed as a career accelerator. Under these circumstances, it is likely that Barro’s decision was motivated by strategic, politic, and scientific reasons. The same might apply for Grossman. 4 For instance, Michael Woodford (2003) claimed that the equilibrium discipline was adopted because it offered a better basis for evaluating economic policies (pp. 11-12).
used models. Several questions are addressed. What was their method when modeling
economies? Did Barro and Grossman have the same goals when using disequilibrium and
equilibrium models? What were their crit