from disequilibrium to equilibrium macroeconomics: barro ... · pdf file in the early 1970s,...

Click here to load reader

Post on 10-May-2020

1 views

Category:

Documents

0 download

Embed Size (px)

TRANSCRIPT

  • From Disequilibrium to equilibrium macroeconomics: barro anD Grossman’s traDe-oFF between riGor anD realism Documents de travail GREDEG GREDEG Working Papers Series

    Romain Plassard

    GREDEG WP No. 2019-17 https://ideas.repec.org/s/gre/wpaper.html

    Les opinions exprimées dans la série des Documents de travail GREDEG sont celles des auteurs et ne reflèlent pas nécessairement celles de l’institution. Les documents n’ont pas été soumis à un rapport formel et sont donc inclus dans cette série pour obtenir des commentaires et encourager la discussion. Les droits sur les documents appartiennent aux auteurs.

    The views expressed in the GREDEG Working Paper Series are those of the author(s) and do not necessarily reflect those of the institution. The Working Papers have not undergone formal review and approval. Such papers are included in this series to elicit feedback and to encourage debate. Copyright belongs to the author(s).

  • 1

    From Disequilibrium to Equilibrium Macroeconomics: Barro

    and Grossman’s Trade-off between Rigor and Realism1

    Romain Plassard

    GREDEG Working Paper No. 2019-17

    Abstract

    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

    and why.

    JEL Codes: B21, B22, B23, E1, E3.

    Keywords: business cycle, non-neutrality of money, disequilibrium macroeconomics,

    equilibrium 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.

  • 2

    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).

  • 3

    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

    macroeconomics.

    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).

  • 4

    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