Monday, May 22, 2006

...The point, however, is to change it...*

Unfortunately I read Greg Mankiw's of Harvard paper (Title: The Macroeconomist as Scientist and Engineer --in pdf) right after giving last lecture of intermediate macroeconomics, with topic on the stabilization policy (the birth of, Keynesian, macroeconomics) and the subsequent New Macroeconomics. If not, I would like to add it as reading list. For non economists, don't worry, it's a non-technical paper (read: no math). You can take it as the biography of the macroeconomics.

In that paper, before coming into a rather disheartening verdict on the disconnection of macroeconomics as science and as engineering (or problem solving) Mankiw draws a very clear and readable history of macroeconomics as a discipline. Soon you would be engaged in a gripping tale on the battle of ideas between Keynesian and New Keynesian in one hand, and New Classical in the other.

Indeed some knowledge on intermediate macroeconomics would help to understand and follow what is being fought. You know: Philips curve and wage stickiness, rational expectation, systematic monetary policy, etc. But even for you who doesn’t have a chance, and privilege (kidding!), for being trained into the subject, it is still fascinating to enjoy the exchange, sometimes nasty, arguments amongst the proponent of each camp. Particularly between Bob Lucas (Chicago) of Neo Classical school and Bob Solow (MIT) Keynesian.

In page 12 Lucas was quoted saying:

"People don't take Keynesian theorizing seriously anymore"

While Solow called that it

"foolishly restrictive" for the new classical economists to rule out by assumption the existence of wage and price rigidity and the possibility that markets do not clear.
Mankiw thinks that Lucas represents the analytical rigour of the new classical --in other word, a sophisticated science--; and Solow concerns on the lack of reality of market clearing assumption -- bad engineering --.

Meanwhile the science itself develops in both camp of neoclassical and neo Keynesian (modern macroeconomics, you would like to say). The interesting research projects of the two schools have been discussed briefly, but excellently, in the paper. Both leads to a conclusion that now we know better about the subject.


If God put macroeconomics on earth to solve the problems, then the Saint Peter will ultimately judge us by our contributions to economic engineering. So let’s ask: Have the developments in business cycle theories over the past several decades improved the making of economic policy? p.15
Alas, no.

Mankiw shows that the macro-model used by US administration is basically the old Keynesian type --yes, that IS-LM and Philips curve stuffs-- with minimal contributions from New Macroeconomics researches. And come to think of it, I guess the IMF model --Polak model--, applied to countries in crisis in need for stabilization and IMF money, is also very much old Keynesian one. And I believe all macroeconomic models for Indonesian economy are no different.

This is indeed a disheartening that since Keynes (and to some extent Hicks) --well OK, call it Neoclassical-Keynesian synthesis-- macroeconomic framework in the 30s, no one come up with significantly different and better model of an economy.

I was expecting, and still hopes, that 1998 Asian crisis, a resemblance of 1929 Great Depression, would give a birth to a new Keynes –-perhaps from the East-- to revolutionize the way we see the economy and business cycle as well as devising better way for stabilization policies.

Apparently we still have to wait.

* yeah, it's Karl Marx's word, not on macroeconomists, but philosophers who are too busy interpret the world in various ways.


  1. aha, an asterisk on post title... that's too gay...

  2. Maybe we don't really need revolutionary ideas, says Lindauer and Pritchett:

    (d'oh.. how to create links in comments..??)

  3. Manager, I know sometimes you have hard times taking care of the cafe. But apparently you read and take this book Overheard in New York too seriously :-). It may give you wrong ideas, mate :-).

    And Michael Franks? d'oh.

  4. ap, can't open the link.
    Are you saying that we'd better stay with Keynesian model? :-)
    For me it'd be cool to see such revolution by the way :-)

  5. Sorry,
    here is the article. if you can't open it, the title is "What’s the Big Idea? The Third Generation of Policies for Economic Growth" by Lant Pritchett and David Lindauer.

    the argument says: perhaps we don't need new 'big' ideas in economics. the question is how to apply the previous ideas and do it right.

    on Keynes, sorry for the Keynesian, Pritchett and Lindauer mentioned than Keynesian was only powerful until the 1970s. Because after that, macro policy has been oriented towards price stablization, meaning switching from Keynesian to neoclassic.

    for Robert Barro, this is a switch from JM Keynes to Friedman. he said "in terms of intellectual battle, Friedman has won it."

    Michael Piore, my Pol. Econ professor at the MIT amen to that by saying, "Friedman won the battle not only in policy perscription, but also in explaining how the world works..."

    Krugman will not agree ("Why aren't we all Keynesian?". so won't the late John K Galbraith.

  6. ap, what policy prescription? Mankiw shows us --and I tend to agree-- that the latest development in theories (be it neoclassicals or new keynesian)are not (yet) incorporated into macroeconomic model of the policymakers. So much for Friedman-ite mania spreading around the world, the framework is still very much Keynesian.

    Even Fischer, Dornbusch, and Startz (2000) in their textbook of Macroeconomics put it bluntly: While the intellectual appeal of rational expectations models is very strong, the empirical evidence is less supportive

  7. Well, I was talking about the actual policies that were implemented. Clearly that since the 1970s macro policies were oriented towards (among other things):
    1. balanced budget, or at least fiscal discipline
    2. controlling inflation through monetary policy (NOT aggregate demand policy -- "inflation is always and forever a monetary phenomenon)

    We can also add the views on crowding out fiscal policy, the neutrality of government bonds etc.

    I am not saying those are the most correct ones. But those were the dominant views.