Conversations with Economists: New Classical Economists and Opponents Speak Out on the Current Controversy in Macroeconomics PDF
Preview Conversations with Economists: New Classical Economists and Opponents Speak Out on the Current Controversy in Macroeconomics
ft l...,J Conversatwiiotnhs Economists Conversations with Economists NewC laaslEs ciocnoamniOdsp topsn ents SpeOaukot n t hCeu rrCeonrntot versy inM acoreconomics ARJOK LAMER ROWMAN& ALLANHELD PUBLISHERS Publiisnht ehUden itSetda toefAs m eriicn1a 9 84 byR owma&n A llanhPeulbdl,i shers (Ad iviosfiL oint tleAfidealm&ds C, o mpany) 81A damDsr ivTeo,t owNae,wJ ers0e7y5 12 Copyr@i 1g9h8tb3 yA rjKol amer Alrli grhetsse Nrovp eadro.tft hpiusb licmaatyi on ber eprodsutcoeriden,ad r etriseyvsatoler m , transmiinat ntyfoe rdm o rb ya nmye anesl,e ctronic, mechanpihcoatlo,c orpeycionrgdo,ir on tgh,e rwise, withtohupetr ipoerr misosfti hopenu blisher. PubliisnhG erde Barti tuanidnet hrte i tle ThNee wC lasEsciocnaolm ics: ArgumFeonartn Asdg ainst LibraorfCy o ngrCeastsa loignPi unbgl icDaattiao n Maienn turnyd etri tle: Converswaittiehoc nosn omists. Bibliogpr.a phy: Incluidnedse x. 1.M acroecono2m.Ei ccosn.o mi3c.Es c.o nomic policIy.K. l ameArr,j o. HB172.5.1C96863 339 83-17765 ISB0N- 86598-146-9 ISB0N- 86598(-p1b5k5.-)8 84 85 8� / 10 9 8 7 6 5 4 3 2 Prinitnte hdU en itSetda toefAs m erica CONTENTS Preface Vll 1 A Background for the Conversations 1 Part One ConversawtiitNohen wsC lassEiccoanlo mists 2 Robert E. Lucasjr. 29 3 Thomas J. Sargent 58 4 Robert M. Townsend 81 Part Two ConversawtiitNohen os- KnesiEacno nomists: ey The" OldGeern eration" 5 James Tobin 97 6 Franco Modigliani 114 7 Robert M. Solow 127 Part Three ConversawtiitNohen os- KnesiEacno nomists: ey The' 'YouGnegneerr ation" 8 Alan S. Blinder 151 9 John B. Taylor 170 Part Four ConverswaittiahoM no netarist 10 Karl Brunner 179 Part Five ConversawtiitNohon nsc onvenEtcioonnoamli sts 11 David M. Gordon 203 12 Leonard A. Rapping 218 Part Six Interpretation 13 An Interpretation of the Conversations 237 Glossary of Names 255 Selected Bibliography 261 PREFACE Can the government help to stabilize the economy through active, in terventionist policies? The question is particularly relevant in a world that experiences painful swings in the degree of economic activity and an increase in the levels of unemployment. How do economists answer it? To seek to know is to court confusion. Listening to neo-Keynesian economists, such as James Tobin and Franco Modigliani, one hears that the government can remedy economic pains. Monetarists Milton Friedman and Karl Brunner, on the other hand, while acknowledging some effect of governmental economic policies in the short run, deny any such influence in the long run. In fact, they attribute most eco nomic pain to governmental meddling in economic affairs. And re cently, new classical economists ( often referred to as rational expecta tions theorists) have extended these laissez-faire conclusions. Bob Lucas and Tom Sargent, major protagonists of this group, have stirred the world of economists with arguments supporting the view that stabiliza tion policies are impotent even in the short run. Moreover, at the nonconventional end of the spectrum we hear protests from post Keynesian and Marxian economists who have little sympathy with the endeavors of conventional economists. Many of them believe that the sickness has progressed too far for the government to doctor the economy in any significant way. Economists, doubtless, still command respect outside their own world. Their ability to talk about a subject as mystifying as economics can inspire awe at dinner and cocktail parties. There is suspicion, how ever; and along with unemployment rates, the suspicion may be rising. viii Preface People have noticed that economists do not return unanimous, clear and unambi ous answers to straightforward economic questions. The gu suspicion is well expressed in jokes like the following. Andropov asks the head of the KGB, during the October parade, "Comrade, who are those ys in the plain suits in the parade?" "Oh," the KGB head an gu swers, "they are economists, comrade." And when Andropov raises his eyebrows, he hastens to explain, "Just wait until we let them loose in the US." In Poland, we are told, the Poles tell "economist jokes." Strong and persistent disagreement among economists is discon certing. "Who is right?" the onlooker or the beginning student in eco nomics may wonder. "Is there not a way to decide who is right?" One is tempted to pose the question to economists themselves, but their answer does not satisfy. Economists tend to be scientific optimists. They believe in their dis cipline, in its methods or tools, and in their ability to deal with major questions. Among themselves they may speak in disparaging terms about psychologists and sociologists, asserting that "They never agree on anything, use imprecise methods, and have no measurements." They then crown economics the queen of social sciences. Economists do acknowledge disagreements, but these are not supposed to be funda mental. Differences in opinion occur, with respect to political issues es pecially, but a sharpening of the tools will eventually smooth those dif ferences out. Most important, economists insist that empirical tests will determine who is right. Their intent is to reach agreement. Personal and ideological differences may temporarily stand in the way, but, in principle, economists are detached scientists who suppress their "nor mative" ideas ( on what ought to be) in favor of positive insights ( on what is). They depict the acquisition of economic knowledge as the out come of a rational process little influenced by external factors, such as political alliances or personal inclinations. This picture of what happens within the world of economists is both incomplete and misleading. For one, it does not account for the persist ence of disagreements between neo-Keynesian, monetarist, new clas sical, and other economists. Where are the empirical tests that should arbitrate these disputes? Second, anyone who has had a chance to ob serve interactions among economists is likely to be struck by the passion and commitment of their ar ments. Their communication frequently gu breaks do\\Ql, as students may discover when they attempt to be critical inside the classroom. Persistent criticism often meets annoyance and is Preface zx dismissed abruptly. Detachment does not appear to be a common phe nomenon in the world of economists. Third, the idealized picture does not do justice to the diverse styles of argument in economic discourse. My own first encounter in the world of economists was with econometricians who preferred to speak "econometrics" instead of economics. Later, I met Dutch economists, who tended to discuss economic issues in a critical way, and who were wary of abstract economic theories. My US teachers did not mind theory; as a matter of fact, they loved it. They were dead serious about the assumption of rational behavior, which I had heard criticized so persistently in Holland. When I suggested that the assumption is ab surd, as I had been taught before, I was told that I did not understand economics. "Did you ever read Friedman's essay on Positive Econom ics?" they would ask. "Well, if you do, then you will understand that the realism of an assumption does not matter." Personal impressions like these suggest that the world of economists is divided into separate spheres among which communication can be difficult. The world of Dutch economists is not the world of US econo mists. But one can go further. The style of Chicago economists is not the style of Harvard economists; the New School of Social Research, where radical economists prevail, 1s another completely different story. It is as if economists in these separate worlds speak different languages. Some want to talk in terms of highly abstract models; others opt for his torical and institutional discussions. Some like mathematics, others do not. Likewise, while one group of economists may worship a particular analytic technique, other groups may resist or ignore the very same technique. In this book, I reproduce a series of conversations with new classical economists and their opponents. The obvious way to read these conver sations is as a report on what today's leading macroeconomic theorists are thinking about economic theory and the policy questions that domi n.ate both the profession and much of the public debate. On this level, the participants in these conservations are remarkably lucid and en lightening. But an underlying theme is the exploration of the disagree ments and problems of communication in economic discourse. New classical economics is a good focus for this purpose. It has taken the world of macroeconomics by storm and recruited large numbers of bud ding economists. Its claims have penetrated the public domain, and the ideas of Lucas and Sargent are frequently quoted in the general press. x Preface Much of the economic profession at large, however, remains to be con vinced. Neo-Keynesian economists and monetarists also (with whom new classical economists are often associated) have produced a substan tial literature that is critical of new classical economics. The debate evokes the image of two well-entrenched camps beleaguering each other, neither willing to surrender. This image may be too strong, but that we shall discover by talking with the main representatives of each camp. I am suggesting that the ways in which economists talk about what they do is unsatisfactory and that a new perspective is needed. These conversations can be used to support such a perspecti�e. Whereas econ omists generally address the logical characteristics of their theories when they talk about economics, I propose to emphasize the more per sonal and communicative aspects of economics. The difference is between asking "How can we appraise economic theories?" and asking "How do economists argue?" or "Why do they disagree?" According to my perspective, economics is an art of persuasion. Economists argue to persuade their audiences of the significance of their ideas or claims. My interpretation of the conversations at the end will elaborate on the particulars of the process of persuasion. Here it suffices to say that the emphasis is on the variety of arguments that economists use and, above all, the role of personal judgment. I shall ar gue that economists are not at all wholly detached, but are committed from the start to a point of view which they will then support with dif ferent types of argument. The persuasiveness of their arguments is critical, and whether an argument persuades is often not a matter of evi dence or logic. Economic discourse is flooded with articles, but most of them are lit tle read and quickly forgotten. Why did Lucas's work escape this fate and have such a powerful impact? And why are neo-Keynesian econo mists unpersuaded? We can push the questioning further and wonder why neither neo-Keynesian nor new classical arguments convince Marxian economists. What are the dynamics of these intellectual inter actions? We shall see by listening to how they argue. Most people answer questions by reading and deducing attitudes and intentions from the written word. Why not talk directly with the people whose intentions and judgments one is trying to guess? This radical suggestion,,which I owe to my brother, I was able to follow, and the reader is invited to join me as I talk with the main participants in the Preface xi debate on new classical economics. Let me briefly introduce them here. Bob Lucas, Tom Sargent, and Robert Townsend will represent the new classical economics. Lucas and Sargent are obvious choices; they stand out as the most influential new classical economists. Townsend speaks for the younger generation of new classical economists. The dis tinction between the younger and older generation also influenced the choice of neo-Keynesian economists. James Tobin, Franco Modigliani, and Robert Solow belong to the older generation of neo-Keynesian economists, that is, the generation that dominated the world of econo mists during the '50s and '60s. The importance of each is universally recognized. Alan Blinder will talk about the way he, a leading younger neo-Keynesian economist, views the controversy. I include, perhaps unjustly, John Taylor in this same category. Although he resists the neo-Keynesian label and his work is very close to that of the new clas sical economists, he still produces neo-J(eynesian conclusions. Karl Brunner represents the monetarists here, and David Gordon, the Marx ist economists. Leonard Rapping occupies a special position, partly be cause he worked with Lucas just before the take-off of new classical eco nomics, partly because of his radical views now. But mainly I am inter ested in his conversion from conventional to radical economics. His story nicely illustrates the importance of personal and social factors in economic discourse. The conversations are reproduced more or less verbatim; the editing has been kept to a minimum. The intention was simply to listen to the ways in which economists talk about themselves, and about doing eco nomics. There is some structure in the questioning, but in general the questions are adapted to the tone and direction of the conversation. The introductory chapter gives a general overview of the issues that are dis cussed and will be of special help to students and those who are unfa miliar with the current debates in macroeconomics. Some technical detail is included, but it can be ignored without losing the thread of the exposition. The final chapter draws connections between what was said and the perspective that I adumbrated above. A glossary gives some brief information on the important names mentioned throughout the text. The conversations have been conducted with several purposes in mind. Most will find the talks entertaining, for these are interesting as well as important people. The informal tone may help to illuminate what new classical economics is all about. Even those familiar with the
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