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from Lewis L. Smith
The sender is a semiretired energy economist and since 1994, a pro bonum researcher into the implications for economics of the new discipline of complexity, with six solo and one joint paper to his credit.
The American Economic Association, the premiere organization for economists in the USA, has just come out with a new journal, "American Economic Journal : Macroeconomics".
Buried away in the back of the first [01/09] issue is >>
Woodford, Michael > "Convergence in Macroeconomics", AEJM 2008, 1:1, 267-279.
To quote the abstract >>
"While macroeconomics is often thought of as a deeply divided field ... there are fewer fundamental disagreements ... than in the past. This is due to important progress in resolving seemly intractable [sic] debates ... I ... outline important elements of the new synthesis [sic] in macroeconomic theory."
To quote the text >>
"The cessation of methodological struggle within macroeconomics is due largely to the development of a new synthesis [sic] by Marvin Goodfriend and Robert G. King [1997]
called 'the New Neoclassical Synthesis' that incorporates important elements of each of the apparently irreconcilable traditions of macroeconomic thought." [268-269]
"Here I briefly list some of the most important examples of formerly contentious issues about which there are now fairly wide agreement [my numbers in brackets] >>
[1] "... it is now widely agreed that macroeconomic analysis should employ models with coherent intertemporal general-equilibrium foundations. These make it possible to analyze both short-run fluctuations and long-run growth within a single, consistent framework." [269]
[2] "... it is now accepted that one should know how to render one's growth model and one's business-cycle model consistent with one another. [269]
[3] "... microeconomic and macroeconomic analysis are no longer considered to involve fundamentally different principles, so it should be possible to reconcile one's views about household behavior or one's views about the functioning of individual markets with one's model of the aggregate economy, when one needs to do so." [269]
[4] "... In this [3] respect, the methodological stance of the New Classical school and the real business-cycle theorists has become mainstream. But this does not mean that the Keynsian goal of structural modeling of short-run aggregate dynamics has been abandoned. Instead, it is now understood how one can construct and analyze dynamic general-equilibrium models that incorporate a variety of types of adjustment fractions that allow these models to provide fairly realistic representations of both short-run and long-run responses to economic disturbances. In important respects, such models remain direct descendants of the Keynsian macroeconometric models of the early postwar period, though an important part of their "DNA" comes from neoclassical growth models as well." [269]
[5] "...when I say that it is now accepted that macroeconomic models should be general equilibrium models, I do not refer solely to the special cases of models of perfect competitive equilibrium with fully flexible wages and prices. The dynamic stochastic general-equilibrium [DSGE] models now used to analyze the short-run effects of alternative policies often involve imperfect competition in both labor markets and product markets ..." [269]
[6] "... it is now widely agreed that it is important to model expectations as endogenous and in particular, that it is crucial in policy analysis to take into account the way in which expectations should be different, in the case that an alternative policy were to be adopted ... it is now routine [sic] in positive interpretations of macroeconomic data and in normative analyses of possible economic policies to assume rational expectations on the part of economic decision makers, in accordance the methodology introduced by the New Classical literature of the 1970's. [However ] acceptance of the methodological precepts of the "rational expectations revolution' has not ... meant acceptance of the view that stabilization policy is necessarily ineffective ... [Rather it implies that one] cannot expect a simple answer about the effects of a given policy action." [271-272]
[7] "... it is now widely accepted that real disturbances are an important source of economic fluctuations [and] I don mean solely the "technology shocks" emphasized in the real business-cycle theory of the 1980's ..." [272]
[8] "Monetary policy is now widely agreed to be effective, especially as a means of inflation control." [273]
[9] "[Nevertheless] important differences in methodological orientation remain among macroeconomists ... I do not mean to claim that all important theoretical and empirical issues in macroeconomics have been resolved." [275]
The sender does not mean to imply that all of the above is "bad". In fact, off hand, he is quite inclined to agree with [2] and the last sentence of [6] , for example. However, I am really not qualified to comment on most of the assertions made.
Nevertheless, I suspect that with this article, "a gauntlet has been tossed down", and that someone should pick it up.
In particular, the casual acceptance of general equilibrium and rational expectations flies in the face of many things which Woodford should have taken into account. These include a great deal of research which has been done in the last twenty years, the petrodollar crisis of the 1970's, the gross failure of "the Washington consensus" and above all, the current crash of the world economy, one which is far from over.
Woodford and the people he cites act as if none of this ever happened. What good is a "convergence" of ideas held by people who ignore the fact that the sky has been slowly crashing around them for a long time ? Indeed the message which the sender gets from this paper is that academia is stilled ruled by "ostriches" with a large degree of hubris.
Also the aggregation problem has not been banished, conceptually or mathematically. Microeconomics and macroeconomics have to be linked, but macro cannot and should not be based on purely micro behavior. "Herds" count, for example. Even in micro, we must give much more attention to collective household decisions versus atomistic individual decisions than we have in the past.
In general, the tone of the paper also flies in the face with the sender's own experience in the analysis of crude-oil markets, as a successful "player" in securities markets over 40 years and as the part-owner of a small mortage-origination firm for a few years, among other wondrous feats.
Cordially. ###
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