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Michaël ASSOUS What have we learned on growth cycles analysis?
Muriel DAL-PONT LEGRAND Qu’a-t-on appris sur la croissance cyclique ? D’ÉCONOMIE POLITIQUE
Kevin D. HOOVER Man and machine in macroeconomics
L’homme et la machine dans la macroéconomie
Niels GEIGER Cycles « versus » growth in Schumpeter – A graphical
interpretation of some core theoretical remarks PAPERS
Cycles vs croissance chez Schumpeter. Une interprétation
graphique de quelques remarques théoriques centrales
Alain RAYBAUT Modeling the interaction of cycles and growth
in the fifties: two Schumpeterian attempts
Modélisation de l’articulation cycles croissance dans Histoire de la pensée et théories
les années 1950 : deux tentatives schumpétériennes 67History of Thought and Theories
Claude DIEBOLT Kuznets versus Kondratieff.
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Kuznets vs Kondratieff
Un essai de macroéconométrie historique
Amanar AKHABBAR Circulation du capital et explication du changement What Have We Learned on Growth Cycles Analysis?
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Qu’a-t-on appris sur la croissance cyclique ?change by Marschak, Frisch and Leontief
Michaël ASSOUS The law of diminishing elasticity of demand
Olivier BRUNO in Harrod’s Trade Cycle (1936)
Muriel DAL-PONT LEGRAND La loi de l’élasticité de la demande décroissante
dans le Trade Cycle (1936) 67
Johannes A. SCHWARZER Growth as an objective of economic policy in the
early 1960s: the role of aggregate demand
La croissance, objectif de la politique économique au
début des années 1960 : le rôle de la demande agrégée
Eric NASICA Stabilization policies and banking behaviors:
2014a rereading of Minsky’s conception of business cycles
Politiques de stabilisation et comportements bancaires :
Publié avec le soutien du CNRS, de l’université de Paris Ouest2014une relecture des cycles d’affaires chez Minsky
et de l’Institut d’études politiques de Lille
ISBN : 978-2-343-05340-0
24 e
Histoire de la pensée et théories 67History of Thought and Theories
What Have We Learned on Growth Cycles Analysis?
Qu’a-t-on appris sur la croissance cyclique ?
Publié avec le soutien du CNRS, de l’université de Paris Ouest
et de l’Institut d’études politiques de Lille

© L’Harmattan, 2014
5-7, rue de l’Ecole-Polytechnique, 75005 Paris


ISBN : 978-2-343-05340-0
EAN : 978234305340 SOMMAIRE
Michaël Assous, What have we learned on growth cycles analysis? .........7
Muriel Dal-Pont Legrand
Kevin D. Hoover Man and machine in macroeconomics ......................15
Niels Geiger Cycles « versus » growth in Schumpeter – A graphical
interpretation of some core theoretical r emarks .........35
Alain Raybaut Modeling the interaction of cycles and growth
in the ffties: two Schumpeterian attemps ..................55
Claude Diebolt Kuznets versus Kondratief.
An essay in historical macroeconometrics ..................81
Amanar Akhabbar Circulation du capital et explication du changement
économique chez Marschak, Frisch et Leontief ........ 119
Michaël Assous,
Olivier Bruno, Te law of diminishing elasticity of demand
Muriel Dal-Pont Legrand in Harrod’s Trade Cycle (1936) ................................... 159
Johannes A. Schwarzer Growth as an objective of economic policy
in the early 1960s: the role of aggregate demand ..... 175
Eric Nasica Stabilization policies and banking behaviors:
a rereading of Minsky ’s conception
of business cycles .......................................................... 207CONTENTS
Michaël Assous, Qu’a-t-on appris sur la croissance cyclique ? ................7
Muriel Dal-Pont Legrand
Kevin D. Hoover L’homme et la machine dans la macroéconomie ........15
Niels Geiger Cycles vs croissance chez Schumpeter.
Une interprétation graphique de quelques
remarques théoriques centrales ..................................35
Alain Raybaut Modélisation de l’articulation cycles croissance dans
les années 1950 : deux tentatives schumpétériennes ...55
Claude Diebolt Kuznets vs Kondratief.
Un essai de macroéconométrie historique ..................81
Amanar Akhabbar Capital circulation and the explanation of economic
change by Marschak, Frisch and Leontief ................. 119
Michaël Assous,
Olivier Bruno, La loi de l’élasticité de la demande décroissante
Muriel Dal-Pont Legrand dans le Trade Cycle (1936) de Harrod ........................ 159
Johannes A. Schwarzer La croissance, obsjectif de la politique
économique au début des années 1960 :
le rôle de la demande agrégée ...................................... 175
Eric Nasica Politiques de stabilisation et comportements bancaires :
une relecture des cycles d’afaires chez Minsky .........207What have we learned on growth cycles analysis?
what have we learned on growth
1cycles analysis?
Michaël Assous
2Muriel Dal-Pont Legrand
Business cycles and growth are considered as independent felds for decades.
indeed, after the s econd w orld w ar, when macroeconomics began to develop
through an increased use of mathematical models, the problem of analyzing
growth-cycles dynamics appeared as a real (and certainly also mathematical)
challenge. s ome economists accepted that dichotomy, concentrating their
attention on specifc questions which they considered as better addressed
in models specifcally built in order to capture either long-run or short-run
issues. t wo subfelds appeared: on the one side were business cycle theories
which focused on understanding detrended data movements; on the other
side was long-run growth theory which analyzed the existence and the
stability of stationary paths. e ven if one can identify an increasing tendency
among economists to accept such a ‘division of labor’ between cycle and
growth theories, there were also economists who never ceased to consider
this dichotomy only as a pedagogical organization. o ne can indeed identify
economists who were fully aware of the restrictions imposed by such a
dichotomy and then proposed to explore the various lines of research which
could analyze how cycles and growth dynamics can intertwine. a lthough
the intensity of research in that feld fuctuated sometimes, interest of
macroeconomists for that question never fully disappeared.
a t least two major episodes exist for which the idea of cycles – and
consequently of the interaction between cycles and growth dynamics
th1. Te present issue contains a selection of the papers presented at the 14 international c onference of
the c harles g ide a ssociation for the s tudy of e conomic Tought, at the University n ice s ophia a
ntipolis and gredeg cnrs , May 2012, in a revised version after having been submitted to the usual
refereeing process.
Te authors of this introduction benefted a lot from earlier discussions with h arald h agemann, and
which are developed in a ssous, d al Pont l egrand and h agemann [2015] in an extended version.
2. d epartment of e conomics, University of Paris i, Pantheon-s orbonne, Phare . e -mail: Michael.a
University of l ille 1 and c lersé cnrs . e -mail: muriel.dal-pont-legrand@univ-lille1.fr
7Michaël a ssous & Muriel d al-Pont l egrand
– ceased to be in the priorities of the agenda: (i) in the late 1960s, when
Bronfenbrenner [1969] emphasized the lack of interest of macroeconomists
for cycle analysis and (ii) more recently, when leading economists spread the
idea that the central problem of depression / prevention has been solved (cf.
3l ucas [2003]) and that such a statement was also confrmed by practitioners
for whom “[o]ne of the most striking features of the economic landscape over
the past twenty years or so has been a substantial decline in macroeconomic
4volatility.” [Bernanke, 2004]
5a fter the obvious return of instability and depression, interest for growth
6– cycle’s analysis is emerging again, and though one cannot still say that this
question has been solved, it becomes more and more difcult to consider
this (artifcial) division as a scientifc choice. indeed, more than “just” the
unsatisfactory understanding of economic fuctuations, this dichotomy has a
second consequence: the two subfelds became so independent that debates
on potential benefcial efects of stabilization policies clearly disappeared
7from the forefront of the feld.
o ne can also notice that when nevertheless the modern literature
addresses the question of the growth cycles interactions, it does it through
models which deal with those issues in a totally new analytical framework
which makes difcult to evaluate efective progress in our understanding
of such complex issues. o n the one side, one cannot deny that various
modern approaches dealing with the infuence cyclical fuctuations can have
8on growth, sometimes ofering competing views, have recently provided a
strong revival for those issues (stimulating also a large amount of empirical
investigations). o n the other side, and despite the use of sophisticated
mathematical or computational devices, one can doubt that those models
3. in 2004, Ben Bernanke was already the governor of the Fed.
4. in the early 2000s this opinion is shared by a large variety of economists.
5. if a great majority of theoreticians seem to have discovered again the instability of economic activity,
one can also fnd some cleaver economists [ Krugman, 2009], not only among historians of economic
thought, who never forget the periodicity of crises, and who never ceased to argue in favor of modeling
approaches which could allow to take into account (monetary and fnancial) economic instability.
6. c f. s olow [1988] “Te problem of combining long-run and short-run macroeconomics has still not
been solved.”[p. 310].
7. o ne notable exception occurs when endogenous growth models were used in order to deal with
business cycles (see s tadler [1990] for one of the pioneering contributions).
8. s ee, for instance, the debate within the n ew g rowth Teory between the literature based on learning
by doing versus learning or doing mechanism on the impact shocks can have on growth.
8What have we learned on growth cycles analysis?
are more relevant than their ancestors. w e then believe that incursions in the
feld of history of economic thought not only reminds us forgotten topics
but also helps to understand to what extent the way economists address
those questions has been afected by the evolution of modeling.
Te purpose of this special issue is try to shed light of the diversity of
approaches and modeling and most touchy problems macroeconomists had
9to deal with. More precisely, its purpose is to pay attention to diferent
lines of thought addressing growth cycle connection. s ince economists
dealing with that question naturally came to identify the need (or not) for
stabilization or for growth enhancing policies, this special issue will also
include papers which addressed the potential necessity and the nature of
the economic policies which should be implemented in order to guarantee
Matthews already noticed in the late 1950s that “there is less agreement
among economists about the relation between trend and cycle than about
10most other topic in the theory of the cycle” [1959: 253]. Te selection of
contributions which compose this special issue may help to have an idea of
the variety of approaches which have dealt with that question.
Te story of macroeconomics is traditionally explained as continuity or
antagonism to Keynes’s contribution. Kevin Hoover proposes in this frst paper
to show how the (hi)story of macroeconomics, far from being so simple, is
characterized by diferent views, not only concerning the variety of competing
analytical frameworks but also with regard to the true nature of economics.
More precisely, h oover emphasizes in his prologue that “the notion that
an economy is an object to be controlled by policy is pervasive.” o ne can
then identify two dominant metaphors: the frst considers economists as
engineers in charge of controlling a “machine”; it represents a mechanical
approach which was developed by the well-known r agnar Frisch and Jan
t inbergen; the second sees the economy as an organic entity and economists
as physicians, it is the so-called “medical” approach and corresponds to
Keynes’s vision. Behind those visions, there is an interrogation about the
fundamental nature of the economy, an element which determines the way
economists conceive economic policy and then articulate short and
longrun analysis. a fter presenting these diferent notions of what an economy
is, h oover shows that recent new classical macroeconomics, which strongly
9. s ee a ssous, d al Pont l egrand and h agemann [2015] for a more detailed survey of this literature.
10. Quoted by a lain r aybaut in the introduction.
9Michaël a ssous & Muriel d al-Pont l egrand
attacked the macroeconometric models in the tradition of t inbergen, is
nevertheless based on an amalgam of the medical and mechanical metaphors.
indeed they were successful in combining human decision-making with
the mechanical models but only because they “applied highly simplifed
microeconomic to aggregate data”, an obviously dangerous shortcut,
especially when those models have to produce economic policy advices.
Te next two papers are concerned with the contribution of Joseph a .
s chumpeter who is a central fgure of the growth cycles analysis. Te frst
paper provides a theoretically grounded graphical interpretation of some of
s chumpeter’s core theoretical conclusions on economic development. Niels
Geiger notes that if the necessity emphasized by s chumpeter to deal with a
growth and cycles interactions is well known, the technical separation he
operates between growth trend and cyclical waves in real-world economies is
more rarely discussed. s tarting from s chumpeter [1927], the author comes
back to the distinction s chumpeter makes between static and dynamic
conditions. Te frst ones characterize the circular fow of an economy in, or
in close proximity of, equilibrium, and are compatible with growth factors.
in this case, changes are gradual which means that they can be absorbed
by adaptive behavior, and that the economy can be maintained in the
neighborhood of the equilibrium. o n the contrary, dynamic conditions are
necessary to account for business cycles [s chumpeter, 1927: 289]. Finally this
paper proposes an original fgure which provides a graphical representation
of s chumpeter’s ideas combining both, the ideas of cyclical and growth
a fter drawing a clear picture of the diferent ways cycles and growth
dynamics can intertwine (or not), Alain Raybaut’s paper proposes to examine
two s chumpeterian models which were developed in the 1950s by s mithies
[1957] and g oodwin [1955]. a t that time s chumpeter was the leading
exponent of the view which considers that cycles and trend are not only
intertwined but indistinguishable. s mithies emphasizes the s chumpeterian
vision that economic dynamics is characterized by a process of disruption
which leads the economy from one equilibrium position to the other, and
described it with a two states linear model, while g oodwin prefers to analyze
the role of technical progress in a nonlinear framework. Tey nevertheless
11both failed in overcoming the fundamental difculty already identifed :
indeed a lain r aybaut shows that, despite his claim, s mithies does not
provide a purely endogenous explanation for business cycles and growth,
11. s ee, for instance, Pasinetti [1960].
10What have we learned on growth cycles analysis?
and g oodwin, pursuing a more promising perspective, did not succeed
in connecting s chumpeterian with Keynesian insights about investment
s chumpeter was also the economist who considered fuctuations as
the superposition of diferent waves or cycles characterized by varying
amplitudes. in that line of research, but focusing on the views of Kuznets
and Kondratief, Claude Diebolt ofers a comprehensive presentation of what
can be the contribution of cliometrics to our understanding of the nature of
economic movements. c ombining historical, statistical and mathematical
methods, cliometrics can contribute to gain insights at a theoretical level. Te
author then examines various national series and concludes the existence of a
single intermediate cycle, a Kuznets swing with 15–20 years frequency which
contradicts, at least partially, previous contributions which gave support to
the existence of long-term economic cycles. s uch a result gives t for
more concerted and cooperative economic policies at the international level.
12Te years of High Teory (1926–1939) are known as the years during
which macroeconomics but also econometrics and national accounting
emerged. Amanar Akhabbar concentrates his attention on models based on
a disaggregated macroeconomic production function: namely, the models
of Marschak, Frisch and l eontief. Te paper shows that these models share
a common view on the growth cycles interactions. Te three based
their analysis of growth–cycles interaction on the circulation of capital goods
among producers examining two diferent causes: the frst one is the spread of
economic change through producers and the second is due to coordination
problems between producers in the capital circulation process.
13o ne of the pioneering authors of the growth-cycles analysis, and of
dynamics in general, is r oy h arrod. h is seminal 1939 contribution is
wellknown – even if most of the time misinterpreted – but only few historians
of economic thought have dedicated attention to his 1936 book, Te Trade
Cycle. Michaël Assous, Olivier Bruno and Muriel Dal Pont Legrand propose a
closer investigation of the frst hints h arrod provided for the dynamics he
14developed later. h arrod initially emphasized the importance of imperfect
12. Tere is the well-known reference to s chackle’s 1967 book Te Years of High Teory: Invention and
Tradition in Economic Teory 1926-1939, gls  s hackle, c ambridge University Press.
13. c f. Bruno and d al Pont l egrand [2014].
14. o ne can mention here the paper of r odolphe d os s antos Ferreira, c laude d’a spremont and l
ouisa ndré g érard-v aret “imperfect competition and the trade cycle: a borted guidelines from the late 1930s”,
History of Political Economy, 2011, 43(3): 513–36.
11Michaël a ssous & Muriel d al-Pont l egrand
competition for trade cycle theory because of its compatibility with decreasing
cost. Te exploration of the implications of decreasing cost brought him
to the conclusion that imperfect competition can provide an equilibrium
approach to business cycles relying upon the existence of multiple
longperiod equilibria. instability may then result from alternative producers
(correct) expectations leading successively the economy in position of high
and low equilibria. r elying on imperfect competition, h arrod later explains
that turning points may result from changes in the value of the multiplier and
the accelerator coefcients. it is in that context that the l aw of d iminishing
e lasticity of d emand (lded ) comes into play: changes in demand elasticity
are likely to change income shares. Tis paper proposes frst to clarify the
precise role h arrod assigned to the lded in the understanding of the
trade cycle; secondly it shows how h arrod used the lded in order to give
microeconomic foundations to a non-linear saving function that may give
rise to an endogenous countercyclical value of the multiplier. Tis paper
sheds light on an element which has been undermined by most of the readers
and which fnally places h arrod as a pioneer of endogenous business cycle
analysis before the seminal work of s amuelson [1939].
Johannes Schwarzer analyses a debate which took place in the early 1960s
when the existence of an optimal level of demand, i.e. a level maximizing
the rate of growth, was controversially discussed. Te main idea was that
“good demand management would dampen cycles, being then an efcient
regulation tool for economic policy purpose. Tat regulation of the economy
step by step, period by period, would allow the economy to follow a sustained
growth path. l ogically, the cycle became “a thing of the past” [Minsky, 1968:
45], and the attention of the economists became absorbed by short-term
economic policies. Tere existed then a rather large consensus on the idea
that sustained growth was the outcome of successful stabilization policies
which, dampening business cycles, could maintain the economy at full
capacity output. Te author gives a survey of the debates which developed
within this feld and identifes three diferent views—the Keynesian, the
Paishian and the skeptical one—the frst two ones sharing the idea that
high demand in the short and medium-run may foster growth, the last one
providing arguments against this view. Te conclusion outlines what we
could learn from the debates of the 60’s but also what may have been lost
since Friedman’s introduction of a “natural rate of unemployment” into the
Phillips curve concept.
Te last contribution follows the same line of research: without directly
discussing the interaction between cycles and growth dynamics, the paper
12What have we learned on growth cycles analysis?
questions the efciency of stabilization policies, which is a crucial issue.
indeed, all the discussions about the infuence cycles can have on growth,
or more generally about the impact short-run fuctuations can have on
long-run (growth) dynamics, have in fne to decide whether there is a need
for stabilization policies. Eric Nasica addresses this question in a Minskyan
analytical framework. h e starts showing the infuence nonlinear business
cycles models à la h icks had on Minsky’s own analysis of fuctuations.
Minsky’s fnancial instability hypothesis is then reassessed. Te author
explains how banks’ behavior undermines the efciency of stabilization
policies and determines the nature of economic fuctuations. Te author
concludes by assessing the relevance this sort of approach can have in order
to understand recent pre- and post-crisis stabilization policies.
13Michaël a ssous & Muriel d al-Pont l egrand
a ssous M., d al Pont l egrand M. and h agemann h . [forthcoming, 2015].
Business cycles and economic growth. in g . Faccarello and h .d . Kurz (e ds)
Handbook of the History of Economic Analysis, Volume I Great Economists since
Petty and Boisguilbert. c heltenham: e dward e lgar Publishing.
thBernanke B. [2004]. Te g reat Moderation. 20 February. <http://www.
federalreserve.gov/Boar ddocs /s Peec hes /2004/20040220/default.
Bronfenbrenner M. [1969]. Is the Business Cycles Obsolete? n ew york: w iley
Bruno o . and d al Pont l egrand M. [2014]. Te instability principle
revisited: an essay in h arrodian dynamics. European Journal for the History of
Economic Tought 21(3): 467–84.
h arrod, r . [1939]. a n essay in dynamic theory. Economic Journal 49: 14–33.
Krugman P. [2009]. Te Return of Depression Economics and the Crisis of
2008. n ew york: w . w . n orton.
l ucas r . [2003]. Macroeconomic priorities. American Economic Review
93(1): 1–14.
Matthews r .c .o . [1959]. d uesemberry on Growth and Fluctuations. Te
Economic Journal 69(2, part 1): 133–45.
s olow r .M. [1988]. g rowth theory and after. American Economic Review
78(3): 307–17.
s tadler g .w . [1990]. Business cycle models with endogenous technology.
American Economic Review 80(4): 763–78.
14Man and machine in macroeconomics
man and machine
in macroeconomics
1Kevin D. Hoover
L’homme et la machine dans la Te potted histories of macroeconomics
macroéconomietextbooks are typically Keynes-centric.
KeyLes aperçus historiques des manuels de nes is credited with founding
macroeconommacroéconomie tournent généralement autour ics, and the central developments in the feld
de Keynes. Keynes est crédité d’avoir fondé through the early 1970s, including
largela macroéconomie, et d’être à l’origine de ses scale macroeconometric models are usually
principaux développements jusqu’au début termed “Keynesian.” Te story of
macroecodes années 1970, y compris les grands modèles nomics is framed as support or opposition
macroéconométriques habituellement qualifés
(e.g., by monetarism or the new classical
de « keynésiens ». L’histoire de la macroéconomie
macroeconomics) to Keynes. Te real story
est ainsi pensée comme un moyen de renforcer ou
is more complicated and involves at least de contredire Keynes (par le monétarisme ou la
two distinct threads. Keynes was important, nouvelle macroéconomie classique, par exemple).
but perhaps more important for the detailed En vérité, la véritable histoire est plus compliquée et
development of the feld were the early mac- comporte deux fls distincts. Keynes fut important,
roeconometricians – r agnar Frisch and Jan mais les premiers macroéconométriciens, Ragnar
Tinbergen. Frisch and Tinbergen adopted Frisch et Jan Tinbergen, se révélèrent peut-être
physical or mechanical metaphors in which plus importants encore. Frisch et Tinbergen
aggregate quantities are central. Keynes’s recoururent à des métaphores physiques ou
vision of macroeconomics is better described mécaniques dans lesquelles les quantités agrégées
as “medical.” it is based in human psychol- étaient primordiales. La vision qu’avait Keynes de
la macroéconomie était plutôt « médicale ». Elle ogy and individual decision-making and sees
s’appuie sur la psychologie humaine et les décisions the economy as an organic system. Whereas
individuelles et elle considère l’économie comme policymakers and economic advisers in
Keyun système organique. Alors que les décideurs et nes view can operate only within the
ecoles conseillers économiques ne peuvent opérer, selon nomic system, Frisch and Tinbergen laid
Keynes, que dans le système économique, Frisch the basis for an optimal-control approach to
et Tinbergen posèrent les bases d’une approche economic policy in which the policymaker
de contrôle optimal de la politique économique stands outside the system. r ecent new
clasoù le décideur se situe hors du système. La
sical macroeconomics has adopted an uneasy
nouvelle macroéconomie classique a réalisé un
amalgam of the medical and mechanical
amalgame déconcertant des métaphores médicale
metaphors. et mécanique.
Keywords: macroeconomics, Keynes, Frisch, Tinbergen, Klein, macroeconometric models,
macroeconomic policy.
Mots clefs : macroéconomie, Keynes, Frisch, Tinbergen, Klein, modèles macroéconomiques,
politique macroéconomique.
JEL classifcaton: B22, B23
1. d epartment of e conomics and d epartment of Philosophy – d uke University – Box 90097, d urham, n orth
c arolina 27708-0097 Tel. (919) 660-1876; e -mail kd.hoover@duke.edu
Plenary lecture delivered to the c olloque de l’a ssociation c harles Gide pour l’h istoire de la Pensée e
conomomique, 7-9 June 2012, Université de n ice s ophia a ntipolis. a n earlier version was delivered in the n ew
d irections in e conomics, Public Lecture s eries at Boston University, 17 n ovember 2010;
15Kevin d . h oover
Te Great r ecession and worldwide Financial c risis promoted soul-searching
among economists and scapegoating among the public, from taxi drivers to
heads of state: Te Queen of e ngland met with a gathering of economists at
the London s chool of e conomics to discuss the fnancial collapse: “Why,”
she asked, “did nobody notice it?” d espite our disappointing record as
prognosticators, the public still expects economists to tell them how to
extricate the economy from its current doldrums.
Tere is an element of magical thinking in these demands. in the
United s tates, we see it in the notion that our president or the chairman
of the Federal r eserve is directly responsible for the success or failure of
the economy. r esponsibility is more difuse in the e uropean Union, but i
would be surprised if public’s expectations of Brussels or Frankfurt are not
similar. a nd i presume that one reason that the French President s arkozy
was not reelected was that he was held responsible for the ills of the French
and e uropean economies. i don’t want to deny that leading politicians
or central bankers are important players for good or ill; but, as i ask my
students, if a president could set the economic dial as a matter of unfettered
choice, why would the economy ever fare poorly? (s ometimes they would
answer that George Bush was a bad man or that Vice President r ichard
c heney benefted in some sinister way from bad economic times. But once
Barack o bama became the a merican president and a merican economy still
performed badly, i heard that less often.)
Te notion that an economy is an object to be controlled by policy is
pervasive. Tere are two dominant metaphors. Te frst sees the economy
as a machine operated by the government: economists and policymakers as
engineers. Te second sees the economy as an organic entity. Bill c linton
campaigned for the a merican presidency in 1992 on a set of policies that he
said would “grow the economy”: economists and policymakers as farmers.
c linton’s phrase is now ubiquitous; but it rings false in my ears – not, as
i once thought, because it is ungrammatical, we naturally talk of farmers
growing crops – but because, even if one accepts an organic metaphor,
it seems like the wrong metaphor. a nother organic metaphor that works
better, perhaps, sees the economy as a body: economists and policymakers
as physicians.
e steem for John maynard Keynes has ever ebbed and fowed. s ince
the onset of the Great r ecession and the Financial c risis, Keynes – never
16Man and machine in macroeconomics
an obscure fgure among economists – became ever more familiar to the
general public. in the two years after the onset of the recession, Keynes was
mentioned in print media more than three times more frequently than in
the two years before the recession – the total number of mentions runs into
2the thousands per year. Keynes, the economic hero; Keynes, the economic
knave. Take your pick.
r eaching a nadir in the last heady days of the boom, Keynesian economics
was again in vogue with the recession of 2007 and the fnancial collapse of
2008, only to become embattled with rising defcits and continued slow
growth despite the stimulus. Te Wall Street Journal often reminds us that
Keynes is dead. in an article in the New York Times, n . Gregory mankiw
[2008], h arvard economics professor and former chairman of George W.
Bush’s c ouncil of e conomic a dvisors, found a well worn passage from
Keynes’s masterwork, Te General Teory of Employment Interest and Money,
that speaks to our time:
a t the present moment people are unusually expectant of a more
fundamental diagnosis; more particularly ready to receive it; eager to try
it out, if it should be even plausible. But apart from this contemporary
mood, the ideas of economists and political philosophers, both when they
are right and when they are wrong, are more powerful than is commonly
understood. indeed the world is ruled by little else. Practical men, who
believe themselves to be quite exempt from any intellectual infuences,
are usually the slaves of some defunct economist. madmen in authority,
who hear voices in the air, are distilling their frenzy from some academic
scribbler of a few years back. [Keynes, 1936: 383; quoted by mankiw,
Keynes himself is now that defunct economist. Te Wall Street Journal
knows that he is defunct, but fears that – zombie-like – he won’t stay down.
mankiw too knows that he is defunct, but sees c aspar, the friendly ghost.
Without diminishing Keynes’s importance, i want to suggest that the story
of macroeconomics is more complex than generally appreciated and that
there are other economists from whom macroeconomists and policymakers
– practical and mad – are distilling their frenzy and their wisdom.
2. Based on a search of the Lexis database.
17Kevin d . h oover
The poted history of macroeconomics
e conomists are typically both ignorant and unappreciative of the history of
their discipline. Yet, economists, like the practitioners of other felds, convey
a potted version of that history their students. Te potted history is easily
discovered through quick perusal of macroeconomics textbooks.
i don’t need to recount the fne details of this potted history: we all
know it. Broadly it goes like this: o nce upon a time, economists were the
champions of laissez faire. Ten, along came the Great d epression. Keynes
declared the end of laissez faire and provided us in his General Teory with
an alternative. Tus, in creating the antithesis between microeconomics and
macroeconomics, Keynes created a dialectical tension that Paul s amuelson
then resolved with his neoclassical synthesis. a nd then Keynesian economics
ruled the policy roost. But Keynes provided no theory of infation. Phillips
introduced his curve and provided policymakers with an instrument through
which they could exchange infation for unemployment. But c assandra in
the form of milton Friedman presciently warned that the heady days of
aggregate demand management would lead to the collapse of the Keynesian
economists’ Troy. Te stagfation of the early 1970s blasted holes in the
ramparts of Keynesian economic management, and Friedman’s monetarism
was there to fll the breach. But Friedman’s monetarism did not get to the
root of the problem with Keynes: real economics is microeconomics and –
despite s amuelson’s irenic doctrine of the neoclassical synthesis – Keynes
failed to build on adequate microfoundations. r obert Lucas, Tomas
s argent and others introduced the new classical macroeconomics, which
supported monetarists policies, but did so on a rigorous microfoundational
analysis. n ostalgic for Keynesian policy conclusions, the n ew Keynesians
adopted n ew c lassical microfoundational methods while still addressing
the problems of market failures. With that, we have reached the situation
of macroeconomics today – at least as it is taught to undergraduate and
graduate students alike.
i cannot begin to say all that is wrong with this potted history. But, love
him or hate him, please note that Keynes stands at its center. a nd while no
story maintains its currency for long if it is totally unconnected to the truth,
this story is misleading or wrong in nearly every respect – not least in its
dramatis personae. a t a bare minimum, we must add the names of r agnar
Frisch and Jan Tinbergen to the history of macroeconomics.
18Man and machine in macroeconomics
most of the pieces of the alternative story have been noticed by other
scholars, but rarely have the pieces been put together. a nd i believe that they
should be put together to craft a diferent history for macroeconomics – one
in which Keynes remains important, but not preeminent, and one in which
a tension between competing visions of macroeconomics is central. o ne
result of this reappraisal will be to present Keynes as a substantially diferent
thinker than he is regarded in our potted textbook histories.
The mechanical vision
Te phenomena that we now recognize as macroeconomic – inter alia
infation, growth, mass unemployment, the balance of payments, interest
rates, and exchange rates – are among the longest recognized and longest
analyzed in the history of economics. Teories of the relationship of infation
to money clearly related to those of modern economics go back at least to
ththe 16 century. But it was not until the 1930s that economists thought
to address them through a special subdiscipline called macroeconomics.
o ne problem that worried economists of the 1920s, even before the Great
d epression, was the trade cycle or, as we now call it the business cycle – the
alternation of good and bad times.
Te puzzle was, how should we begin to think of business cycles. Tere
were at least three options:
• First, they might be intrinsic to the structure of the economy;
• Second, they might be merely the cumulation of random infuences;
• Tird, they might be the complex implications of human actions in an
unrepeatable historical setting.
Te frst two options could be regarded as analogous to physical dynamics
– a pattern such as the tides or the amplitude of the string of a musical
Te n orwegian economist r agnar Frisch and the d utch economist Jan
Tinbergen were deeply infuenced by such physical metaphors. Frisch and
Tare not so well known as Keynes, even to economists. a search in
the e conlit database for articles with their names in the titles produces 75 for
Frisch, 117 for Tinbergen, and 1,978 for Keynes. Yet, they are not altogether
uncelebrated. s trikingly, it was not s amuelson, but Frisch and Tinbergen
who shared the very frst n obel Prize in e conomics in 1969.
19Kevin d . h oover
Frisch was born in o slo in 1895 and trained as a goldsmith. h e entered
university only at the age of 21 and chose economics as it was regarded as an
easy subject and the path to a quick degree. h e was drawn to mathematics
and statistics and joined the then small group of mathematical economists.
a s he saw it, earlier mathematical economists (e.g., c ournot and Walras)
had satisfactorily analyzed exchange at a single period; so the key problem
was to deal with economic decision-making over time. Te frst pr
analogized to the problem of statics in physics; the second, to the problem of
dynamics. a nd the physicists had already done the math. When Frisch began
3to analyze the business cycle, he began by thinking of pendulums. Te
swing of a simple pendulum is too regular; so, he analyzed the movements
of complex pendulums and worked out the mathematics of their cycles. in
a famous paper , he analogized the business cycle to a rocking horse that is
given a push from time to time. Te rocking horse itself captured the intrinsic
dynamics of the cycle (what he calls the propagation mechanism), while the
irregular pushes (what he calls the impulses) corresponded to various random
shocks to the economic system. in this metaphor Frisch ties together his
interests in physical dynamics and statistics. Frisch was explicit: economics
is social physics.
Frisch is a central, if neglected, fgure in shaping modern economics. h e
was the moving force behind the e conometric s ociety – the group dedicated
to promoting mathematical and statistical economics. e ven today, to
become a fellow of the e conometric s ociety is to join the elite of economics
theorist and econometricians (a term which now has a narrower, statistical
focus than it did in 1933). Frisch was the frst editor of the society’s journal,
Econometrica, still reckoned among the top fve economics journals.
Frisch was great coiner of neologisms. h e originated not only econometrics,
but the terms microeconomics and macroeconomics. most people regard Keynes
as the originator of this distinction. h e certainly never used the terms, though
he drew the distinction between the economics of individual or frm-level
decisions, which we now regard as microeconomic, and the determination
of output in the economy as a whole, which we regard as macroeconomic.
3 s ee, for example, Frisch [1933].
20Man and machine in macroeconomics
Frisch drew a similar distinction, earlier perhaps than Keynes, and clearly
4invented the terminology.
Frisch thought that we should start with a macroeconomic model that
worked with broad aggregates (Gd P rather than an individual’s income, for
example) to determine the context for a microeconomic model of individual
behavior. Tis is an inversion of the manner in which recent economists
think. For them, the ideal is to start with microeconomic analysis and build
up individual by individual to the behavior of the economy as a whole.
Frisch rejected that idea. h e conceded that we could imagine in principle
a very complex economic model in which every individual and frm was
represented. But such a model would be of no practical use.
h ere again, he conceived of analogies with physics. To model the behavior
of a single charged particle, the physicist conceives of it as being situated in
a feld that is the aggregate product of all the charged particles in a system.
Tinbergen was born in 1903 in the h ague. h e studied physics, and his
doctoral supervisor, the eminent physicist Paul e hrenfest, suggested that he
apply physical analysis to economic problems. Te result was a dissertation
whose e nglish title is Minimization Problems in Physics and Economics.
Frisch was primarily interested in the more theoretical problem of
characterizing dynamics and the epistemological problem of discovering
the right methods for working backwards from available economic data
to the specifcation of an economic model. Tinbergen’s interests were less
detached from the beginning. h e wanted to use economic models for policy.
Tinbergen [1937] created the frst econometrically estimated macromodel
– a model of the d utch economy – in the mid-1930s. o n the basis of this
achievement, the League of n ations, which had undertaken a larger project
on the causes and cures of the business cycles – a response to the worldwide
efects of the Great d epression – commissioned Tinbergen [1939] to create
the frst macroeconometric model of the United s tates, which was published
on the eve of World War ii . Tinbergen’s model contained 48 equations and
was estimated without the beneft of modern electronic computers. “it is
4 . Frisch [1933] uses microdynamic and macrodynamic in a manner nearly equivalent to current usage
of microeconomic and macroeconomic. a t roughly the same time, he used their n orwegian equivalents,
mikroøkonomiske and macroøkonomiske in a set of widely circulated, mimeographed lectures [Frisch
19331934]. Frisch’s coinages appear to have spread through the early meetings of the e conometric s ociety.
21Kevin d . h oover
strange,” Keynes [1939: 568] observed, “that [Tinbergen’s book] looks . . .
to be the principal activity and raison d’être of the League of n ations” on the
eve of the s econd World War.
The medical vision
in contrast to Frisch and Tinbergen, physics did not animate Keynes’s
research strategy. h e was not hostile to mathematics generally, having read
thmathematics at King’s c ollege, c ambridge and graduated 12 wrangler. h is
fellowship essay for King’s was later published as his Treatise on Probability.
e conomics was not in Keynes’s course of study; it was in his blood. When
Keynes was student, economics formed part of the moral sciences tripos
and was not an independent course of study. Keynes’s father was himself a
c ambridge economist; and Keynes absorbed economics both from formal
study and from being dandled, as it were, on the knee of that c ambridge
hero a lfred marshall.
a s an economist, Keynes is known so much in the caricatures of the
potted history with which i began, that i want to state what seem to me to
be the key points of his approach.
The fallacy of compositon
Unlike the economics of a dam s mith, which focused on the wealth of nations,
thor the of 19 century neoclassical economists, such as William
s tanley Jevons, which focused on markets, much of modern economics sees
the most basic economic problem as the one faced by r obinson c rusoe: to
do the best one can with scarce resources. For Jevons the game changes as
soon as Friday arrives and opens up the possibility of trade. a nd for Keynes
(and s mith), it’s a new game altogether if we start to think about Friday’s
tribe – a whole economy.
For Keynes people are heterogeneous – each is situated diferently,
each has diferent tastes, diferent capacities, diferent beliefs. Yet, they
form a society. a nd extending our reasoning from individual interactions
to the whole economy is misleading. it commits a fallacy of composition.
Te quickest way for an individual from n ew o rleans to Baton r ouge is
interstate 10; but it is not the quickest way to get the whole population of
n ew o rleans to Baton r ouge.
22Man and machine in macroeconomics
a key fallacy of composition in economics is a false analogy from
elementary exchange to the economy as a whole. r obinson c rusoe’s and
Friday’s diferent skills and diferent endowments give rise to mutually
benefcial trade, and there is never any reason other than wanting to enjoy
sleep or meal or a swim that they should be unemployed. But for Keynes,
an economy as a whole is more like mandeville’s grumbling hive in the
Fable of the Bees [1714]: private virtue (parsimony and restraint) produces
public vice (economic collapse). a mercedes sportscar or dinner at a fne
restaurant is a dispensable luxury, but if enough of us dispense with such
luxuries the autoworker and the busboy go without their dinners: as Keynes
puts it, “the gay of tomorrow are absolutely indispensable to provide a raison
d’être for the grave of to-day” [General Teory: 105–6]. Unlike r obinson and
Friday, workers in a complex economy can be unemployed; the economy can
operate at less than full capacity.
Keynes was keenly aware that the complexity of the economy depends
on the institution of money, which allows us to obtains goods from people
we’ll never know, living lives that we can hardly imagine, in places we’ll never
see. r obinson and Friday may be selfsh, but in an obvious sense they work
for each other. if they save, they save by laying up stores. We too work for
each other, but only indirectly. d irectly, we work for money. a nd when we
save, we save money, and do not demand the work of others. Te process
of my abstaining from spending leading to another’s loss of income and
his from spending, leading to still ’s loss of . .
.and so on is Keynes’s famous investment multiplier. Te multiplier works
the other way too – expenditure (yours or mine or the government’s) gives
some people income which, if they spend it, gives other people income . .
.and so forth. Te investment multiplier is the intellectual basis for President
o bama’s stimulus package.
Keynes’s important analytical insight is that it just won’t do to believe that
the private sector will always and everywhere fnd and efect every valuable
exchange. Tat would imply that the unemployed are dissembling: they say
that they want to work, but really they are on vacation.
Te multiplier explains the process of getting into and out of trouble, but
what started the trouble in the frst place? Keynes’s answer (surprisingly like
that of the a ustrian economists – often his most vocal opponents) is time
and ignorance. Te future matters to economic decisions, but we cannot

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