1. Center for the History of Political Economy Summer School June 2012
History of Modern Macroeconomics Lecture 3.3. Macroeconometrics and the New Economics ( ) Kevin D. Hoover Department of Economics Department of Philosophy Center for the History of Political Economy Duke University
Center for the History of Political Economy Summer School June 2012

2. Ragnar Frisch Inventor of important terminology:
microeconomics/macro-economics
econometrics
Influential in development of:
dynamic economics
econometric (empirical) methods
Creator of modern professional institutions
Founder of Econometric Society
First editor of Econometrica
Ragnar Frisch ( ), Nobel Laureate (1969)
Center for the History of Political Economy Summer School June 2012

3. Contrasts and Complementarities Between Frisch and Keynes
micro vs. macrodynamics
econometrics
pragmatism and aggregation
dynamics
pervasive micro analysis
system properties and emergence
against econometrics
Frisch
Keynes
Center for the History of Political Economy Summer School June 2012

4. Frisch: Dynamics and the Macro/Micro Distinction
“micro-dynamic analysis is an analysis by which we try to explain in some detail the behaviour of a certain section of the huge economic mechanism, taking for granted that certain general parameters are given . . .”
“macro-dynamic analysis, on the other hand, tries to give an account of the fluctuations of the whole economic system taken in its entirety.”
Macro not built on micro; micro presupposes macro.
Center for the History of Political Economy Summer School June 2012

5. Frisch: The Economic Pragmatist
“it is always possible to give even a macro-dynamic analysis in detail if we confine ourselves to a purely formal theory Such a theory, however, would only have a rather limited interest” for actual business-cycle problems.
“We may perhaps start by throwing all kinds of production into one variable, all consumption into another, and so on, imagining that the notions ‘production,’ ‘consumption,’ and so on, can be measured by some sort of total indices.”
Center for the History of Political Economy Summer School June 2012

6. Center for the History of Political Economy Summer School June 2012
Keynes on Dynamics
“The real task of [monetary] theory is to treat the problem dynamically, analysing the different elements involved, in such a manner as to exhibit the causal process and the method of transition from one position of equilibrium to another.” Treatise on Money
Center for the History of Political Economy Summer School June 2012

7. Keynes and the Centrality of Microeconomic Analysis
All the main Keynesian functions analyzed microeconomically:
consumption function
labor supply
labor demand
liquidity preference
investment
Center for the History of Political Economy Summer School June 2012

8. An Illustration: Keynes on Liquidity Preference
Speculative demand for money
normal rate of interest—individual and heterogenous
hold bonds if market rate above normal  expected capital gain; hold money if market rate below normal  expected capital loss
market rate = rate at which market is divided into balanced groups of bulls and bears
no aggregation; market rate = some particular agent’s normal rate
Center for the History of Political Economy Summer School June 2012

9. Another Illustration: Keynes on the Labor Market – 1
Labor demand: standard firm optimization problem
Labor supply: not principally money illusion but a relative efficiency-wage argument:
“the struggle for money-wages is essentially a struggle to maintain a high relative wage . . .” General Theory
Kevin Hoover, “Relative Wages, Rationality, and Involuntary Unemployment in Keynes’s Labor Market,” History of Political Economy 1995.
Center for the History of Political Economy Summer School June 2012

10. Another Illustration: Keynes on the Labor Market – 2
Defines unemployment not by aggregative version of individual situation: real wage > marginal disutility of labor but by market test: “Men are involuntarily unemployed if, in the event of a small rise in the price of wage-goods relatively to the money-wage, both the aggregate supply of labour willing to work for the current money-wage and the aggregate demand for it at that wage would be greater than the existing volume of employment. “
No reference to aggregate labor-supply function.
Center for the History of Political Economy Summer School June 2012

11. Keynes vs. Frisch: Role of Theory
macro system a giant machine approximated by coarser simplifications;
the “economic engineer”; models as mechanical analogues.
Keynes:
economy organic; macro properties emergent;
the “economic physician”; models as diagnostic tools
Center for the History of Political Economy Summer School June 2012

12. Frisch’s Vision: Two Versions of the Tableau Economique
Ragnar Frisch 1933
François Quesnay 1759
Center for the History of Political Economy Summer School June 2012

13. Keynes’s Vision: Mandeville’s Fable of the Bees
“the gay of tomorrow are absolutely indispensable to provide a raison d'être for the grave of to-day” (Keynes, General Theory, pp ).
Center for the History of Political Economy Summer School June 2012

14. Keynes vs. Frisch: Aggregation and Econometrics
Frisch: aggregation pragmatically necessary for econometrics;
Keynes: against econometrics; despite introducing terms such as aggregate supply and aggregate demand, aggregates do not drive dynamics
Center for the History of Political Economy Summer School June 2012

15. Center for the History of Political Economy Summer School June 2012
Frisch: The Economy as Machine: A Simple Pendulum as an Analogue of the Business Cycle
Center for the History of Political Economy Summer School June 2012

16. Center for the History of Political Economy Summer School June 2012
Complex Pendulums
Center for the History of Political Economy Summer School June 2012

17. Propagation and Impulse Mechanisms
Center for the History of Political Economy Summer School June 2012

18. Jan Tinbergen and Applied Macroeconometrics
Trained as physicist
Created first modern econometric models:
Smaller Dutch model
Larger U.S. model
Two-volume study of U.S. business cycles for the League of Nations (1939)
methodology and application
object of Keynes’s attack on econometrics
Jan Tinbergen ( )
Center for the History of Political Economy Summer School June 2012

19. Jan Tinbergen Socialist
In 1950s director of the Dutch Central Planning Bureau
Jan Tinbergen ( ), Nobel Laureate (1969)
Center for the History of Political Economy Summer School June 2012

20. Keynes Meets Frisch and Tinbergen – 1: The Cowles Commission
Cowles Commission for Research in Economics founded in 1932 by Alfred Cowles
Moved to Chicago in 1939
Early research:
Econometric methodology (especially structural macromodels)
General equilibrium models
Center for the History of Political Economy Summer School June 2012

21. Keynes Meets Frisch and Tinbergen – 2: Hicks
Value and Capital (1939): Keynes in light of Walras
Dynamics of type Frisch thought impractical
Formal analysis of aggregation
The IS-LM Model
Sir John R. Hicks ( ), Nobel Laureate (1972)
Center for the History of Political Economy Summer School June 2012

22. Klein and the Aggregation Program
Keynesian
Walrasian
Econometrician
Socialist
Lawrence Klein ( ), Nobel Laureate (1980)
Center for the History of Political Economy Summer School June 2012

23. Keynes and Bretton Woods
Keynes and Harry Dexter White (U.S. Delegate)
Bretton Woods (NH) Resort
Keynes and the Soviet Delegate
Center for the History of Political Economy Summer School June 2012

24. Making the Economy Work - 1
Lord Beveridge ( )
Center for the History of Political Economy Summer School June 2012

25. Making the Economy Work - 2
Harry S. Truman ( , President )
Alvin Hansen ( ), American popularizer of Keynes
Center for the History of Political Economy Summer School June 2012

26. Center for the History of Political Economy Summer School June 2012
Abba Lerner ( )
Center for the History of Political Economy Summer School June 2012

27. Center for the History of Political Economy Summer School June 2012
Thanks 
The End
Center for the History of Political Economy Summer School June 2012