J. Bradford DeLong
What Should Macroeconomics Do? J. Bradford DeLong U.C. Berkeley November 12, 2010
What is wrong with American macroeconomics? In a nutshell, when 2007-9 came along every single macro textbook (including mine) and every single macro course (save possibly Perry Mehrling's) was of little or no use in helping people who had read or taken them to read publications like the FT as they chronicled the downturn or understand the policy debates hosted by the FT. At the very minimum, a macro course should teach people enough about the macroeconomy that they can then read the reporting of the FT. And it should teach people enough about the theoretical approaches that underpin policy advocacy that they can then understand and evaluate the policies proposed in contributions to the FT. What would such a macroeconomics course look like? It would, I think, teach the five still-live theories of the causes of economic downturns that underpin people's analyses:
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J. Bradford DeLong
• The theory that high unemployment is produced by real wages stuck at too high a level for a full-employment economy to sustain. It must be suffered. • The theory that high unemployment today is the unavoidable consequence of past overinvestment. It must be suffered. • The monetarist theory that a downturn is the result of a shortage of liquid cash money which induces people desperate to build up their cash balances to try to switch their spending away from currently-produced goods and services. It is fixed by expanding the money supply or increasing velocity and so reducing money demand. • The Keynesian--or is it Wicksellian?--or is it a Hicksian?--theory that a downturn is the result of a shortage of bonds, of vehicles that savings can use to transfer purchasing power into the future which induces people desperate to build up their assets to try to switch their spending away from currently-produced goods and services. It is fixed by expanding the supply of bonds or reducing savings. • The Minskyite theory that a downturn is the result of an overspeculationcaused panic that generates a shortage of safe high-quality assets, of vehicles that people to park their wealth and be sure it will not melt away while their backs are turned, which induces people desperate to build up their safe asset holdings to try to switch their spending away from currently-produced goods and services. It is fixed by expanding the supply of safe assets or restoring confidence and so diminishing the demand for safety. All five of these theories need to be taught sympathetically, yet critically. They all make claims about how the world works that might be true-indeed, there are surely times and places when and where they are true-and that can and should be evaluated. All five of these theories are best taught sympathetically by being taught historically: as long traditions of thought that smart people have used to try to understand a changing and confused world. Thus Minskyism from its nineteenth century roots with Walter Bagehot or perhaps Adam Smith grappling with nineteenth-century financial crises, Keynesianism from its roots in Knut Wicksell's studies of disturbances to the flow-of-funds,
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J. Bradford DeLong
monetarism from its roots in John Stuart Mill trying to understand the first industrial downturn in England in 1825, overinvestment theories from their roots in Karl Marx grappling with the crisis of 1848, high-real-wage from its roots in Nassau Senior's examinations of technological unemployment in the pre-1850 Midlands--all tussling with a set of problems first raised by Jean-Baptiste Say and Thomas Robert Malthus. That would be a macro course that would turn out graduates who could read the FT--and who would be of great value to all the employers who need people to process information from the FT.
November 12, 2010: 1069 words
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