Lance Taylor (1940-2022) and his legacy

With Lance in Beijing (2001)

I took Lance’s macro class in the Fall of 1995 at the New School for Social Research (NSSR), and then was his Teaching Assistant for two years. The book we formally used was Income Distribution, Inflation and Growth: Lectures on Structuralist Macroeconomic Theory, in which the terms (not the concepts) for wage-led and profit-led economies were first used (at least that's what I think; profit-led does not appear in the index, I must note). But classes were based on his notes, on what became his next book Reconstructing Macroeconomics (he thanked me for all the input in my copy; I had to learn how to read his handwriting, which was not easy). In many ways, my thinking was influenced more by the Sraffian professors at the NSSR, both John Eatwell (I was also his TA in the micro class) and Ed Nell (who really was the first to discuss functional finance in my classes), in part because the blend of Cambridge left-of-center Keynesianism and Latin American Structuralism, that Lance exposed, was more familiar to me coming from Brazil.

My plan was to work on inflation theory (and I did write a conflict model, that can be seen as being in Lance’s tradition later on; in my view his best book is the one that is less formal, and is on inflation, his Marshall Lecture at Cambridge, Varieties of Stabilization Experience; at the time I first read it I didn't know that the title was a quote from Henry James; the other candidate is his book with Eatwell Global Finance at Risk. Both are more books than manuals). But I started working with Wynne Godley on his stock-flow model for the joint Center for Economic and Policy Analysis (CEPA) and Levy Economic Institute project. A year into the project I told Lance that it would make sense if I worked on something related to the project, namely the sustainability of the US external account. Lance was very nice about it, and not only went along, but also provided funding, since I received CEPA’s dissertation grant.

I ended up writing something that was very close to Massimo Pivetti’s monetary theory of distribution. The theory at least. Lance provided comments and feedback, and, at some point, told me that I was obsessed with this monetary distribution thing (I was, indeed). But he also provided support, and his criticism was always constructive. Lance was the best supervisor one could have. He guided the work with frequent conversations, read and criticized what I gave him to read, and, after it passed certain standards, approved it, even if it wasn't exactly a Lance Taylor dissertation. He never tried to mold my thinking, or force me to work on own his terms. Sadly, that isn’t the norm in academia. I think he had been lucky with his supervisor too. He once spoke fondly of Hollis Chenery (his supervisor; not his mentor, which I think was Rosenstein-Rodan; I might be wrong), because he protected the radicals, which were under pressure in the late 1960s at Harvard. His intellectual generosity, among several other qualities, is something that will be deeply missed.

Lance was open to alternative methods, and approaches, what he called closures (certainly more than I am), and his comparative method was influenced by other disciplines, the qualitative "thick descriptions" a la Clifford Geertz that he liked. I actually ended up reading a bit of Geertz because of my conversations with Lance, particularly when I was the assistant director at CEPA (he was the director) and he organized a book on several comparative studies of liberalization in peripheral countries (the one on Brazil, which was supposed to appear in a previous volume, and should have been written by Edward Amadeo, was eventually written by me; photo above is from one of the conferences that led to that book). Geertz saw anthropology, as he famously put it, "not [as] an experimental science in search of law but an interpretive one in search of meaning." The thick description was essentially the interpretive work of the ethnographer. Lance took that view, in some sense, of economics, blending the description of the historical and institutional features of peripheral countries, with relatively simple models in what Paul Krugman (a co-author; Paul's first paper was the one on contractionary depreciations with Lance) called the MIT or Solow type models (my only other model in that sense, is the currency crisis one that puts Krugman's one upside down).

 

I tend to think that this methodological stance is Lance most enduring legacy, and the one that had the most influence on my own work. Most discussions of his work emphasize the gap models (which I think are problematic, the savings and fiscal gaps in particular), or the stagnationist model of growth, which builds on Bob Rowthorn's seminal Neo-Kaleckian growth model (and also on Amitava Dutt's model, which I think was part of his dissertation work under Lance). Some might even think that it was the reversal of his views on the role of exchange rates in development, his paper with Roberto Frenkel on stable and depreciated exchange rates as engines of growth (which can be seen in line with Luiz Carlos Bresser-Pereira and Jaime Ros views, and as being at the center of New Developmentalism). Others might think it's his work on Social Accounting Matrices that prefigured, and went hand in hand with his appreciation for Wynne Godley's stock-flow consistent models (on Wynne's methodological stance, see this old post).

In a way, all these models, and others (I could have added the Minsky crisis one, that is often neglected), to some extent show the use of models for Lance. He was somewhat eclectic, and use them to illustrate some of the issues with developing countries. But for him that had to be complemented by the interpretive thick descriptions. In my view, the models per se were less relevant for Lance, who was an unorthodox lefty that remained so, as someone remembered recently, even as the whole world moved to the right in the 1980s, and 1990s (he told me that a director of research at the World Bank, that had become a neoliberal, told him in his last visit to that institution, if he wasn't ashamed for still defending those structuralist views). And he did leave MIT for the NSSR, which was a strong signal of his political views. The simple model allowed him to tell the stories.

I have a tendency to prefer greater consistency in the models, and I'm less keen on accepting some possibilities of neoclassical/monetarists closures for the real world. But his methodology, which in some sense contrasts with the large stock-flow models that my other mentor (Wynne) liked, is certainly something I think it is a more fruitful way of thinking about macroeconomic problems. But again the specific models per se are less relevant, and the thick description that they illustrate with simplicity matter more.

The Trouble with Paul Romer's Angriness

Count to 10

The paper by Paul Romer, The Trouble with Macroeconomics, has been in the news, and many bloggers have posted about it (Lars Syll here, to name one) and some of the major newspapers (for example, here and here). This follows his previous critiques on what he referred to as mathiness. It's also important since now Romer is the World Bank's chief economist. In all fairness, the only refreshing thing in the paper is the sarcasm, and the internal sociological critique of the profession that "places an authority above criticism."

This paper is better than the previous one on mathiness. He clearly notes that Real Business Cycle (RBC) models including in the synthesis version with New Keynesian models, the Dynamic Stochastic General Equilibrium (DSGE) models he discusses, use productivity shocks as something akin to phlogiston. He's not wrong. My favorite quote is this one also by Ed Prescott, Romer's bête noir, who argues that:

"In the 1930s, there was an important change in the rules of the economic game. This change lowered the steady-state market hours. The Keynesians had it all wrong. In the Great Depression, employment was not low because investment was low. Employment and investment were low because labor market institutions and industrial policies changed in a way that lowered normal employment."

So you ask: what was the negative shock that caused the Great Depression? Lucas, a mentor and friend of Prescott that shares his views, said (cited here) about this: "Where is the productivity shock that cuts output in half in that period? Is it a flood or a hurricane? If it really happened, shouldn't we be able to see it in the data?" [For more on the problems with the interpretation of the Depression go here]. And Romer is right also that Friedman's instrumentalism, the idea that it is "as if" there is a negative productivity shock, is not serious.

In his paper, Romer takes issue with Prescott's explanation of productivity shocks as being like "that traffic out there." Here is his explanation of why this is problematic:

"What is particularly revealing about this quote is that it shows that if anyone had taken a micro foundation seriously it would have put a halt to all this lazy theorizing [about imaginary shocks]. Suppose an economist thought that traffic congestion is a metaphor for macro fluctuations or a literal cause of such fluctuations. The obvious way to proceed would be to recognize that drivers make decisions about when to drive and how to drive. From the interaction of these decisions, seemingly random aggregate fluctuations in traffic throughput will emerge. This is a sensible way to think about a fluctuation. It is totally antithetical to an approach that assumes the existence of imaginary traffic shocks that no person does anything to cause."

This is very close to getting lost in the analogy, but at any rate, for what is worth, Romer is essentially fine with the methodological individualism of marginalism, and he implies that if you look hard enough you can find in the behavior of economic agents the reasons for why productivity fell and caused a Depression. There is no discussion of causality issues, which are central in the understanding of scientific differences, and why productivity might be endogenous. Romer perhaps thinks, not differently from Lucas or Friedman, that the Fed caused the Depression.

While the tone of the paper is that "Keynesian" ideas that money matters are relevant, and that RBC and DSGE models (or some of them) can't even get the effects of the Volcker stabilization right, it is probably true that Romer doesn't get it either. Anybody that worked with Phillips curves knows that the output gap is relatively weak, and that in order to get reasonable results supply side factors must be included (often the price of oil and other commodities). So the fall in commodity prices, and the indirect effects of the recessions on the bargaining power of the labor force (besides other things like Reagan's anti-union policies) played a role in the stabilization.

And should I mention that Romer writes a whole paper on the troubles with macroeconomics without one single note on the limitations of the idea of a natural rate of unemployment (or interest) and the inability of economists, which use it all the time for policy purposes, to even measure it? Oh well. Now the World Bank, with him as chief economist, will emphasize even more the need to spend on "human capital," because knowledge unleashes increasing returns and development. Yeah nobody though that education was central for development [and he doesn't even think of reverse causality]! Don't get me wrong, macroeconomics has been in trouble since the 1930s, when it developed as a field, but Romer's ideas are not particularly helpful. Being angry at RBC and New Classicals (angriness?) does not provide a clear path for macroeconomics.

PS1: I won't even go on the fact that he thinks that the Cowles Commission methodology is flawed, a position he shares with Lucas and Sargent. On that Ray Fair has said:"If the macro 2 [the RBC/DSGE models Romer criticizes] message is not sensible or its methodology is not feasible for estimating realistic models, it is perhaps time to move back to macro 1 [the Cowles Commission models that Romer also thinks are problematic]. This requires dropping the assumption of rational expectations and trusting the theory to impose exclusion restrictions." I may not agree with Fair, and other Old Keynesians (not sure he would like that label), on the restrictions that need to be applied, but at least methodologically we're on the same page. Not sure what Romer wants.

PS2: Romer doesn't even know of the problems with the growth accounting methodology and Solow's residual. On that see this paper by Jesus Felipe and Franklin Fisher.

New Working Paper By Passarella & Sawyer: Financialisation in the circuit

From The Abstract:

The relationships between financial systems and the macro-economy with emphasis on the saving-investment relationships and the nature of money are set out. A circuitist framework is extended to reflect some major features of the era of financialisation circa 1980.

Read the rest here.

* FESSUD is a multidisciplinary, pluralistic project which aims to forge alliances across the social sciences, so as to understand how finance can better serve economic, social and environmental needs. For more on the project, see here.

Lars P. Syll On What’s wrong with IS-LM?

By Lars. P. Syll

Yesterday, David Fields of Naked Keynesianism wondered what was my position on the fact that many heterodox economists would consider the IS-LM framework “to still be relevant if given enough flexibility without neoclassical synthesized elements.”

I will sure come back on this when time admits a more thorough analysis, but let me start by giving at least a tentative answer — focusing on where I think IS-LM doesn’t adequately reflect the width and depth of Keynes’s insights on the workings of modern market economies.

Read the rest here.

Lars P. Syll On Krugman's Fuddy Duddy Defense of Economic Orthodoxy

By Lars P. Syll

“Sorta-kinda New Keynesian” economist Paul Krugman now has learned from Francesco Saraceno — who links to yours truly — that “some people are attacking” him for “defending an economic orthodoxy that has failed.” Let me just start with an observation on Krugman’s allusion (“simple models”) to IS-LM. This, of course, comes as no surprise, since we who have followed Krugman’s writings over the years, know that he is very fond of referring to and defending the old and dear IS-LM model.

Read rest here.

Lars Syll on Loanable Funds Theory

By Lars Syll

The classical theory of the rate of interest [the loanable funds theory] seems to suppose that, if the demand curve for capital shifts or if the curve relating the rate of interest to the amounts saved out of a given income shifts or if both these curves shift, the new rate of interest will be given by the point of intersection of the new positions of the two curves. But this is a nonsense theory. For the assumption that income is constant is inconsistent with the assumption that these two curves can shift independently of one another. If either of them shift, then, in general, income will change; with the result that the whole schematism based on the assumption of a given income breaks down … In truth, the classical theory has not been alive to the relevance of changes in the level of income or to the possibility of the level of income being actually a function of the rate of the investment.

There are always (at least) two parts in an economic transaction. Savers and investors have different liquidity preferences and face different choices — and their interactions usually only take place intermediated by financial institutions. This, importantly, also means that there is no “direct and immediate” automatic interest mechanism at work in modern monetary economies. What this ultimately boils done to is — iter — that what happens at the microeconomic level — both in and out of equilibrium — is not always compatible with the macroeconomic outcome. The fallacy of composition has many faces — loanable funds is one of them.

Read the rest here.

Lars Syll on Krugman as An Apologetic Defender of Esoteric Mathematization

By Lars P. Syll

Paul Krugman had a post up on his blog a while ago where he argued that “Keynesian” macroeconomics more than anything else “made economics the model-oriented field it has become.” In Krugman’s eyes, Keynes was a “pretty klutzy modeler,” and it was only thanks to Samuelson’s famous 45-degree diagram and Hicks’s IS-LM that things got into place. Although admitting that economists have a tendency to use ”excessive math” and “equate hard math with quality” he still vehemently defends — and always have — the mathematization of economics.

See rest here.

New introductory heterodox macro textbook, "Principles of Macroeconomics: Activist vs. Austerity Policies"

New introductory heterodox macroeconomics textbook (see here) by acclaimed writers, Howard J. Sherman & Michael Meeropol (whom I was a student of). In similar vein as E.K Hunt and Howard J. Sherman's "Economics: An Introduction to Traditional and Radical Views," the authors stress the inherent instability of the capitalist macro-economy. Moreover, the entire book, as the subtitle indicates, centers on the debate between activist and austerity policies. Hence, it takes on many of the most important issues related to what has become known as the Great Recession.

When did the term macroeconomics become dominant?

I discussed before the origin of the term macroeconomics (here). The term was introduced most likely by Ragnar Frisch, and become associated with the Keynesian Revolution. Before the rise of the macro/micro divide economics was divided between monetary theory (which roughly corresponded to the macro part) and theory of value and distribution (the micro one). Using my new toy in Google Books we can see when the new terms became dominant.

Note the term macroeconomics takes a very long time to become part of the vocabulary of economists. If Ngram Viewer is to be trusted, only in the 1970s the term macroeconomics became more relevant than monetary theory (which now would be more a sub-field of macro).

The Barriers to Full Employment are Political, Not Economic

By Malcolm Sawyer

In “Political Aspects of Full Employment,” a still widely cited article from 1943, Michal Kalecki raised many questions about the ability of a capitalist economy to maintain prolonged full employment — even though in light of the understanding of tools for stimulating aggregate demand and the use of fiscal policy brought about by the Keynesian ‘revolution.’ In a series of papers, Kalecki showed that the arguments against the use of budget deficits to secure full employment were invalid. Among these arguments, and their rebuttals, were that:

• deficits add to government debt, which is a burden on future generations (rather, the government debt is bonds owned by individuals, pension funds etc.);
• deficits crowd out investment (rather, they allow savings to take place and enable investment); and
• deficits cause higher interest rates (the current situation makes the rebuttal to this clear).

Yet those arguments are still trotted out.

Read the rest here.

IS-LM is bad economics no matter what Krugman says

"There is nothing in the post-General Theory writings of Keynes that suggests him considering Hicks’s IS-LM anywhere near a faithful rendering of his thought. In Keynes’s canonical statement of the essence of his theory in the 1937 QJE-article there is nothing to even suggest that Keynes would have thought the existence of a Keynes-Hicks-IS-LM-theory anything but pure nonsense. So of course there can’t be any “vindication for the whole enterprise of Keynes/Hicks macroeconomic theory” – simply because “Keynes/Hicks” never existed..." (see rest here)

Brad DeLong on Carmen Reinhart

Great post by Brad DeLong, about misplaced fatalism. His comments are based on a video (you can see the whole thing in his post) debate between Krugman and Reinhart. He says:

"A word about the content: I continue to find Carmen Reinhart’s fatalist view puzzling. She agrees with me that we’re facing a demand-side problem — but insists that this problem can’t be solved quickly, that we need to go through many years of painful deleveraging that leave millions of potentially productive workers idle. I agree that this is probably what will happen, given the political realities. But surely this is a huge failure of policy, not something we should accept as inevitable. It’s truly bizarre, if you ask me, to say that our economy suffers from too little spending, and that nothing can or should be done to increase that spending."

He then uses a variation of an ISLM to explain his and Reinhart's views. Translating, political fatalism seems appropriate in the US, but theoretical fatalism is out of place. Agreed!

PS: Also worth reading is Cassidy's take on Obama's speech. An antidote to the fatalism above.

Lucas in context, Keynes out of context

Krugman decided to try his hand at history of macroeconomic thought in one of his last posts. That's great, since history of thought is essential to understand how we got here. It's also bad, since Krugman is still very much a mainstream author, and misses the point of Keynes' contributions, and the limitations of neoclassical (or more properly, marginalist) approach. He suggests correctly that the New Classical (NC)/Real Business Cycle (RBC) project was a failure, but both the reasons for that and his interpretation of the Keynesian project are misguided.

The first proposition in Krugman's reassessment of the recent history of macroeconomics, is that Keynesian models were ad hoc, and assumed wage and price rigidity. The whole of chapter 19 of the General Theory (GT) is about the effects of price and wage flexibility, and how it does not produce full employment. It was with Franco Modigliani's PhD dissertation, done at the New School for Social Research under Jacob Marschak, that the sticky wage version of Keynesian theory that would dominate the neoclassical synthesis was concocted.

Keynes is actually quite explicit about the negative effects of wage reductions. He says (GT, ch.19-link above):

"A reduction of money-wages will somewhat reduce prices. It will, therefore, involve some redistribution of real income (a) from wage-earners to other factors entering into marginal prime cost whose remuneration has not been reduced, and (b) from entrepreneurs to rentiers to whom a certain income fixed in terms of money has been guaranteed.

What will be the effect of this redistribution on the propensity to consume for the community as a whole? The transfer from wage-earners to other factors is likely to diminish the propensity to consume. The effect of the transfer from entrepreneurs to rentiers is more open to doubt. But if rentiers represent on the whole the richer section of the community and those whose standard of life is least flexible, then the effect of this also will be unfavourable. What the net result will be on a balance of considerations, we can only guess. Probably it is more likely to be adverse than favourable."

Hence, the fix-wage version of Keynes' thought is the result of misconception, that suggests that if markets worked well, without imperfections, they would move to full employment. Unemployment is a disequilibrium, by definition a short run situation resulting from a rigidity.

The whole point of the neoclassical synthesis was to suggest that one could continue to teach that markets are efficient, and that supply determined the price and quantity of equilibrium in all markets including those of "factors of production" (i.e. the labor and capital markets), and as a result unemployment could only result  from rigidities in the labor market. Nothing revolutionary there, and in that case, as Keynes foresaw, people would think he was quite wrong or said nothing new.

By the way Krugman does not believe that rigid wages are behind our current lack of full employment (in his view it is the downward rigidity of the rate of interest; Keynes also did not believe in the liquidity trap as the cause of depressions), which makes it more difficult to understand why he defines Keynesians (Old and New) as pragmatic rigid price and wage modelers. You cannot blame then Laurence Kotlikoff for his confusion (here and Krugman's reply and here; Jamie Galbraith, also implicated, gives a better answer since he never said that Keynes is about wage rigidity; scroll down for Jamie's and Kotlikoff's back and forth).

Krugman's second point is that Friedman and Phelps in the 1960s were trying to provide microfoundations to wage and price rigidity. Actually, the microfoundations agenda had more to do with the theoretical development of theories for consumption (Modigliani, Friedman), investment (Eisner, Tobin) and money demand (Baumol, Tobin) behavior. The Phillips Curve (PC) debate and the Friedman-Phelps notion of a natural rate of unemployment is associated to the idea that there is a supply side constraint to the economy, and stimulating demand would ultimately have only effects on prices and not on quantities. The economy naturally moves to full employment, unless there are restrictions, and what is needed is to eliminate the restrictions not stimulate demand.

In other words, the monetarist approach of Friedman accepts the neoclassical synthesis notion that it is the rigidities that cause unemployment. It just proposes a different policy solution. By pointing out the existence of a natural rate of unemployment analogous to Wicksell's natural rate of interest (which Keynes' criticizes in the GT) Friedman was just emphasizing that if one believes in the neoclassical theory of value and there are no restrictions the system moves to full employment. In fact, Friedman's (1970) theoretical framework, an ISLM cum PC and natural rate model, is remarkably close to the neoclassical synthesis models.

In that sense, the Lucas Revolution and the subsequent move, after Kydland and Prescott's work, of most New Classicals , including Lucas, to the Real Business Cycles camp is a not a break with Friedman, and the New Keynesians (NK) that accept everything (including the natural rate) are part of the same tradition. The difference is that some emphasize the long run neoclassical principles and others the short run rigidities that demand policy action.

The fundamental problem of the neoclassical/marginalist approach, and the importance of Keynes analysis, can ONLY be properly understood in light of the 1960s capital debates (for a good reference go here). The point, for the purposes of our discussion here, is that if there is unemployment and real wages fall, neoclassical theory tells you that according to the principle of substitution, more labor is demanded (the cheap thing that is in excess supply) and less machines (capital) are used, since they are relatively more expensive. However, since labor (which is cheaper) is used in the machine sector too their price should fall too, and is not generally true that there is a tendency for the full utilization of "factors of production" according to their relative scarcities. Further, even if the substitution effects go in the right direction, and more labor is used, the income effect of lower real wages tends to be large and have a negative effect on demand (put simply, workers cannot buy stuff), which implies that less of all "factors of production" are used. In other words, there is no natural tendency to full utilization of labor or capital, and both the natural rate of unemployment and its evil twin the natural rate of interest do NOT exist.

So it is peculiar that Krugman thinks that "NK economics [is] useful, if only as a way to check my logic, although it’s not really clear if it’s any better than old-fashioned Keynesianism." What logic? New Keynesian models assume a natural rate, and that the economy (without rigidities) moves to full employment! The problem with the NC/RBC/Lucas' type of theory is not that it failed to predict the 1980s recession or that they think that most crises are caused by real shocks (although both propositions are obviously wrong), as Krugman seems to believe, but that they do maintain the fiction of an efficient market that clears (in their case too fast for Krugman's taste) and that produces a natural rate. If he wants to move in the right direction Krugman should follow Galbraith and announce that it is time to ditch the natural rate hypothesis.

PS: That means that progress in economics is not linear, and that one can and should learn from old and forgotten traditions (classical political economy did not assume full utilization of resources).

Macro vs. Micro

A debate on the relation between micro and macroeconomics has been raging in the mailing list of the Societies for the History of Economics (SHOE; yep that's the acronym they went for!).  The main question being discussed is whether micro-foundations are necessary for coherent macroeconomic theory. I have argued in a previous post that, in fact, this is the other way round, macro-foundations for microeconomics are essential.

From a history of thought point of view, it is important to note that the distinction is a relatively modern one, starting in the 1930s.  The term macroeconomics was first used, most likely, by Ragnar Frisch in his lectures notes in 1933-34, and first used in print by Jan Tinbergen and Eric Lindahl in 1936 and 1939, respectively (for a full discussion see Vela Velupillai, 2009; subscription required).  Keynes did not use the term in his General Theory, even though the book is considered the foundational book of macroeconomics. To a great extent the work of John Hicks -- both his ISLM paper and his Value and Capital -- is central to understand the direction in which the profession developed.

Yet, Keynes book was central in the eventual split of macroeconomics and microeconomics.  In particular, because Keynes defied the conventional wisdom, associated with marginalism, that the rational maximizing behavior of firms and individuals would lead to the optimal (meaning full) utilization of resources, including obviously labor resources.  Full employment was not the normal equilibrium position of the economy.  In that sense, Gary Mongiovi provided the most enlightened note to the SHOE debate.  He tells us:

"the macro/micro distinction actually arose after Keynes's theory took root, and students had to be taught two distinct and apparently incompatible stories about how market economies work: (1) a neoclassical distribution theory in which the real wage adjusts to bring the S & D for labor into line with one another; and (2) a Keynesian story about how the economy could settle into an equilibrium in which the labor market doesn't clear."

That incompatibility and incoherence is still with us.  Students are taught that markets are efficient in their micro text, and some imperfectionist story is told in order to provide a foundation for the Keynesian macro story (at least in salt-water departments).  Of course an alternative would be to discard the marginalist approach altogether, since it does have insurmountable problems as admitted by Paul Samuelson during the capital debates in the 1960s.  But that's another story for a different post.

C'mon, Paul, you can get there!

Professor Krugman seems to be undergoing an (structuralist?) epiphany. Or at least admitting it in public.

What am I talking about? My perception of his movement toward recognizing macro foundations as the driving force in reality and any model that presumes to approximate it.

Evidence?

This piece, in which he says "pah...all that micro trade theory doesn't have anything to do with reality." He doesn't really say that, I am imputing that. Here's what he did say "The case for free trade is about microeconomics, about raising efficiency. There’s no particular reason to think that trade liberalization is good for fixing problems of inadequate demand."

And this piece, (which I promise to find) in which he admits to becoming increasingly interested in macro somewhere in the 90's.

And he's almost there...,almost as in this piece, where he, among others, takes Barro to task for his ridiculous labeling of micro as "regular economics," implying that, well, read the piece.

So, Paul, keep going, you are on the road to the promised land. We're really happy that you got your Nobel for micro trade theory...that wonderful event appears to have freed you to follow the path of truth. Now just take the final step and follow Vernengo et al. into explaining microeconomics using macro foundations.

The meaning of structuralist macroeconomics

Semester started again.  Teaching Intermediate Macroeconomics, and trying to explain to students what is the meaning of structuralist macroeconomics.  The origins of the term are well known, and associated to the development of the theory of inflation by Juan Noyola Vázquez, and other economists at the Economic Commission for Latin America (ECLA). Development implies changes in the structure of production, with an increase of the industrial and service sectors, and a reduction of the agricultural sector, accompanied by significant increases in the levels of labor productivity in all sectors.

As the agricultural sector's size decreases, and its productivity increases, and workers migrate from rural to urban areas, the price of foodstuff goes up, and wage resistance by workers implies that costs increase in general.  In other words, inflation resulted from the transformation of the structure of production.  Hence, the term structuralism, that at the same time, in 1950s, was being popularized by Claude Levi Strauss. Structuralism in Latin America was, as a result, a response to Monetarist views of inflation, and seemed to be aligned with Keynesian economics.

However, there is a more profound meaning to structuralism.  Levi Strauss argued that science proceeds in two ways; it is reductionist when the object of analysis is simple, and it is structuralist when it deals with complex systems.  I tend to believe that a more productive understanding of social sciences should not distinguish between simple and complex phenomena, but emphasize the difference between methodological individualism and structuralism, that is, the presumption that one cannot understand social behavior unless one understands individual behavior, and the counter-argument that individual behavior is by definition constrained by social relations.

In that sense, classical authors (surplus approach), that emphasized the role of class as a central determinant of individual behavior, and Keynes, whose belief in the fallacy of composition implied that the whole is more than the aggregation of its parts, would be structuralists.  For example, it might seem reasonable to assume that an individual worker would accept to work for a lower wage in order to find a job, but if lower wages in the whole system lead to lower demand and a reduction in labor demand, the individual firm reducing wages, and the individual worker accepting it may not solve the problem. One has to understand the functioning of the system as whole first, in order to understand how the individual parts interact.  Or put it simply one needs macro-foundations for microeconomic behavior, not the other way round.

PS: The classic book on macroeconomic structuralism in the anglo-saxon world is Lance Taylor's one (image above).  A simple intro to structuralism in Spanish and Portuguese was the book by Carlos Lessa and Antônio Barros de Castro, the latter sadly passed away last Sunday.

Do what I say not what I do

These days there is a great amount of praise for the IMF's changing views, on everything, from the rethinking of macroeconomics, to their admission that capital controls might be good.  I remain very skeptical, and that's why it was great to read Mark Weisbrot's last piece on the IMF. He reminds us that:

"Unfortunately the IMF's practice still does not match its rhetoric or even, increasingly, its own research.  In Greece, Ireland, Spain, Portugal, Latvia and other countries, the Fund is still involved in the implementation of 'pro-cyclical' policies that will keep these countries from recovering for a long time."

How do you call a person (or institution) that says one thing, but then does another?!

Is there something in the water at the IMF?

via Mark Thoma, Economist's View
The paper:IMF on inequality and growth

Whilst I haven't yet taken the time to delve into the 'metrics, this looks to be an interesting survey and addition to one of the fundamental macro questions: whence growth. Interestingly, the authors highlight the finding of the importance of (the lack of) inequality for continuation of "growth spells."

Given its history, it's fairly stunning that this would emanate from the IMF. Further, I think it's time to do a really good syllabus on the topic of growth and inequality. Inequality mavens, send us your links!

I'll be reading this one more closely, especially in the context of Matias' immediately preceding post.