One concealed yet problematic feature of the booming “current state of macro” genre is the systematic reliance on incomplete historical arguments. Relying on individual impressionistic reminiscences, rather than the kind of systematic data – archival, oral, prosopographic, bibliometric, text-mined or network-organized – which historians much prefer, can often result in distorted narratives. Moreover, these narratives usually focus on how important models were engineered, and not on the important questions of how they were disseminated and became influential in policy circles.
Without a real understanding of how we have got to where we are, I contend that no improvement, cure, reorientation or more radical rebuilding can be properly conceived. Here I sketch a map of some of the roads which my historian colleagues and I are exploring, to understand how macroeconomic models are really disseminated between academia and policy spheres and how they become influential.For example, the “each-major-crisis-induces-a-revolution-in-macroeconomics-thinking” narrative may well be appealing and reassuring. But a closer look at the records shows that it is simply false to state that 1960s Keynesians like Paul Samuelson, Robert Solow or Lawrence Klein did not bother with microfoundations; that they did not understand how expectations might challenge the existence of an employment-inflation trade-off or that they resisted rational-expectations modelling.
Some critics of macroeconomics point to a “disconnect” between academia and policy-making institutions. Yet in recent decades economics PhD graduates have taken over central banks, with MIT economics PhDs often in the driving seat; and a similar shift is visible in other major economic policy institutions. The models used in policy institutions have been “academicied” in the last decades. Francesco Sergi reports on the development of 39 DSGE models since 2003 in institutions policy ranging from the European Commission or the Czech Ministry of Finance to the Peruvian and Australian central banks, including 22 since the financial crisis.
Yet this doesn’t mean that policy-making in practice, especially within central banking, relies exclusively or even largely on the latest academic models. In 2014 the US Federal Reserve revealed that the large-scale structural econometric model developed by Franco Modigliani and Albert Ando in the 1960s had not been trashed in the wake of the New Classical Revolution. It has been amended to accommodate different ways of modelling expectations and hybrid estimation strategies, but constantly maintained and used for forecasting.
The reliance upon such flexible and adaptable models has recently been endorsed by ECB Vice-President Vítor Constâncio and BoE Chief Economist Andrew Haldane has long advocated greater diversity in macroeconomic modelling which should include, for instance, agent-based models.
Rather than a “disconnect,” it seems that macroeconomists suffer from some kind of schizophrenia. They have learned a set of practices and epistemological standards during their graduate studies which they have imported into policy-making institutions. Yet the scientific standardized models advertised may, in fact, conceal a much wider array of practices. Why macroeconomics fosters such schizophrenia needs researching.
Excavating academia-policy pipelines
Because macroeconomists’ real practices are often concealed, historians have to excavate amongst the academia-policy pipelines of past decades. Some of these pipelines are very idiosyncratic. For example, the way in which Walter Heller, chairman of the Council of Economic Advisors, convinced John F. Kennedy to implement a large tax cut in the early 1960s, owes much to his exceptional memo writing skills and the president’s own appetite for economics discussions.
But how economists carved out institutional space for applied macroeconomic modelling and analysis at the Federal Reserve is a subject worthy of inquiry. Chairman William McChesney Martin, was a banker not widely seen as being receptive to complex macroeconomic analysis. Yet he was persuaded to fund, develop and maintain a large applied macroeconomic model, and to bring the resulting forecasts to bear on policy decisions.
In 1964-65, it was decided that the FOMC should be provided with two reports entitled “Current Economic and Financial Conditions” and “Monetary Policy Alternatives”, known as the Green and Blue books respectively. Why and how Fed economists Daniel Brill, Frank de Leeuv and Robert Rasche succeeded in lobbying in favour of academic macroeconomics, who engineered the Green and Blue books, what methodological discussions were presided over, their elaboration and whether they influenced policy decisions, are questions deserving of further scrutiny.
Another key episode in the history of macroeconomics is 1972-1983, when a handful of researchers effectively hijacked the whole field, forcing their colleagues to debate theoretical, empirical and policies strategies on their own terms (of the 81 articles published in this 1992 anthology of new classical macroeconomics, more than half are authored by Robert Lucas, Robert Barro, Thomas Sargent, Neil Wallace, Chris Sims, Finn Kydland and Ed Prescott).
On the surface, this period seems to be perfectly in line with the well-documented hierarchical structure of the discipline. Kevin Hoover and Andrej Svoren?ík report that, between 1982 and 2014, 42% of officers in the American Economic Association were academics from Harvard, MIT, Chicago and Stanford; and 71% of AEA officers held doctorates from these Universities. Half of all John Bates Clark medalists, the American marker of economic excellence in the making, graduated from Harvard and MIT alone.
I believe, however, that most discussions of the “New Classical” revolution suffer from a tendency to look backwards. None of the protagonists who went on to receive a Nobel Prize ever won a John Bates Clark medal. Stellar publication records made Lucas, Prescott, Sims and Sargent serious candidates in 1977, 1979, 1981 and 1983. In these years, the laureates were Martin Feldstein, Joseph Stiglitz, Michael Spence and James Heckman.
With exception of Lucas, these macroeconomists did not take MIT, Harvard or Chicago by storm. Instead, they clustered at the University of Minnesota, then a second tier university, and crowded into the offices and publications of the Federal Reserve Bank of Minneapolis. And in just a few years, the Minnesota Department of Economics became the strongest in the US department for econometrics, training the likes of Peter Hansen, Lawrence Christiano and Martin Eichenbaum; and the public discourses of Minneapolis Fed chairman Mark Willes became heavily influenced by New Classical theories.
The importance of the connection between the University of Minnesota and the Federal Bank of Minneapolis, in the spread of New Classical ideas, also requires further investigation. But the pipeline sketched out above suggests that the notion that battles get fought within academia, and that those ideas or models which “win” are then exported into the policy realm, is deeply flawed.
Theoretical and empirical innovations came from policy demands: it was Heller who asked Arthur Okun to provide the estimation of the output gap that became the famous “Okun law” as an argument to win over Kennedy; it was the Council of Economic Advisors who asked John Taylor to provide a “more tractable” monetary policy rule in the 1970s. And the Minneapolis Fed chairman trumpeted the need for a more “coherent theory of how the economy works.” Macroeconomic models are developed in a two-way street between academia and policy institutions.
Are label wars in macroeconomics harmful?
Macroeconomics exceptionalism draws on another characteristic of the academia-public pipeline. Ideas, models, prescriptions and even economists themselves enter the public sphere systematically sorted out by antagonistic labels. The freshwater/saltwater pair was coined by Robert Hall in 1976, and ‘monetarist’ was a word quickly used by Milton Friedman in conjunction with ‘revolution’, a pattern also seen in the deployment of ‘new classical’ in Lucas and Sargent in 1979. ‘New Keynesian’ is a term with several lives and meanings, which was eventually stabilized by some of its members in the early 1990s.
Models are similarly systematically blessed with cryptic acronyms (DSGE, RBC, VAR, SEM, ABM), and the shadow of Paul Samuelson’s heterodox vs orthodox divide is looming in the background. Despite heated theoretical, empirical and political disputes elsewhere in economics, for example, the effect of tax cuts or a rise in the minimum wage, such labelling is not seen to such an extent in public economics, labour economics or other microeconomics fields.
It is not clear what function this labelling really serves within academic enquiry, or how it affects the public discourse on macroeconomics. Are these words used by economists to label themselves or their opponents? Do they describe groups of researchers, their models or policy ideas or even ideologies? Are they used for groupthink, pedagogy, for clarification, or to convey notions of progress? Are the conflicts largely fantasies or do they reflect real fault-lines? Further investigation is necessary to improve our understanding of how macroeconomics ideas are communicated to a wider audience.
This blog is a summary of introductory remarks at a Rebuilding Macroeconomics Discovery Meeting ‘Do we have confidence in economic institutions’ on 17th November at NIESR. A summary of the meeting can be found here.
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01 December 2017