Conversations with Economists: New Classical Economists and Opponents Speak Out on the Current Controversy in Macroeconomics

268 Pages·1983·8.684 MB·English

by  Arjo Klamer (ed)

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ARJOK LAMER
ROWMAN& ALLANHELD
PUBLISHERS
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CONTENTS
Preface
Vll
1 A Background for the Conversations 1
Part One ConversawtiitNohen wsC lassEiccoanlo mists
2 Robert E. Lucasjr. 29
3 Thomas J. Sargent 58
4 Robert M. Townsend 81
Part Two ConversawtiitNohen os- KnesiEacno nomists:
ey
The" OldGeern eration"
5 James Tobin 97
6 Franco Modigliani 114
7 Robert M. Solow 127
Part Three ConversawtiitNohen os- KnesiEacno nomists:
ey
The' 'YouGnegneerr ation"
8 Alan S. Blinder 151
9 John B. Taylor 170
Part Four ConverswaittiahoM no netarist
10 Karl Brunner 179
Part Five ConversawtiitNohon nsc onvenEtcioonnoamli sts
11 David M. Gordon 203
12 Leonard A. Rapping 218
Part Six Interpretation
13 An Interpretation of the Conversations 237
Glossary of Names 255
Selected Bibliography 261
PREFACE
Can the government help to stabilize the economy through active, in­
terventionist policies?
The question is particularly relevant in a world that experiences
painful swings in the degree of economic activity and an increase in the
levels of unemployment. How do economists answer it?
To seek to know is to court confusion. Listening to neo-Keynesian
economists, such as James Tobin and Franco Modigliani, one hears
that the government can remedy economic pains. Monetarists Milton
Friedman and Karl Brunner, on the other hand, while acknowledging
some effect of governmental economic policies in the short run, deny
any such influence in the long run. In fact, they attribute most eco­
nomic pain to governmental meddling in economic affairs. And re­
cently, new classical economists ( often referred to as rational expecta­
tions theorists) have extended these laissez-faire conclusions. Bob Lucas
and Tom Sargent, major protagonists of this group, have stirred the
world of economists with arguments supporting the view that stabiliza­
tion policies are impotent even in the short run. Moreover, at the
nonconventional end of the spectrum we hear protests from post­
Keynesian and Marxian economists who have little sympathy with the
endeavors of conventional economists. Many of them believe that the
sickness has progressed too far for the government to doctor the
economy in any significant way.
Economists, doubtless, still command respect outside their own
world. Their ability to talk about a subject as mystifying as economics
can inspire awe at dinner and cocktail parties. There is suspicion, how­
ever; and along with unemployment rates, the suspicion may be rising.
viii Preface
People have noticed that economists do not return unanimous, clear
and unambi ous answers to straightforward economic questions. The
gu
suspicion is well expressed in jokes like the following. Andropov asks
the head of the KGB, during the October parade, "Comrade, who are
those ys in the plain suits in the parade?" "Oh," the KGB head an­
gu
swers, "they are economists, comrade." And when Andropov raises his
eyebrows, he hastens to explain, "Just wait until we let them loose in
the US." In Poland, we are told, the Poles tell "economist jokes."
Strong and persistent disagreement among economists is discon­
certing. "Who is right?" the onlooker or the beginning student in eco­
nomics may wonder. "Is there not a way to decide who is right?" One is
tempted to pose the question to economists themselves, but their answer
does not satisfy.
Economists tend to be scientific optimists. They believe in their dis­
cipline, in its methods or tools, and in their ability to deal with major
questions. Among themselves they may speak in disparaging terms
about psychologists and sociologists, asserting that "They never agree
on anything, use imprecise methods, and have no measurements." They
then crown economics the queen of social sciences. Economists do
acknowledge disagreements, but these are not supposed to be funda­
mental. Differences in opinion occur, with respect to political issues es­
pecially, but a sharpening of the tools will eventually smooth those dif­
ferences out. Most important, economists insist that empirical tests will
determine who is right. Their intent is to reach agreement. Personal
and ideological differences may temporarily stand in the way, but, in
principle, economists are detached scientists who suppress their "nor­
mative" ideas ( on what ought to be) in favor of positive insights ( on
what is). They depict the acquisition of economic knowledge as the out­
come of a rational process little influenced by external factors, such as
political alliances or personal inclinations.
This picture of what happens within the world of economists is both
incomplete and misleading. For one, it does not account for the persist­
ence of disagreements between neo-Keynesian, monetarist, new clas­
sical, and other economists. Where are the empirical tests that should
arbitrate these disputes? Second, anyone who has had a chance to ob­
serve interactions among economists is likely to be struck by the passion
and commitment of their ar ments. Their communication frequently
gu
breaks do\\Ql, as students may discover when they attempt to be critical
inside the classroom. Persistent criticism often meets annoyance and is
Preface zx
dismissed abruptly. Detachment does not appear to be a common phe­
nomenon in the world of economists.
Third, the idealized picture does not do justice to the diverse styles of
argument in economic discourse. My own first encounter in the world
of economists was with econometricians who preferred to speak
"econometrics" instead of economics. Later, I met Dutch economists,
who tended to discuss economic issues in a critical way, and who were
wary of abstract economic theories. My US teachers did not mind
theory; as a matter of fact, they loved it. They were dead serious about
the assumption of rational behavior, which I had heard criticized so
persistently in Holland. When I suggested that the assumption is ab­
surd, as I had been taught before, I was told that I did not understand
economics. "Did you ever read Friedman's essay on Positive Econom­
ics?" they would ask. "Well, if you do, then you will understand that the
realism of an assumption does not matter."
Personal impressions like these suggest that the world of economists
is divided into separate spheres among which communication can be
difficult. The world of Dutch economists is not the world of US econo­
mists. But one can go further. The style of Chicago economists is not
the style of Harvard economists; the New School of Social Research,
where radical economists prevail, 1s another completely different story.
It is as if economists in these separate worlds speak different languages.
Some want to talk in terms of highly abstract models; others opt for his­
torical and institutional discussions. Some like mathematics, others do
not. Likewise, while one group of economists may worship a particular
analytic technique, other groups may resist or ignore the very same
technique.
In this book, I reproduce a series of conversations with new classical
economists and their opponents. The obvious way to read these conver­
sations is as a report on what today's leading macroeconomic theorists
are thinking about economic theory and the policy questions that domi­
n.ate both the profession and much of the public debate. On this level,
the participants in these conservations are remarkably lucid and en­
lightening. But an underlying theme is the exploration of the disagree­
ments and problems of communication in economic discourse. New
classical economics is a good focus for this purpose. It has taken the
world of macroeconomics by storm and recruited large numbers of bud­
ding economists. Its claims have penetrated the public domain, and the
ideas of Lucas and Sargent are frequently quoted in the general press.
x Preface
Much of the economic profession at large, however, remains to be con­
vinced. Neo-Keynesian economists and monetarists also (with whom
new classical economists are often associated) have produced a substan­
tial literature that is critical of new classical economics. The debate
evokes the image of two well-entrenched camps beleaguering each
other, neither willing to surrender. This image may be too strong, but
that we shall discover by talking with the main representatives of each
camp.
I am suggesting that the ways in which economists talk about what
they do is unsatisfactory and that a new perspective is needed. These
conversations can be used to support such a perspecti�e. Whereas econ­
omists generally address the logical characteristics of their theories
when they talk about economics, I propose to emphasize the more per­
sonal and communicative aspects of economics. The difference is between
asking "How can we appraise economic theories?" and asking "How do
economists argue?" or "Why do they disagree?"
According to my perspective, economics is an art of persuasion.
Economists argue to persuade their audiences of the significance of
their ideas or claims. My interpretation of the conversations at the end
will elaborate on the particulars of the process of persuasion. Here it
suffices to say that the emphasis is on the variety of arguments that
economists use and, above all, the role of personal judgment. I shall ar­
gue that economists are not at all wholly detached, but are committed
from the start to a point of view which they will then support with dif­
ferent types of argument. The persuasiveness of their arguments is
critical, and whether an argument persuades is often not a matter of evi­
dence or logic.
Economic discourse is flooded with articles, but most of them are lit­
tle read and quickly forgotten. Why did Lucas's work escape this fate
and have such a powerful impact? And why are neo-Keynesian econo­
mists unpersuaded? We can push the questioning further and wonder
why neither neo-Keynesian nor new classical arguments convince
Marxian economists. What are the dynamics of these intellectual inter­
actions? We shall see by listening to how they argue.
Most people answer questions by reading and deducing attitudes and
intentions from the written word. Why not talk directly with the people
whose intentions and judgments one is trying to guess? This radical
suggestion,,which I owe to my brother, I was able to follow, and the
reader is invited to join me as I talk with the main participants in the
Preface xi
debate on new classical economics. Let me briefly introduce them here.
Bob Lucas, Tom Sargent, and Robert Townsend will represent the
new classical economics. Lucas and Sargent are obvious choices; they
stand out as the most influential new classical economists. Townsend
speaks for the younger generation of new classical economists. The dis­
tinction between the younger and older generation also influenced the
choice of neo-Keynesian economists. James Tobin, Franco Modigliani,
and Robert Solow belong to the older generation of neo-Keynesian
economists, that is, the generation that dominated the world of econo­
mists during the '50s and '60s. The importance of each is universally
recognized. Alan Blinder will talk about the way he, a leading younger
neo-Keynesian economist, views the controversy. I include, perhaps
unjustly, John Taylor in this same category. Although he resists the
neo-Keynesian label and his work is very close to that of the new clas­
sical economists, he still produces neo-J(eynesian conclusions. Karl
Brunner represents the monetarists here, and David Gordon, the Marx­
ist economists. Leonard Rapping occupies a special position, partly be­
cause he worked with Lucas just before the take-off of new classical eco­
nomics, partly because of his radical views now. But mainly I am inter­
ested in his conversion from conventional to radical economics. His
story nicely illustrates the importance of personal and social factors in
economic discourse.
The conversations are reproduced more or less verbatim; the editing
has been kept to a minimum. The intention was simply to listen to the
ways in which economists talk about themselves, and about doing eco­
nomics. There is some structure in the questioning, but in general the
questions are adapted to the tone and direction of the conversation. The
introductory chapter gives a general overview of the issues that are dis­
cussed and will be of special help to students and those who are unfa­
miliar with the current debates in macroeconomics. Some technical
detail is included, but it can be ignored without losing the thread of the
exposition. The final chapter draws connections between what was said
and the perspective that I adumbrated above. A glossary gives some
brief information on the important names mentioned throughout the
text.
The conversations have been conducted with several purposes in
mind. Most will find the talks entertaining, for these are interesting as
well as important people. The informal tone may help to illuminate
what new classical economics is all about. Even those familiar with the