The theory of new classical macroeconomics: a positive critique.
My career as a researcher started under the spell of Keynes. I took a sincere interest in the ultimate questions of economic theory relatively early, surprising even myself. Attending lectures on sociology and social philosophy at the faculty of humanities and social sciences, I almost ran away f...
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Format: | Book |
Language: | English |
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Springer
2020
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Online Access: | http://dspace.uniten.edu.my/jspui/handle/123456789/15343 |
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Summary: | My career as a researcher started under the spell of Keynes. I took a sincere
interest in the ultimate questions of economic theory relatively early, surprising
even myself. Attending lectures on sociology and social philosophy at the faculty of
humanities and social sciences, I almost ran away from the philosophy lectures. The
lack of firm answers and the different systems of thoughts contradicting and
overwriting each other were too disturbing and what is more even frustrating for
me. So, my interest turned to economic sociology first and then to economics itself,
hoping to find a disciplined science built on mathematics. I did believe that schools
of economic thoughts could harmonize in the most fundamental questions and have
only minor differences in their opinions. I could hardly realize that economic
theories suffer the same confusion. Moreover, having been armed with lectures
given by Endre Nagy, Mikl os Mar oth, and Gy€orgy Mikl os, all these impressions
made it obvious and nearly inevitable that my interest as an economist would turn to
economic theory and to the philosophy of economics. Today, I know that economic
theory for me, due to these early experiences, has become a thesaurus of philosophical
texts describing the economic aspects of processes going on in societies.
Of course, it is true as well that I realized only as an economist that the questions
raised by a branch of science itself cannot be answered on the grounds of its
methodology and theory. If we want to consider the objects and methods of
economics, the theory of marginal utility does not help us too much.
I made myself familiar with Keynes’ theory as an undergraduate student.
Fortunately, my first attempts were helped and controlled by professors who
required me to study the most important texts in the history of economic thoughts
very young. The impact that Keynes exerted on me was huge, since, on one hand, I
could become not only acquainted with the principles that had governed operative
economic policy for decades but also got an insight into the most significant and
most extensive theoretical debate of economics of the twentieth century. My early
interest was mainly focused on the points on which Keynes was opposed to the program of neoclassical economics that had been generally accepted up to that time.
Back then, of course, I regarded all the scientific debates as black and white and,
with all my strength, I tried to declare Keynes the winner, wherever and whenever it
was possible. I often entered into indirect criticism (while doing so, its master, Prof.
La´szl o Vı´gh, also helped and encouraged me), so the conflict I was inquisitive about
was soon relocated between Keynes and Milton Friedman. The orthodox monetarism
led by Milton Friedman was the first after-Keynes great theoretical system with
which I got acquainted thoroughly. I think, I made quite a good job, since a serious
antipathy to Friedman’s theory took shape in my mind and it still exists even today.
However, there is no doubt that I indulged in studying monetarism thanks to
Friedman.
Previously, I tended to evaluate new classical macroeconomics similarly, in
which I was encouraged by both the oversimplified sights formed on the new
classical group and the vulgarization of the new classical theory itself. I do not
know exactly what that turning point was after which I showed greater concerns to
Lucas and his group than to my former master, Keynes. It was roughly at the end of
my university years, so, as a fellow, I devoted my dissertation to new classical
macroeconomics. I remember well, my initial purpose was to write a monographic
comparison of Keynes and monetarism, but it was expected to be a monumental
mission, so a Ph.D. dissertation could not have been able to embrace all the results
I wanted to include. Finally, the dissertation was written on the monetary and fiscal
policy recommendations of new classical macroeconomics—and it soon has
become the basis of this book as well.
The genre of this book is comparative critical history of economic thoughts. It
must be noted that I was aware of neither the ultimate aim nor the path leading to it,
so I could not foresee where I would get to in the end. Curiosity was my only
guiding principle, and the book as a whole should be considered an explanatory
note to my readings. My interest was not governed by a single theorem to be proved
or criticized. I just wanted to know where the economists labeled as new classicals
came from and what they actually taught. Therefore, I based my investigation on
the original texts, so the first level of comparison was made between these texts and
their commentaries (i.e., reviews on economic theories). Of course, the comparison
emerged in the context of the history of economic thoughts as well, since I had to
realize at an early stage that, for example, either the Phillips curve elaborated by the
new classicals or their comprehensive suggestions of economic policy can be
judged only by comparing them recurrently with the theory of Friedman or Keynes.
Moreover, I did not want to write a reading log. I wanted to avoid a simple
reformulation of the theory of new classical macroeconomics, so I tried to carry
out a critical analysis. During my work I was mainly supported by the methodological
principles set out in Chap. 1. My determination to avoid writing a mere
summary explains why I discussed topics (albeit, sketchily) such as automatic fiscal
stabilizers or the conceptual differences between fiscal consolidation and structural
reforms, to which new classicals had not paid any attention no matter how close
these issues were to the problems being investigated. This volume consists of seven chapters succeeding in birth order. Chapter 1 is
the only exception as it was written only after the logical structure of the book had
been ready. I had to face the recurrent critical remark made in debates that
reproached me with the lack of a well-articulated methodological introduction.
Although my declared purpose from the very beginning was to exert a constructive
critique against new classical macroeconomics, the clarified methodological principles
on which this book had been built were missing; I could give account of these
fundamentals only in the course of private conversations at best, being satisfied
with the belief that my interlocutors were familiar with them. The methodological
and philosophical system detailed in Chap. 1 that later became the most important
and interesting part of the book for me took form during these conversations. The
ultimate goal of this chapter was to identify the characteristic aspect of mainstream
economics and to clarify its methodological grounds, setting the discussion and the
evolution of the methodology of (mainstream) economics in the context of general
history and history of science. To my great surprise, the fundamental differences
between orthodox monetarism and new classical macroeconomics emerge even at
the level of the methodological principles.
Chapter 2 turns directly to the new classical doctrines. Although mostly implicit
doctrines were examined in Chap. 3 (for instance, when discussing the conception
of new classical labor market), rational expectations hypothesis being the most
often cited and the most influential new classical theorem was studied here.
Underlying assumptions and theoretical consequences were also reviewed here.
These investigations were made especially gripping by the direct intention of new
classicals to give a realist description of processes and mechanisms observed in
reality. This circumstance induced and justified me to compare new classical
macroeconomics with reality. It is argued below that estimations of market participants,
since agents do not have access to information the theory requires and do not
possess the necessary methodological skills either, can meet the requirements that
were specified by Muth (1961) only if agents are supported by an institution in a
central position. It could be, as a typical example, an inflation targeting central
bank—so, after all, rational expectations hypothesis can effectively underpin this
monetary policy regime. This chapter is very precious for me, since it is based on
my first important publication.
Chapter 3 continues reviewing the fundamentals. Here, we can get an inside
view of the underlying logic that determines the new classical way of thinking. We
are going to be forced again and again to realize that the existence of (general)
equilibrium is based on a set of fragile assumptions among which also the equilibrium
itself stands as the most objectionable. The most of Chap. 3 was uncertain in
the beginning. The text is based on notes that were made in the course of some
fundamental reviews of John Weeks’ “A Critique of Neoclassical Macroeconomics.”
Since Weeks laid his emphasis on other aspects and details than I had to
concentrate, these notes advanced to be a chapter on their own as time was passing
by. Weeks mainly focused on the analysis of aggregate reproduction while I was
rather interested in the theory of macroeconomic cycles and countercyclical economic
policies. I supposed (and suppose even today) that the most fundamental discrepancy separating rivaling macro-theories is determined by how these theories
explained and answered the problem of business cycles. My interest in the theory of
business cycles may be explained by the fact that the theories scrutinized below
could and can start governing operative economic policies.
I could hardly deny the fundamental effects Weeks had on the tone and the
methodology of this work. I think, Weeks’ Critique can be referred to as the most
essential and significant critical treatise on mainstream economics. Its impacts and
importance are hard to estimate—moreover, in stylistic terms, it is an outstanding
manifestation of the collection of the briefest and most disciplined works in
economics. But, at the same time, it is a difficult and ponderous piece of reading.
It is only for the third or fourth time when the inter- and intra-textual relations and
the limitations of the reasoning can be revealed. The robust text of Weeks makes us
feel as if everything that is possible has been told about neoclassical-mainstream
economics. Actually it is almost completely true since it is very difficult to find
those points where the issues discussed could be complemented. Weeks’ work is
indispensable: I believe that it is almost impossible to write about new classical
macroeconomics without having Weeks’ monograph among the references: breaking
away from his works could have only impaired my efforts and I would have
seemed to reinvent the wheel. I did my best to avoid simply echoing Weeks’
discussion and I think I managed to do so. It would have been difficult indeed to
refute his thoughts, so I had to agree with him and, wherever it was necessary for the
sake of my reasoning, I strived for abundant completions.
Chapters 4 and 5 make up the central part of the book. After the necessary
theoretical preliminaries had been set out, new classical thoughts on monetary and
fiscal policy could be analyzed and evaluated here for the first time. I was deeply
biased by the conventional view on monetarism, according to which fiscal policy is
only of secondary importance for mainstream economics, while monetary policy is
assumed to have potential only in setting the price level. I think, if this notion was
relevant at all, it was true only of Friedman’s system at best. For him, macroeconomic
systems settle in stable (long-lasting) equilibrium state, as his accounts on
the natural rate of unemployment highlight, from which they can be dislocated
through monetary policy interventions only temporarily and only with considerable
detriments and avoidable-unnecessary costs. I had to fumble in the dark for a while
when scrutinizing the countercyclical potential of monetary policy on these
grounds. In the beginning, I showed some inclination to think that Friedman had
stressed the countercyclical impotency of monetary policy (and, as a consequence,
of fiscal policy) through these doctrines of his—but, later, it became evident that
business cycles originate in economic policy, as argued implicitly by him. Actually,
Friedman talked about the possibilities of monetary policy in growth enhancement—
however, it is completely and fundamentally impotent in these terms so
the only consequences of its efforts are the business cycles it generates. So, the best
option of monetary policy is to specify its goal of increasing the quantity of money
at an appropriate rate—and, moreover, fiscal policy should abstain from all of these.
The new classical system is much more elaborated. It is a significant step forward
that the emergence of business cycles is allowed now, so the countercyclical potential of economic policy can be a sensible question. While new classical
macroeconomics could not abandon the traditional and common interpretations
when evaluating monetary policy, giving room for monetary policy only in price
level setting at a maximum, new classical doctrines regarding countercyclical fiscal
policy (its scope and potential) seemed to be mainly unclarified to me. On the
grounds of the permanent income theory specified under rational expectations
hypothesis or the Barro–Ricardo equivalence, it is really possible to declare that
fiscal policy is predestined to be impotent in new classical macroeconomics as well.
However, it has to be realized how thorough the theory is when considering the
assumptions and conditions necessary for this ineffectiveness. The ineffectiveness
of fiscal policy is dependent upon tight conditions in the new classical theory, and,
in this context, underlying this conditionality proved to be the greatest merit of the
school.
Chapter 6 summarizes some conclusions that were highlighted by new classical
macroeconomics but were outside the core of the theory. Such a topic is the
problem of economic policy credibility to which we get starting from the equivalence
theorem. Credibility is discussed with Reaganomics as a background, the
interpretation of which can be found in the literature though, but it was worth
stressing the relations to the equivalence theorem as well. It is also Chap. 6 where a
topic analyzed previously recurs: it is inflation targeting, scrutinized in Chap. 2
before, with regard to the strong definition of rational expectations hypothesis.
Here, some technical issues emerge such as strict inflation and output-gap targeting
or flexible inflation targeting. I made efforts to stress the advantages of economic
policy offered by flexible inflation targeting and to lay those features of the system
in the limelight that can be evaluated and understood more easily with the support
of new classical macroeconomics or rational expectations hypothesis.
Chapter 7 gives a short summary and raises some further questions to which I
could not even try to find ultimate and satisfying answers, not only for the reason
that the chosen topic of this work or certain size constraints would not have made it
possible at all. These are problems the solutions to which are the question of faith
rather than the question of proofs or reasoning. |
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