In Which Paul Krugman Drags Me Back into the Chicago Macroeconomic Isolation Discussion
Well, Paul doesn’t do anything. But he writes a good post, and I find myself procrastinating on other things…
: Trash Talk and the Macroeconomic Divide: “Paul Romer… maintain[s]… Chicago’s inward turn…
…was a defensive reaction to the sarcasm of Robert Solow…. [But] what was actually going on at MIT was nothing like the implacable opposition of Chicago fantasies. I was at MIT from 1974 to 1977… [when] Rudi Dornbusch and Stan Fischer were the preeminent teachers of macroeconomics… ‘Expectations and Exchange Rate Dynamics’… ‘Long-term Contracts, Rational Expectations, and the Optimal Money Supply rule’ that combined rational expectations with realistic limitations on wage and price flexibility…. an attempt to build bridges, not a war on Chicago….
But Chicago responded with trash talk. Lucas and Sargent (1978) talked a lot about the ‘wreckage’ of Keynesian economics, and…
For policy, the central fact is that Keynesian policy recommendations have no sounder basis, in a scientific sense, than recommendations of non-Keynesian economists or, for that matter, noneconomists.
And two years later, as Mankiw points out, this had descended into pure neener-neener, with Lucas asserting that:
At research seminars, people don’t take Keynesian theorizing seriously anymore; the audience starts to whisper and giggle to one another….
Lucas and Sargent… how did they respond in the face of strong evidence that their own approach didn’t work? Such evidence wasn’t long in coming. In the early 1980s the Federal Reserve sharply tightened monetary policy… openly… much public discussion… anyone who opened a newspaper… [was] aware…. [In all] Lucas-type models… such a… monetary change should have had no real effect [on employment]…. In fact… there was a very severe recession–and a dramatic recovery once the Fed, again quite openly, shifted toward monetary expansion. These events definitely showed that Lucas-type models were wrong…. But there was no reconsideration on the part of the freshwater economists; my guess is that they were in part trapped by their earlier trash-talking…
And Charles Steindel agrees with Paul K.:
: “It seems I must have finished at MIT a few weeks before Romer arrived, so my recollections predate his period…
…I agree with [Paul R.] on the [very high] intellectual influence of Stan and Rudi, and with Brad on Rudi’s intellectual style. What I find a bit baffling is the supposed major influence of Bob Solow’s comments on creating a more permanent rift. Bob wasn’t that heavily into money/macro in my day (for instance, he was still dealing with the last embers of Cambridge-Cambridge); of course, I’m aware of his later work and remarks, but I find it baffling to think that his comments would have such an impact (as to particulars about Bob and more technical work, one should observe that he was Mike Woodford’s advisor!). Interestingly, at one point (in 1975, 1976, or 1977–I can’t recall it more precisely) Lucas gave a seminar at MIT and went outside and lunched with the grad students on the ‘lawn’ (the wide median strip on Memorial Drive). Seemed like a nice enough gesture, and unique in my day.
The “Robert Solow and Frank Hahn looked at Bob Lucas funny” line is, without a doubt, one that is deeply embedded in the folk psychology of those whose thought Paul Romer is currently trying to understand. But that does not make it true. And I do not think it is.
What I do find interesting is Robert Lucas’s expressed rationale for his own abandonment of his own research program. One day he was a shrill and unreasoning advocate of his own information-imperfections are the only reason that monetary policy has real effects. The next day he was saying that even though the credible disinflations of Thatcher and Volcker were followed by big recessions much larger than any credibility-information-imperfections theory could account for, that nevertheless the temporal coincidence of the Thatcher and Volcker disinflations with the recessions of the early 1980s in Britain and the U.S. was simply coincidental–that something bad had simply happened to economy-wide total factor productivity at the same time.
In his Nobel Lecture:
Robert Lucas (1995): Monetary Neutrality: The importance of this distinction between anticipated and unanticipated monetary changes…
…is an implication of every one of the many different models, all using rational expectations, that were developed during the 1970s…. But… none of the specific models that captured this distinction in the 1970s can now be viewed as a satisfactory theory of business cycles…. Much recent research has followed the lead of Kydland and Prescott (1982) and emphasized the effects of purely real forces on employment and production…. General-equilibrium reasoning can add discipline to the study of an economy’s distributed lag response to shocks, as well as to the study of the nature of the shocks them- selves. More recently, many have tried to re-introduce monetary features into these models, and I expect much future work in this direction. But who can say how the macroeconomic theory of the future will develop? All one can be sure of is that progress will result from… formulat[ing] explicit theories that fit the facts, and that the best and most practical macroeconomics will make use of developments in basic economic theory.
And in his Professional Memoir:
Robert Lucas (2001): Professional Memoir: “In October, 1978—leaf season—the Federal Reserve Bank of Boston…
…sponsored a conference at the Bald Peak Colony Club in New Hampshire…. Though I did not see it at the time, the Bald Peak conference… marked the beginning of the end for my attempts to account for the business cycle in terms of monetary shocks…. Prescott presented a model… growth subject to stochastic technology shocks and my model of monetary shocks…. Later on… through numerical simulations… Kydland and Prescott found that the monetary shocks were just not pulling their weight: By removing all monetary aspects of the theory, they obtained a far simpler and more comprehensible structure that fit postwar U.S. time series data just as well as the original version…
The years 1978-1986 saw the first out-of-sample test by reality of both Lucas’s original theory that it was all information misperceptions driven by unanticipated monetary shocks and Lucas’s later allegiance to Prescott’s theory that it was all shocks to total factor productivity–recessions = “great forgettings”. Both Lucas’s monetary-misperceptions and Prescott’s real business cycle theory failed those tests catastrophically. Yet that–the world knocking on Lucas’s brain and saying: “BOB!! YOU ARE WRONG!!!!”–made no impression whatsoever, neither on what he thought he should write about in his Nobel Lecture nor what he should write about in his Professional Memoir.
What is going on?
One clue: Lucas does tell one story on himself in his Professional Memoir, of himself as an undergraduate taking a biology course:
The only science course I took in college was Natural Sciences II…. We read a modern anatomy text… selections from Darwin, Mendel, and others… an incomprehensible paper on embryology by Spemann and Mangold, and one by another German author called “The continuity of the germ plasm” that had mysterious overtones. But there was nothing spooky about Mendel’s genetic theories. They were clear, they made some kind of sense… you could work out predictions that would surprise you, and these predictions matched interesting facts. We did a classroom experiment with fruit flies… pooled the results. Our assignment was to write up the results… and compare them to predictions from a Mendelian model…. It was the first time I can recall ever working out the predictions of a scientific theory from its basic principles and testing these predictions against experimental evidence….
My friend Mike Schilder returned to the dorm from a weekend that had clearly not been occupied with fruit flies. The report was due Monday, and he asked to copy mine. I agreed, in part just to get some reaction to a report that I was very pleased with. Mike came back in half an hour, and told me: “This is a good report, but you forgot about crossing-over.” “Crossing over” was a term introduced to us to describe a discrepancy between Mendelian theory and certain observations. No doubt there is some underlying biology behind it, but for us it was presented as just a fudge-factor…. I was entranced with Mendel’s clean logic, and did not want to see it cluttered up with seemingly arbitrary fudge-factors. “Crossing over is b—s—,” I told Mike.
In fact, though, there was a big discrepancy between the Mendelian prediction without crossing over and the proportions we observed…. My report included a long section on experimental error… arguing that errors could have been large enough to reconcile theory and fact…. Mike… replaced my experimental error section with a discussion of crossing over. His report came back with an A. Mine got a C-, with the instructor’s comment: “This is a good report, but you forgot about crossing-over.”
I don’t think there is anyone who knows me or my work as a mature scientist who would not recognize me in this story. The construction of theoretical models is our way to bring order to the way we think about the world, but the process necessarily involves ignoring some evidence or alternative theories…. Sometimes my unconscious mind carries out the abstraction for me: I simply fail to see some of the data or some alternative theory. This failing can be costly and embarrassing to me, but I don’t think it has any effect on the advance of knowledge. Others will see the blind spot… keep what is good and correct what is not.
The kicker, of course, is that, as everyone who remembers their first-year biology at all knows, “crossing over” is an absolutely key part of the microfoundations of genetic inheritance–of the process of meiosis–and its discovery was a major part of the reason Thomas Hunt Morgan won the Nobel Prize in Biology in 1933.
Yet Lucas, to this very day, tells this story on himself and appears to have never bothered to dig any deeper to learn about the real microfoundations of inheritance. In 2001 he knew no more about chromosomal crossover than that “no doubt there is some underlying biology…” “seemingly arbitrary fudge-factors…” “entranced with Mendel’s clean logic… [I] did not want to see it cluttered up…” “crossing-over is b—s—…”