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I have always regarded Competitive General Equilibrium analysis as akin to the mock-up an aircraft engineer might build. My amazement in recent years has accordingly been very great to find that many economists are passing the mock-up off as an airworthy plane, and that politicians, bankers, and commentators are scrambling to get seats. This at a time when theorists all over the world have become aware that anything based on this mock-up is unlikely to fly, since it neglects some crucial aspects of the world, the recognition of which will force some drastic redesigning. Moreover, at no stage was the mock-up complete.⁶⁶
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The Economic Jourmal, 91 (December 1981), 1036-10g2
Printed in Great Britain
REVIEWS
A Neoclassical Analysis of Macroeconomic Policy. By Michael BeensTocK. (Cam
bridge: Cambridge University Press, 198o. Pp. xii +231. ^18.50
I have always regarded Competitive General Equilibrium analysis as akin to the mock-up an aircraft engineer might build. My amazement in recent years has accordingly been very great to find that many economists are passing the mock-up off as an airworthy plane, and that politicians, bankers, and commentators are scrambling to get seats. This at a time when theorists all over the world have become aware that anything based on this mock-up is unlikely to fly, since it neglects some crucial aspects of the world, the recognition of which will force some drastic re-designing. Moreover, at no stage was the mock-up complete; in particular it provided no account of the actual working of the invisible hand. Yet here we are, and it is not surprising that Mrs Thatcher is reported as accusing Sir Keith Joseph of being 'just an economic theorist'. If that is how theorists proceed, we might just as well rely on guts and brawn. Of course, it should be remarked that the Keynesians were not much better.
If economists are to be useful, so it is often argued, they must give advice; and if that advice is to be taken seriously, it must be given with complete conviction. Certainly many live up to this precept. One can only hope that things are
otherwise in medicine!
In this context, Mr Beenstock's book has the right aim: to give a theoretical
(that is a logically coherent) account of the new (Neoclassical) Macro-
economics. In this he succeeds only partially, and not at all with any rigour.
He does not possess the theoretical skills of, say, Lucas, and so it happens
that on occasions he actually sells the Neoclassicals short. Indeed he lacks
the theoreticians' sense of orderliness and will often modify his account in
an ad hoc and arbitrary manner (e.g. when he suddenly lets disposable income
be an argument of what had hitherto been a Walrasian demand function)
His knowledge of contemporary theory is neither deep nor wide (e.g. he claims
that an economy in rational expectations equilibrium is Pareto efficient), nor
has he penetrated beyond the first layer of any argument about economic
policy (e.g. when he believes that there is nothing for government to do in
a Pareto-efficient world). He ties himself to a simple log-linear model which
is far more special than is required for some of his comparative statics exercises
and far too special to sustain any general dynamic propositions. Indeed he
finds it difficult to distinguish between example and theory and between
assumptions and propositions. Here is an instance: 'However our main
theoretical conclusions that discretionary macroeconomic policies are on the
whole undesirable rests on two crucial propositions which are (a) in the long
run excess demand will be eliminated and (b) expectations regarding future
macroeconomic aggregates are formed rationally...if either of these assumptions
are invalid...' (p. 3 my italics). A few lines on he tells us that 'this book is
[1036 ]
[DECEMBER 1981] BEENSTOCK MACROECONOMIC POLICY1037
concerned with the demonstration of these two propositions' (my italics). A truly
remarkable promise which of course is not fulfilled. Lastly at this general
level, it must be noted that Beenstock has no stomach for devil's advocacy
Thus he never considers any of the considerations and arguments which
could be advanced against his approach more than in passing. For instance,
he does not stop to consider whether the labour market is really like a market
for fish, one segment of which might be monopolised. This led me on occasions
to suspect that Beenstock was not at all engaged in the advocacy of a view
but rather in its description. I had to re-read the first and last chapters to
convince myself that this was not the case
Thus, from the point of view of economic theory, this is a slight, untidy
book which says little that has not been said before and which settles nothing
However, it does have some virtues. It is written in a lively style (with, how
ever, lots of 'hopefully'); it has verve and enthusiasm, and the exposition
of known concepts and ideas is often very good (e.g. rational expectations)
But its main danger is this: it will be pretty widely accessible. This in turn
should ensure that more people will learn on just what sort of flimsy foundations
current slogans are based; but it might not. The unwary and the student
might actually become 'believers', especially since at one stage we are given
undocumented regressions for scientific versimilitude. So the following note
form remarks are offered in the hope that they may cause some to hesitate
before they leap
(a) In general only 'large' economies can be perfectly competitive. There
seems to be extremely strong evidence that western industrial economies are
not large in this technical sense, at least not so far as many markets are
concerned. Now look at the supply equations (e.g. pp. 172, 714) and at the
interpretation of Y (p. 6o and elsewhere). Ask: what would happen to
Beenstock's propositions if output decisions actually depended on what people
think they can sell at various prices? Next notice that perfect competition
is implicit in only some of the equations we are offered. Thus on page 60, for
instance, it appears that agents actually change prices (not the auctioneer)
But then it is strange that in equation 3.4 prices change because demand
differs from 'capacity output'. Price adjustment equations in this book are
completely ad hoc and explanations when offered are not consistent with the
underlying theory. The equations also, for the most part, are highly implausible,
particularly those for money wage changes
(b) However, all the price adjustment equations have this common feature
prices will continue to change as long as the economy is not in its unique
Walrasian equilibrium in which expectations are not systematicallydisappointed
I have not been able to ascertain whether Beenstock thinks of these processes
as being a tâtonnement-he certainly does not allow agents to recalculate their
optimum plans when, in disequilibrium, they are disappointed. In any case,
the examples are mostly so chosen as to ensure convergence to the unique
equilibrium. (Sometimes the proof of this is not penetrable, e.g. p. 87 where
he claims that some coefficients in an equation are all positive.) Readers who
go so far as to accept the underlying model should try increasing the lags and
THE ECONOMIC TOURNAL
DECEMBER
perhaps introducing some simple non-linearities before they agree that Been-
stock has proved that the invisible hand does it all
(c) Beenstock is much taken with Rational Expectations-he often refers
to a Rational Expectations Revolution. He gives a good account of the macro
manifestation of this theory (but does not discuss Grossman or Radner or
Jordan, or any of the General Equilibrium manifestations). However, in
application and general comment, he often gets things wrong
(i) It is notorious that rational expectations equilibria are in general
not unique. One cannot in general argue that all rational expectations
paths of an economy, except one, are explosive (as does Beenstock). For
instance, it has been shown in the growth literature (with many capital and
consumption goods), that the steady state is not in general a saddle point
(ii) There is no evidence that God made a linear world. Even if he had
done so, a root of absolute value greater than one in a linear difference
equation does not mean that the variable goes to infinity in finite time
It can be shown in certain (non-linear) models that there is a rational
expectations equilibrium with a constant stock of money and always
rising prices, which asymptotically go to autarky (no trade). No one has
any reason to change his views. Beenstock's remarks on boundary con
ditions (pp. 148 et seq) are not generally applicable. The remark of
Minford's that one never observes exploding prices, which is quoted
with approval, seems factually false but also of no relevance to the point
at issue. One wonders whether Beenstock has ever observed an economy
in infinite time rational expectations equilibrium. One further notes that
there are also examples of rational expectations cycles
(iii) Beenstock's remarks on bootstrap equilibria are quite false and suggest that he has not thought very deeply on this matter. In any case,
Azariadis has produced a rigorous example of a rational expectations bootstrap cycle based on sunspots (or any economically intrinsically irrelevant stochastic process). The reader should try out Beenstock's argument on the arms race-or for that matter on education.
(iv) No analysis with quantity expectations is offered
(v) Rational expectations do not overcome the lack of Arrow-Debreu
markets. Creating markets involves set-up costs and, in general, there
is no reason to suppose that all socially desirable markets will be set
up (e.g. because of complementarities). Hence in general, Rational
Expectations equilibria are not Pareto-efficient (there is a large literature
on this). Of course there is no reason to suppose that any equilibrium of
whatever sort is socially optimal
(vi) Even on Beenstock's own terms, the economy may exhibit a funda-
mental class of externalities which he does not discuss. That is that one
agent's decision to buy may improve the lot of other agents who are
restrained in their selling. This has recently been discussed by Diamond
but of course it is an externality Keynes had much in mind. In any case,
Beenstock's Welfare Economics approach to macro-policy is not based
on precise, detailed, or convincing theorising.
1981]MALINVAUD: PROFITABILITY AND uNEMPLOYMENT
1039
I fear that I could continue in this vein for a long time. My copy of the
book has marginal comments (and exclamation marks) on almost every page
But let this summing up suffice
(1) There exist logically coherent descriptions of a Walrasian economy in
Rational Expectations equilibrium. In general, there is a whole set of such
equilibria. This set has the comparative statics properties claimed by Beenstock
and others in their exercises. There exists at the moment no coherent account
of an economy in Rational Expectations equilibrium when there is imperfect
competition and monopoly power (e.g. Trade Unions)
54
(2) The Welfare Economics of Walrasian Rational Expectations equilibria
is not that of the textbook. The Welfare Economics with asymmetric infor-
mation and, in particular, market-dependent information is not at the
moment developed. The same applies to economies where agents have market
power.
(3) There is no theory of how Rational Expectations Equilibria come to
be established. There are examples where this occurs and examples where it
does not. In studying these matters, one must not mix tâtonnement with path:s
on which actual transactions occur. Beenstock's tátonnement interpretation of
the Phillips' curve is for the birds and he is not followed in this by many
monetarists.
(4) The crucial questions are: is the Walrasian representation adequate?
and even if it is, have we strong grounds for supposing that there is convergence
to equilibrium? In my view, the answer to both questions is 'No'. Beenstock
at no stage provides the proper discussions; he relies on examples. Particularly
interesting is the possibility that economies might get stuck in unsatisfactory
equilibria which are not Walrasian. Beenstock does not consider this since
by fiat there cannot be equilibrium when agents are quantity constrained
At the end of all this, my advice is this: read the book if for no other reason
than to see the enthusiasm of the converts and its slender foundation. As for
myself, having worked mostly in Neoclassical Economics, all I can say is
'this is not what I meant, this is not what I meant at all'
F. H. HAHN
University of Cambridge
Profitability and Unemployment. By EdmonD Malinvaun. (Cambridge: Cambridge
University Press, 198o. Pp. viii + 108. 55.95
In the 195os and early 1g6os economic policy debates concentrated mainly upon
the mechanics and tools of Keynesian demand management. From the late
1g6os rising inflation and unemployment encouraged doubts about Phillips
curve assumptions and governments turned increasingly to incomes policies and
demand restraint. Problems intensified after the oil crisis of 1973 and there was
growing concern not only about increasing inflation, but also about declining
profitability. Professor Malinvaud feels that the new policy focus which has
emerged has not resulted from or been assisted by theoretical economists
(monetarists are presumably excluded from this category). Present economic
https://ufocatchme.exblog.jp/10147554/
Azariadis, C.,Intertemporal Macroeconomics, Blackwell, 1993
Sargent, T.J., Dynamic Macroeconomics Theory, Harvard, 1987
Roger E.A.Farmer, Macroeconomics of Self-fulfilling Prophecies 2nd ed, MIT press 1999
Stokey, N.L. and R.E. Lucas, Recursive Methods in Economic Dynamics, Harvard, 1989
https://en.m.wikipedia.org/wiki/Costas_Azariadis
Constantine Christos "Costas" Azariadis (Greek: Κώστας Αζαριάδης; born February 17, 1943) is a macroeconomist born in Athens, Greece. He has worked on numerous topics, such as labor markets, business cycles, and economic growth and development. Azariadis originated and developed implicit contract theory.
Azariadis studied engineering in the National Technical University of Athens before earning his MBA and PhD in economics at Carnegie Mellon during 1969-73. His doctoral dissertation at Carnegie Mellon was advised by Edward C. Prescott and Robert Lucas. His dissertation won him the Alexander Henderson Awardfor excellence in economics, an award also won by Nobel Laureates Oliver Williamson, Dale Mortensen, Finn Kydland and Edward Prescott.
He was an assistant professor at Brown during 1973-76, a visiting researcher at Hebrew University in 1977, then at University of Pennsylvaniaduring 1977-92. He was appointed professor at UCLA in 1992. On July 1, 2006, he was made Edward Mallinckrodt Distinguished Professor in Arts & Sciences at the Economics Department of Washington University in St. Louis while retaining a position at UCLA as a professor emeritus. The same year, he became a research fellow at the Federal Reserve Bank of St. Louis. Azariadis was elected a Fellow of the Econometric Society in 1989.
Azariadis originated implicit contract theory. He proved that wage rigidities may represent a mechanism by which firms insure workers against risk, thus showing that wage rigidity was not necessarily evidence in favor of the Keynesian theory. Later Azariadis demonstrated that there are ways in which uncertainty is structured that imply that wages cannot perform their risk insurance role and simultaneously produce full employment. This result aided the Keynesian theory by providing a coherent microeconomic explanation of unemployment.
Azariadis formalized and developed the idea of poverty trap. He showed that there would be multiple equilibria arising from threshold externalities in the overlapping generations model, and some of the equilibria are associated with long-lasting poverty. This novel idea envisioned the possibility of convergence clubs.
Azariadis contributed to clarifying the concept of sunspot equilibrium developed by David Cass and Karl Shell. He generalized it in the name of "Self-fulfilling prophecies" which consist of a belief system consistent with the rational expectations equilibrium. By doing that, he could demonstrate fluctuations can emerge endogenously in a neoclassical model of equilibrium in which prices are flexible and expectations are rational.
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