Solow on the sad state of macroeconomics

Further to my earlier post (19 February) on Arnold Kling, here is a message that Kling’s PhD thesis adviser – Robert Solow – delivered at Joe Stiglitz’ 60th birthday conference in 2003.

So how did macroeconomics  arrive at its current state? The answer might provide a lead as to where it ought to go. …. What emerged was not a good idea. The preferred model has  a  single  representative  consumer  optimizing  over  infinite  time  with  perfect foresight or rational expectations, in an environment that realizes the resulting plans more or less flawlessly through perfectly competitive forward-looking markets for goods and labor, and perfectly flexible prices and wages.

How could anyone expect a sensible short-to-medium-run macroeconomics to come out of that set-up? …. A model that rules out pathologies by definition is unlikely to help. It is always possible to claim that those “pathologies” are delusions, and the economy is merely adjusting optimally to some exogenous shock. But why should reasonable  people  accept  this? ….

When I was in advanced middle age, I suddenly woke up to the fact that my colleagues in macroeconomics, the ones I most admired, thought that the fundamental problem of macro theory was to understand how nominal events could have real consequences. This is just a way of stating some puzzle or puzzles about the sources for sticky wages and prices. This struck me as peculiar in two ways.

First of all, when I was even younger, nobody thought this was a puzzle. You only had to look around you to stumble on a hundred different reasons why various prices and factor prices should be much less than perfectly flexible. ….

The second peculiarity was that the path from nominal events to real consequences was not my idea of the fundamental problem of macro theory anyway. All along, I had been thinking … that the main problem was to understand why real shocks that took the economy out of some satisfactory equilibrium led to such a prolonged and sometimes unsatisfactory adjustment. …..

Robert Solow, “Dumb and dumber in macroeconomics“, 25 October 2003.

That is a small sample of the talk. Read all three pages at the link.

Robert Solow (born 1924) has a remarkable sense of humour.Here is one of my favourite quotes from him: “Everything reminds Milton Friedman of the money supply. Everything reminds me of sex, but I try to keep it out of my papers.”

HT Brad DeLong

 

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