Barro and Grossman’s Dynamic Disequilibrium Macroeconomics1 Abstract During the 1970s, most macroeconomists developed “fixed-price” equilibrium models. Such models featured equilibria with rationing on markets. Not the dynamic of non-clearing markets. However, this was the original project. “Fixed-price” equilibrium models emerged out of Don Patinkin ([1956] 1965), Robert Clower (1965), and Axel Leijonhufvud’s (1968) interpretation of the General Theory (1936). All three considered that John Maynard Keynes (1936) was concerned with the dynamic of markets when individuals behaved under rationing constraints. From there, they all tried to provide microfoundations to a model capable of portraying disequilibrium adjustment processes occurring in capitalist economies. The question is whether “fixed-price” theorists abandoned this project. My paper shows that Robert Barro and Herschel Grossman did not. When elaborating the seminal “fixed-price” model (1971), they had a second step in mind. It was to build a dynamic disequilibrium model. It turns out to be very much in the spirit of Patinkin ([1956] 1965) and Clower’s (1965). I present its main features and discuss its scope. By doing so, I account for the richness and limits of the research line that Patinkin ([1956] 1965) and Clower (1965) initiated but barely explored. JEL Codes: B13, B21, B22, D45, D5, E12. Keywords: dynamics, disequilibrium, microfoundations of macroeconomics, Barro and Grossman. 1 Duke University, Department of Economics, Center for the History of Political Economy, e-mail: [email protected] 1 Introduction During the 1970s, most macroeconomists, including Robert Barro and Hershel Grossman (1971), Jean-Pascal Bénassy (1975), Jacques Drèze (1975), Jean-Michel Grandmont and Guy Laroque (1976), and Edmond Malinvaud (1977), developed “fixed-price” equilibrium models. Such models featured equilibria with rationing on markets. Not the dynamic of non- clearing markets. However, this was the original project. “Fixed-price” equilibrium models emerged out of Don Patinkin ([1956] 1965), Robert Clower (1965), and Axel Leijonhufvud’s (1968) interpretation of the General Theory (1936). All three considered that John Maynard Keynes (1936) was concerned with the dynamic of markets when individuals behaved under rationing constraints. From there, they all tried to provide microfoundations to a model capable of portraying disequilibrium adjustment processes occurring in capitalist economies. The question is whether “fixed-price” theorists abandoned this project. My paper shows that Barro and Grossman did not.2 While presenting the seminal “fixed-price” equilibrium model, Barro and Grossman (1971) showed a concern for disequilibrium dynamics. They argued that their “analysis did have implications for the appropriate specification of the forces making for changes in prices and wages” (1971: p. 84); they considered “a parenthetical example concerning the cyclical behavior of real wages” (1971: p. 84); and they referred to an article in which Grossman (1971) addressed “in details (…) the disequilibrium behavior of prices and interest” (1971: p. 85). All these remarks suggest that the 1971 model was just a stage in the process of developing a dynamic disequilibrium model. A conjecture which becomes even more plausible when reading the contents of Money, Employment, and Inflation (Barro and Grossman, 1976). Section 2.5 offered a “Dynamic analysis in the absence of recontracting”, Section 4.4.3 analyzed the “Dynamic effects of monetary policy”, Chapter 5 explored the dynamic of “Inflation and unemployment”, and Chapter 6 focused on “The Dynamics of aggregate demand” (1976: vi- vii). The challenge is to place dynamics at the heart of Barro and Grossman’s disequilibrium program of microfoundations. This requires to show that when writing the 1971 article, Barro and Grossman had a dynamic approach to disequilibrium economics. Then, I have to determine how Barro and Grossman modeled the operation of economic activities during the adjustment 2 Matthieu Renault, Goulven Rubin, and I express a similar viewpoint in a recent working paper, centered on French “fixed-price” theorists. 2 of markets. To overcome these difficulties, I place their disequilibrium program of microfoundations in its intellectual context. Emphasis is given to two sources of inspirations: disequilibrium macroeconomics à la Patinkin ([1956] 1965) and Clower (1965), and non- tâtonnement economics à la Frank Hahn and Takashi Negishi (1962). Besides, I analyze in depth “Market Disequilibrium in a Macro-Economic Context”, an unpublished manuscript written by Grossman in 1968, and Money, Employment, and Inflation (1976).3 In that process, two interpretations of Barro and Grossman’s microfoundational program are challenged. The first one asserts that Barro and Grossman either marginalized or abandoned Patinkin ([1956] 1965), Clower (1965), and Leijonhufvud’s (1968) project to model the dynamic of non-clearing markets. The extreme position is supported by Michel de Vroey (2016), in A History of Macroeconomics from Keynes to Lucas and Beyond. Whilst acknowledging that Barro and Grossman “found inspiration in reading Patinkin, Clower, and Leijonhufvud”, De Vroey argue that like other “fixed-price” theorists, they “were striving to produce an equilibrium result, a radically different project” (2016: p. 124). Roger Backhouse and Mauro Boianovsky (2013) are more nuanced in Transforming Modern Macroeconomics: Exploring Disequilibrium Microfoundations, 1956-2003. They acknowledge that Barro and Grossman (1976) extended their “[1971] model to encompass dynamics” (2013: p. 78). But this is not presented as a central element of their disequilibrium program of microfoundations. The treatment of “wage and price dynamics” would be just one extension “amongst” others of the 1971 model (2013: p. 72). The second interpretation concerns the analytical proximity between Patinkin ([1956] 1965), Clower (1965), and Barro & Grossman’s models. The three historians consider that it is limited. Barro and Grossman would use simply Patinkin ([1956] 1965) and Clower’s (1965) foundations – i.e., the spillover effect and the dual-decision hypothesis. By contrast, I argue that just like Patinkin ([1956] 1965), Clower (1965), and Leijonhufvud (1968), Barro and Grossman’s project was to model disequilibrium adjustment processes. They completed it by elaborating a disequilibrium model very much in the spirit of Patinkin ([1956] 1965) and Clower’s (1965). I present its main features and discuss its scope. By doing so, I account for the richness and limits of the research line that Patinkin ([1956] 1965) and Clower (1965) initiated but barely explored. 3 Juan Carlos Acosta found this manuscript in Franco Modigliani’s Papers, at Duke University. I would like to thank him for giving me access to it. 3 1. A dynamic approach to disequilibrium economics Just like Patinkin ([1956] 1965) and Clower (1965) or Hahn and Negishi (1962), Barro and Grossman adopted a dynamic approach to disequilibrium economics. They considered disequilibrium as a phenomenon occurring only during the market-clearing process. From there, the challenge was to provide microfoundations to a dynamic theory of spillover and to study the stability properties of Walrasian equilibrium. 1.1 Background Barro and Grossman initiated their disequilibrium program of microfoundations between 1968 and 1971, at Brown University.4 In 1968, Grossman wrote “Market Disequilibrium in a Macro-Economic Context”. In this research project (submitted to the National Science Foundation), he argued that the “existing macro-economic literature” (i.e., Walrasian macroeconomics à la Hicks) was inappropriate for “explaining and predicting the behavior of the actual economy.5 For the actual economy may rarely, if ever be in equilibrium” (1968: p. 5). According to Grossman, the bulk of actual exchange took place while individuals would like to buy and/or to sell more, given market prices. Hence the need to “analyze explicitly the behavior of macro-economic systems which [were] not necessarily or even typically characterized by market equilibrium” (1968: p. 5). Such an approach to macroeconomics already attracted Barro’s interest while he was in graduate school at Harvard (Backhouse and Boianovsky, 2013: p. 67). Thus, when arriving at Brown University in 1968, he engaged with Grossman.6 This resulted in a collaboration which culminated in the publications of “A General Disequilibrium Model of Income and Employment” (1971) and of Money, Employment, and Inflation (1976). 4 In the preface of Money, Employment, and Inflation (1976), Barro and Grossman explained that their “monograph [was] the outgrowth of ideas developed while [they] were colleagues at Brown University from 1968 to 1971. During that period, [they] became aware that [they] shared similar reservations about the weak foundations of conventional macro-economic analysis. [They] both felt the need for a substantial restructuring of these foundations, especially to deal adequately with the problem of exchange under non-market-clearing conditions” (1976: xi). 5 “The existing macro-economic literature deals primarily with analysis of the characteristics and stability properties of market equilibrium: that is, the condition of equality between aggregate supply and demand. The classic example is the Hicksian comparative static analysis of the values of dependent variables consistent with market equilibrium” (1968: p. 5). 6 In “Money, Interest, and Prices in Market