Theory to the rescue of the macroeconometric models: Edmond Malinvaud’s alternative view on the search for microfoundations

Matthieu Renault1

Abstract: In this paper, I explore Edmond Malinvaud’s alternative view on microfoundations along with his conception of the methodology of macroeconomics. I show that he deeply committed to the methodology and the practice of macroeconometric modeling. Accordingly, and far from the view endorsed by the New Classical Economics, Malinvaud regarded the search for microfoundations as bounded to and oriented towards the needs of the large-scale macroeconometric models. At last, I show that this commitment did not contradict his involvement in the disequilibrium theory during the 1970s and the 1980s, for his contributions were also oriented towards the needs of the large-scale macroeconometric models.

Keywords: Microfoundations of Macroeconomics; Edmond Malinvaud; Macroeconometric Modeling; Disequilibrium Theory; New Classical Economics.

JEL codes: B22; B23; B31; B41

Acknowledgments: Research funding from the Fundação de Amparo à Pesquisa do Estado de São Paulo (FAPESP) is gratefully acknowledged. I am also grateful to Pedro Garcia Duarte for careful readings and helpful comments. I thank the members of the History and Economic Methodology seminar (FEA-USP) along with those of the Albert O. Hirschman seminar (CES, Paris 1) for comments on earlier drafts of this paper. The usual caveat applies.

1 Postdoctoral Fellow at the University of São Paulo (FEA-USP); contact: [email protected]

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Can we understand macroeconomic phenomena without connection to underlying microeconomic phenomena? Of course not, but it does matter to know exactly why and to wonder about the extent of the necessary links between these two levels of analysis. (Malinvaud 1991, 26)2

1. Introduction

Since Weintraub’s (1977, 1979) seminal works, microfoundations has ever been a topic of great interest in methodology (Janssen 1993; Rizvi 1994; King 2012). In the recent years, research in the history of macroeconomics has also paid an increasing attention to the search for microfoundations as the founding act of modern macroeconomics (Duarte and Lima 2012; Hoover 2012; Backhouse and Boianovsky 2013; De Vroey 2016). Unsurprisingly, this research points out that our representation of microfoundations was profoundly influenced by the standard narrative.3

According to the standard narrative, the prevailing mainstream in macroeconomics (either called “Neoclassical Synthesis” or “Keynesian consensus”) collapsed during the 1970s as a result of the search for microfoundations. The standard narrative usually presents that collapse along a two-stage process. It mentions at first that a few theoreticians had cast severe doubts on the theoretical foundations of the Neoclassical Synthesis from the mid-1960s (Clower 1965, Leijonhufvud 1968, Friedman 1968, Phelps 1968). It then stresses the macroeconomic disturbances from the early 1970s that came to substantiate these previous objections. In particular, the stagflation phenomenon invalidated one of the pillars of the Neoclassical Synthesis, i.e., the Philips Curve, thus giving much credit on Friedman’s (1968) claims on its instability. The theoretical foundations of the Neoclassical Synthesis thus became a major concern within the profession, and many macroeconomists embarked on the search for microfoundations from the early 1970s. The challenge at stake was to determine to what

2 This and all subsequent translations from Edmond Malinvaud’s publications in French are my own. 3 The standard narrative is the contemporary macroeconomists’ account of the history of macroeconomics from WWII until nowadays (e.g. Mankiw 1990; Snowdon, Vane, and Wynarczyk 1994; Blanchard 2000). For a complete presentation, see: e.g. Duarte (2012), Hoover (2012), or Sergi (2016).

2 extent macroeconomic theory could be said consistent with microeconomic theory, that is, Arrow-Debreu general equilibrium theory. The collective challenge of evaluating theoretical foundations of the Neoclassical Synthesis and providing alternative micro-foundations for macroeconomics happened to matter more than the doctrinal divisions among the protagonists involved in the search for microfoundations. The disequilibrium theory thus faded away in macroeconomics as a result of its incapacity to provide micro-foundations for its key- assumption: the fix-prices. For this reason, the search for microfoundations mainly concerned the New Classical Economics and the New Keynesian Economics, which fierce but fruitful opposition over two decades successfully resulted in a better-founded mainstream from the mid-1990s, that is, the New Neoclassical Synthesis and the DSGE models. There is a good part of truth in this narrative, to be sure, and the latter received strong support within the profession at the time. For instance, this was the bottom line in Alan Drazen’s influential review of the search for microfoundations.

Explanations of macroeconomic phenomena will be complete only when such explanations are consistent with microeconomic choice theoretic behavior and can be phrased in the language of general equilibrium theory. (Drazen 1980, 293)

The standard narrative is yet far from being comprehensive. Also, research in the history of macroeconomics has departed from the latter on a few significant points. First, it stresses the decisive role of the New Classical Economics that succeeded in imposing a particular conception of microfoundations and transforming macroeconomics accordingly. This successful crusade has been described at length (Hoover 1988; De Vroey 2016). Second, it points out that the New Classical Economics’ crusade did not happen without resistance within the profession. That resistance hardly can be represented by the New Keynesian Economics, which accepted Lucas’s conception of microfoundations and postulates but considered marginal departures from either rational expectations or market-clearing (De Vroey 2016). Not to even mention heterodox economics, the New Classical Economics encountered significant resistance from the very core of the discipline. On the one hand, it came from macroeconomists associated with the previous mainstream such as James Tobin, Robert Solow, among many others (Renault 2018). On the other hand, it came from General Equilibrium theoreticians such as Frank Hahn, Alan Kirman, among many others.

The second kind of resistance is certainly more problematic for the standard narrative, which

3 takes for granted the New Classical Economics’ pledge to reconcile macro with microeconomics thanks to their common adherence to General Equilibrium theory. In this respect, Hoover (2012) purposefully labeled the latter approach “Representative-Agent Program” in order to emphasize how this key-assumption, used to get round aggregation effects, is antithetic with general equilibrium theory (e.g., Kirman 1992). Besides, Hoover (2001, 2010, 2012, 2015) grasps the very nature of New Classical Economics, that is, a reductionist approach that promoted eliminative microfoundations. In other words, this approach aims at discarding any particular autonomy to the aggregate level, that is, at negating the representation that had prevailed in macroeconomics back to his founding fathers, namely Frisch and Keynes.

If these developments succeed, the term “macroeconomics” will disappear from use, and the modifier “micro” will become superfluous. We will simply speak, as did Smith, Ricardo, Marshall, and Walras, of economic theory. (Lucas 1987, 107– 8)

According to Hoover (2012: 19), the most significant defect of the standard narrative is to minimize, if not dismiss, the two other microfoundational approaches that were competing with the New Classical Economics throughout the 1970s and the 1980s. For the sake of clarity, I will label them alike the “General-Equilibrium program” and the “Aggregation program.” The General-Equilibrium developed a theoretical approach based on Hicks’s (1939) method. It consisted in elaborating (Walrasian) dynamic macro-models in which time is broken and unusual factors are taken into account (account expectations, incomplete markets, and various adjustment processes) in order to address Keynesian issues, such as the concept of involuntary unemployment. From the early 1970s, many theoreticians developed that framework to reconcile microeconomics with macroeconomics and contribute to the search for microfoundations. The most influential approach was the disequilibrium theory, which encompassed aggregated and disaggregated models. As formerly noted, the standard narrative only refers to the latter approach as an inglorious predecessor of the New Keynesian Economics, for it failed to provide microfoundations for fix-prices. The disequilibrium theory did not yet fade away with the rise of New Keynesian Economics in macroeconomics. It turned out to be a fruitful and multifarious approach throughout the 1970s and the 1980s, including many dynamic models and several econometric applications.

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The second microfoundational approach, namely the Aggregation program, consisted of nothing but the methodology and the practice of macroeconometric modeling, embodied at best by Lawrence Klein’s achievements such as the Brookings model. Individuals were not ignored but replaced by aggregates for macroeconometric modeling. These aggregates were not taken uncritically, and the ultimate goal was to disaggregate macroeconometric models after a top-down process. This approach of microfoundations existed long prior to the 1970s.4 However, the difficulties encountered by the large-scale macroeconometric models in terms of forecasting in the 1970s stimulated this microfoundational approach. In particular, Klein’s as other macroeconometricians’ main challenge in that decade was to develop the supply-side (e.g., Goutsmedt 2017). The standard narrative omits this second microfoundational. This is quite surprising provided that the Kleinian macroeconometrics really seems to be its “bête noire”, for it “stigmatizes large-scale macroeconometric models as unidentified, non- structural reduced forms that substitute correlation for causation.” (Hoover 2012: 45)

According to Hoover (2012: 54), the “Aggregation” and the “General Equilibrium” programs had much in common. First, he suggested that these programs were not entirely separate and had many connections among them; but this could also concern the Representative-Agent program. Second, he claimed that both microfoundational programs promoted non-eliminative microfoundations. In a nutshell, they acknowledged the prehistory of microfoundations that did not call into question the autonomy of that discipline, in clear opposition to the New Classical Economics this time. However, Hoover (2012: 54) concludes in pointing out the peculiarity of the “Aggregation program,” which was the only one to seriously deal with practical problems that arise in empirical macroeconomics and, for this reason, must come to terms with aggregation. This point was so crucial to Klein that he came to define the distinction between micro- and macroeconomics in terms of aggregation (Hoover 2012: ibid.)

In that context, the case of Edmond Malinvaud is relevant for his well-known commitment to the disequilibrium theory since The Theory of Unemployment Reconsidered (Malinvaud 1977). Moreover, it is worth noting that he continued to contribute to this approach afterward, thus taking part in disequilibrium dynamics (Plassard, Renault, and Rubin 2019). The case of

4 This approach even inspired many of the famous contributions to the large-scale macroeconometric models, such as Duesenberry’s (1949) and Friedman’s (1957) modeling of the consumption function instantiated by Hoover (2012: 41-44).

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Malinvaud is also relevant for his well-known commitment to the Cowles Commission methodology in econometrics since Statistical Methods of Econometrics ([1964] 1966). In this respect, it is also worth noting that he was deeply involved in applied macroeconomics and the setting-up of macroeconometric models all over his career in the French administration, in particular at the INSEE (Armatte et al. 2016). Thus, Malinvaud’s twofold and contradictory commitment shall come to terms with his view on microfoundations that was, to be sure, an alternative one. Clarifying his conception is the purpose of this paper. For doing so, I will largely rely on his writings about the methodology of macroeconomics in which he justified, by and large, his opposition to the New Classical Economics’ microfoundational program.5

I shall speak today on methodology in macroeconomics, a subject about which I forged a few strong convictions, progressively throughout the years by my experience of applied macroeconomics and of research in macroeconomic theory. […] Does macroeconomics need Microfoundations? And if so, which [ones]? (Malinvaud 2001a, 1)

Let us face the famous issue of microeconomic foundations of macroeconomics. To begin with, I protest against the way in which the issue was presented in some of the most heralded writings of the 1970s and 1980s. (Malinvaud 2001a, 4)

This study of Malinvaud’s view on microfoundations aims at completing Hoover’s (2012) statements on microfoundational programs. In particular, it shows that the Aggregation and the General-Equilibrium were not incompatible. In this respect, Malinvaud makes a case in being committed to both microfoundational programs. His conception of macroeconomics indeed turned out to be very close to the one of Lawrence Klein’s, for he also embraced the methodology and practice of macroeconometric modeling (sections 2, 3, and 4). His great difference with Klein, however, rests on his belief that a theory-laden search for microfoundations could be beneficial for the large-scale macroeconometric models. In so arguing, Malinvaud came to clarify what was common between the Aggregation and the General-Equilibrium programs, namely their common understanding of “non-eliminative microfoundations” (section 5). Malinvaud’s proper contributions to the disequilibrium theory

5 For this reason, this paper ends up establishing the radical nature of Malinvaud’s opposition to the New Classical Economics that I supported elsewhere (Renault 2018).

6 throughout the 1970s and 1980s illustrate that compatibility as his research was connected to and oriented towards the needs of the large-scale macroeconometric models (section 6).

2. The untenable ambition of general microeconomics

Malinvaud ever adhered to the general principle on which is based on the deductive approach in economics (Malinvaud 1988c, 1990c, 1990d, 1991, 1996a). Referring to the authors that championed this approach (Robbins 1932; Hausman 1992), he claimed that economics – like any other social science – does not have a secure empirical basis but only unreliable data coming from non-experimental methods, at the difference of natural sciences. Fortunately, economics can take advantage of its direct observation of economic phenomena, whether about human behaviors or the functioning of institutions. Malinvaud regarded this source for knowledge as well-founded as the logically-driven results derived from that basis in order to address economic phenomena. Such appraisal especially applies to general equilibrium theory that Malinvaud used to regard as the epitome of microeconomics, a “pure theory”, that is, a meta-theory serving for other derivations.

Malinvaud did not, however, believe in a general microeconomic theory that would satisfy all macroeconomics needs. This claim was far from being provocative from someone that had explored so much the potentialities of general equilibrium theory in various domains such as optimal growth theory or welfare theory. Besides, it is worth noting that he has ever kept close attention to the developments of general equilibrium theory over the years, as illustrate his regularly upgraded handbook in microeconomic theory and his survey of the most recent developments of neo-Walrasian theory (Malinvaud 1969, 1993a). Malinvaud formed his convictions about microeconomics long prior to the 1970s. As far as he remembered from his interchanges with Debreu, he had early doubted that general equilibrium theory could succeed in accounting all economic phenomena by progressing by concentric circles.

That was a vision Gerard Debreu was arguing with me in our interchanges for – I don’t know how many years – but certainly at the Cowles Commission. And I have always been skeptical. I thought that he was seriously underestimating the distance from the general equilibrium theory of Arrow and Debreu to the actual macroeconomic problems. (Malinvaud 2003, 190)

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Against Debreu’s contention, he asserted that logical derivations based on general equilibrium theory tend to generate its proper set of internal and “scholastic” issues (Malinvaud 1990d, 1990b, 1990a, 1991, 1996a). In retrospect, he noted that Sonnenschein-Mantel-Debreu results came to substantiate his skepticism for they proved that neoclassical usual excess demand functions were not required at the aggregate level, that is, were arbitrary to deal with macroeconomics issues (Malinvaud 2003, 2012). However, Malinvaud did not elaborate much on SMD theory, except for some comments on Debreu (1974) he interpreted as a proof that excess demand functions needed for extra information at the aggregate level. In any case he drew the radical conclusion according to which GET is unable to offer an empirical basis for macroeconomics (Kirman 1989; Rizvi 1994, 2006). By contrast, Malinvaud elaborated more on aggregation issues and insisted on various occasions the logical impossibility of perfect aggregation (Malinvaud 1981b, 1981a, 1991, 1993c).

More to the point, Malinvaud argued that except for some rare exceptions it was not in general equilibrium theoreticians' contention to account for economic reality, far less to explain macroeconomic phenomena. Nor did they concern much about applications, in line with Leon Walras’s epistemology to whom “la théorie pure n’attend aucune confirmation de la réalité” [pure theory requires no confirmation from reality] (cited by Baranzini and Bridel 2005). For instance, Frank Hahn typically endorsed this position about general equilibrium theory (Backhouse 2019). As for Malinvaud, he turned out to be closer to Pareto, for the greater room the latter dedicated to the application.6 According to Pareto, pure theory needed and could be verified in getting closer and closer to real phenomena. The method of “successive approximations” he championed accordingly supposed to continuously modify pure theory.7 In the same line, Malinvaud considered that pure theory could not take into account macroeconomic phenomena without breaking at some point with the logic of the deductive approach, that is, introducing one or several elements inspired by economic reality, hence, derived from data observation. Such an approach was at play in the disequilibrium theory, in which a hypothesis inspired by the external reality, namely prices rigidities, was put into the general equilibrium framework. Noteworthy, Malinvaud always justified fix-prices

6 Malinvaud provided a thorough discussion of Pareto’s collected writings (Malinvaud 1993b). 7 For more details on Walras’ and Pareto’s alternative epistemologies (i.e., rationalism Vs verificationism), along with their views on application, see: Baranzini and Bridel (2005); Bridel (2009).

8 rigidities for its compliance with data (Renault 2016; Plassard, Renault, and Rubin 2019).

As for available results derived from general equilibrium theory, Malinvaud deemed their properties “too specific,” valid for particular cases, and too “qualitative” or “inconclusive” in regard to available data (Malinvaud 1989a, 1991, 2001b).8 In both cases, the realism of general equilibrium theory hypotheses was at stake. This claim led him to discuss Friedman’s (1953) methodological thesis (Malinvaud 1989a, 1990b, 1991). On the one hand, he admits that a theory is nothing but an approximation of the reality and, hence, should not be primarily evaluated after the realism of its hypotheses. On the other hand, he opposes Friedman’s main conclusion that a theory should be exclusively evaluated after its results (or forecasts).

He [Friedman] correctly states that the true question is to know whether the hypotheses provide sufficient approximations for the object being studied and that one cannot know whether the approximations are sufficient without reference to the theory. But clearly neither can one know it without reference to observation. (Malinvaud 1989a, 220)

Malinvaud thus rejected Friedman’s “as if” methodology that the evaluation of alternative theories does need to pay attention to the empirical accuracy of hypotheses. Instead, he advocated for testing both hypotheses and conclusions for the sake of application. Among other motives, he brought to the fore that testing hypotheses prevents the risk of hidden variables and helps interpret the results of a theory (Malinvaud 1989a, 1991). On this basis, needless to say that Malinvaud also rejected Friedman’s criterion whereby alternative theories should be selected according to their simplicity and fruitfulness. In this respect, he merely referred to the discussion that took place in the AER columns from 1963 to 1965, which raised its paradoxical results well captured by Samuelson’s F-twist formula: the more irrealistic the hypotheses are, the better the theory is. Malinvaud took that conclusion for granted and since then regarded Friedman’s “as if” methodology as an unsuccessful attempt to

8 It applies to neoclassical growth theory and Solow’s model, in particular. Although he supported the neoclassical synthesis, Malinvaud came to disregard the neoclassical growth model after he had attempted to study French growth on this basis, as part of Moses Abramovitz’s project to study economic growth in many Western countries after WW2 (Carré, Dubois, and Malinvaud 1975). “This approach may be useful, for instance, for studying economic growth – even though my experience with Abramovitz certainly made me understand still more that the neoclassical synthesis doesn’t explain fully economic growth”. (Malinvaud 2003, 190)

9 champion in economics the practical relevance of general equilibrium theory.

In arguing that neoclassical theses on general equilibrium theory could become relevant by the empirical verification of their consequences, Friedman not only put forward a dubious idea but he also hijacked the methodological reflection in regard to the object of this theory. (Malinvaud 1990b, 12)

Of course, Malinvaud’s actual target was less Friedman than the New Classical Economics, which endorsed and promoted the “as if” methodology in macroeconomics from the early 1970s onwards. Noteworthy, he opposed this last school of thought along the same line, regularly claiming the untenable ambition of general microeconomics because of the proper limits of a pure deductive approach.

3. Rationalizing the inductive process in macroeconomics

To Malinvaud, macroeconomics cannot pretend to be scientific unless it rests on an empirical basis. For this reason, he regularly paid tribute to the pioneers of quantitative economics who strove to establish macroeconomics on an empirical basis. He thus referred to the German Historical School and NBER pioneering studies, among others (Malinvaud 1989a, 1996a, 2001b). Nevertheless, he marked the decisive turn in “positive economics” after WWII, when the stock of economic data had increased considerably as a result of the setting-up of the national accounting and statistical systems (Malinvaud 1989a, 1991, 1996a, 2001b). Pushed by his “empirical inclination,” he decided to embark on a career of public statistician and economist at the INSEE in 1945 (Malinvaud 2001b). There he took part in the building of the statistical system and he was personnaly involved in the setting-up of some statistical indexes (1948-1951) and national accounts (1951-1957). Interpreting this turn as a step forward in the way of the “positive science,” he later declared that it had allowed undermining the prevalence of the deductive approach since economists no longer had “the universal excuse of being in lack of data” (Malinvaud 1973, 267).

However, Malinvaud’s enthusiasm for quantitative economics did not convert him to naïve empiricism, whereby it would be possible to discover laws by merely accumulating data. No more than the deductive approach, he did not believe either that the knowledge in

10 macroeconomics could make progress thanks to the inductive method alone. Alike, he often mentioned the set of obstacles that undermine the efficiency of inductive methods (e.g., Malinvaud 1988c, 1989b, 1989a, 1991, 1996a, 1990b, 1990a, 2001b). In a nutshell, gathered data result from non-experimental methods and, therefore, they are nothing but doubtful. As a result, the analyst is continuously confronted with the challenge of disentangling causes and effects in the variables at stake. For this reason, he also doubted that the inductive method could be efficient for producing knowledge in macroeconomics in an efficient manner.

The alternative consisting of finding out the good macroeconomic representation in a more direct manner would, of course, be preferable if it would be feasible. Unfortunately, this alternative way is untractable. Observation is too poor and passive in front of the multiple causes affecting macroeconomic phenomena. […] It is in order, therefore, for macroeconomic specifications to be founded in microeconomic theories. (Malinvaud 1988c, 30–31)

To overcome the difficulties of the inductive method, Malinvaud thus suggested relying on the direct knowledge issued from the deductive approach. The intent was not, for sure, to verify this direct knowledge provided his disbeliefs that general equilibrium theory was not reliable empirically. The intent was plainly to rationalize the inductive process in guiding the search for empirical regularities and correlations and, then, facilitating their interpretation. At this point, Malinvaud’s methodological conception of macroeconomics thus embraced the probability approach in econometrics defined at the Cowles Commission (Haavelmo 1944). Noteworthy, he became familiar with this methodological framework thanks to his stay at the Cowles Commission (then in Chicago) from 1950 to mid-1951. After that, he taught the probability approach in econometrics to several subsequent generations of French economist- engineers at the INSEE School, then at the ENSAE.9

For this inductive process, the best guide and rationalization is what was called "the probability approach" at the Cowles Commission and is normally taught in econometrics. […] I do not doubt the value of the methodological principle that is so defined. (Malinvaud 2001b, 10)

9 Incidentally, the textbook in econometrics he published in English in 1966, which was successful enough to be reedited several times, was based on his teaching and was at first published in French (Malinvaud 1964).

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It is by no doubt that Malinvaud regarded the probability approach in econometrics as the proper framework for producing knowledge in macroeconomics. Indeed, this framework felt down with his methodological conviction that there is no alternative than articulating the deductive and the inductive methods. In his words: “[I take] for granted that macroeconomics aims at being scientific, i.e., at going beyond pure description, while also avoiding to become a detached intellectual play” (Malinvaud 1989a, 205).

Malinvaud did not yet restrict himself to the Cowles methodology in econometrics. Instead, he endorsed the way this methodology evolved in the forecasting centers across the world after WWII, so as in France. As head of the forecasting department, the Direction de la Prévision (1972-1974), and then of the INSEE (1974-1987), Malinvaud was even in charge of the macroeconometric models. At this time, the setting-up of large-scale models was flourishing in France: DECA (launched in 1969), STAR (1974), DMS (1976), METRIC (1977), and PROPAGE (1979). This experience had placed him in closer touch with the daily job of applied macroeconomists and had had potentially a decisive impact on his conception of macroeconomics, which mainly rested on the macroeconometric modeling since then.

4. The methodology and the practice of macroeconometric modeling

Malinvaud departed from the Cowles Commission methodology on a fundamental aspect, namely the strict compliance with an a priori model as if it were true knowledge. In this respect, he argued that macroeconomic phenomena are hardly autonomous and permanent in practice (Malinvaud 1989b, 1991, 1996a, 2001a). As for autonomy (i), his point was that macroeconomic phenomena often depend on other socio-political factors. Hence, relying on one a priori model and proceeding to statistical inferences on its parameters can result in neglecting a series of other relevant variables that would explain the phenomenon at stake. Malinvaud’s regular example was economic growth.10 As for permanency (ii), he argued that macroeconomic phenomena are not immutable in practice but likely evolve as a result of changes in the economic structure. Indeed, sticking to an a priori model and confronting it to

10 This example come from attempt to explain and to measure economic growth in France after post-WWII based on Solow’s model (Carré, Dubois, and Malinvaud 1975). In their study, they left unexplained a great part of growth, and gave room to non-economic factors such as the population’s optimism or the planning influence.

12 data will not resolve to what extent this model is accurate – because of the probabilistic residual capturing all deviations.11 In other words, the probability approach in econometrics is not this powerful device to discriminate theories against data.12 Malinvaud thus challenged the Cowles Commission methodology for its incapacity to identify omitted variables and changes in the economic structure.

Malinvaud unfolded his distance towards the Cowles Commission methodology when he came to comment the Koopmans-Vining controversy in his many writings dedicated to the history of the Cowles and the macroeconometric modeling (Malinvaud 1988a, 1991, 1997a, 1998, 2007b, 2007a).13 Noteworthy, Malinvaud always claimed his sympathy for Vining’s position. By contrast, he testified that many members of the econometrician community had found Koopmans’ assaults against Vining both virulent and pretentious. Moreover, he noted that whether Koopmans’ position eventually came to dominate after WWII it was mainly due to Klein’s (1950) and Klein and Goldberger’ (1955) models which performed impressively (Malinvaud 1988b, 2007a). Therefore, Malinvaud did not regard closed this controversy, even after WWII.14 For this reason he claimed to be not surprised by the rise of skepticism about macroeconometric models during the 1970s (Malinvaud 2001a). Nor was he disturbed by the violent charges raised by Robert Lucas (1976) and Christopher Sims (1980).

Interestingly, Malinvaud interprets these two criticisms as a revival of the Koopmans-Vining controversy. They both addressed the reliability and/or the arbitrariness of the underlying structure, but they proposed remedying it differently. Lucas wanted to impose more a priori restrictions in consistency with general equilibrium theory, while Sims advocated for releasing any a priori restrictions. Consistently with his reading of the controversy, Malinvaud was much more sympathetic with Sims’s criticism.15 However, his reaction to Sims was nothing but conservative since he basically defended the prevailing methodology and practice of macroeconometric modeling (Malinvaud 1981a, 1981c, 1982b, 1988a, 1997a, 1998, 2001a,

11 On the limits of the probability approach in econometrics, see Aldrich 1989 and Quin 2014. 12 Incidentally, he also noted that time series were a poor database to select discriminate alternative theories, hence, confronting to data (Malinvaud 1991, 1997b, 1998). 13 Malinvaud earlier disclosed his reading of this controversy in his review of the Tjalling C. Koopmans’ Collected Writings, including Koopmans’ complete interchanges with Daniel R. Vining (Malinvaud 1972). 14 For more details on his reading of the Koopmans-Vining controversy, see Armatte et al. (2017, 90–93). 15 I developed Malinvaud’s reaction to the Lucas Critique elsewhere (Renault 2018).

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2007b, 2007b). In doing so, he argued that Sims’s criticism primarily concerned the Cowles Commission methodology and was less relevant for the current practice.

Regarding the autonomy (i), Malinvaud regularly reminds that the practice used to rely on several models for the sake of forecasting. Moreover, he notes that albeit an original linkage to the Keynesian theory the macroeconometric models progressively emancipated from that theoretical influence and turned out to be more eclectic (Malinvaud 1982b, 1987b, 1991). In this respect, he insists on a feature of the practice in macroeconometric modeling that consists in melting various theoretical approaches. Such a feature results from the testing methodology leading to only implement the theoretical proposals that had been proved to be reliable at the macroeconomic level. Now, Malinvaud’s main point against Sims’s criticism, and to better handle with autonomy (i) and permanency (ii) issues, consisted in pleading for a broader use of pure inductive methods (e.g., data analysis or VAR techniques, business survey data, and others).16 According to him, these pure inductive methods had many advantages, such as enriching the factual knowledge of macroeconomic phenomena, exploring the properties of a new database, or identifying the prior of a variable or the delay structure of correlations in time series (Malinvaud 1987b, 1988a, 1991, 1997a, 2007b, 2007a). Although Malinvaud pleaded for a larger use of inductive methods alike, he distinguished from Sims by restricting their use to the “exploratory stage” (Malinvaud 1981a, 1982b, 1987b, 1988a, 1989a, 1997a, 1998, 2001b). This means that these inductive methods played a crucial role at the so-called “specification stage,” that is, when structural equations of macroeconometric models are written down.

The initial specification of the macroeconometric models precisely aims at incorporating information of various kinds. That it does it well can be disputed, of course, but the meaning and the general validity of the approach cannot be disputed. (Malinvaud 1982b, 19)

Among the consequences of this practice, Malinvaud points out the tendency to substitute

16 Noteworthy, he pleaded in favor of these techniques prior to the rise of skepticism about macroeconometric modeling from the mid-1970s. Indeed, he defended the use of regression without a model soon in his handbook in econometrics (Malinvaud 1964), and he contributed promoting the data analysis in France in the early 1970s (Malinvaud 1970; Fouquet and Malinvaud 1971).

14 empirical regularities (discovered by inductive methods) for theoretically-based specifications with a poor empirical basis. He used to call “adjustment laws” these empirically-based specifications and asserted that a lot of large-scale models used to rely on them, at least in France. The most common example was the Phillips Curve, namely an empirically-based regularity between unemployment and inflation then refined by theoretical reflection. According to Malinvaud, the introduction of such “adjustment laws” typically illustrates the kind of articulation between deductive and inductive methods at play in the prevailing methodology and practice of macroeconometric modeling.

[…] macroeconomics has two roots: theory and observation. Trying to forget about one of them is bound to fail, because one is then unable to prove specific conclusions of interest. This means in particular that our present macroeconomic knowledge embodies a lot that has been learned from statistics combined with reasoning. (Malinvaud 1989b, 314)

Now, that Malinvaud advocated for restricting the inductive methods to the exploratory stage also meant that they should in no way replace the large-scale macroeconometric models, especially for studying the effects of economic policies. In this regard, he regularly claimed his skepticism about the VAR models, again, because of the proper limits of the inductive method (Malinvaud 1981a, 1982b, 1987b, 1988a, 1989a, 1997a). For Malinvaud, the prevailing practice was the proper framework for producing and accumulating the knowledge in macroeconomics. Interestingly, when he comes to describe the methodology and practice adopted in macroeconomics, he often referred to a “dialectic approach,” that is, a permanent back and forth process between observation and modeling (Malinvaud 1989b, 1990a, 1991, 1996b). According to him, the same approach was at play in the setting-up of national accounting, statistical indexes, and, of course, macroeconometric models.

I felt secure not only about the general structure within which macroeconomic analysis takes place (national accounts, behavioural relations, market adjustment laws…) but also about the scientific way of proceeding in this field of knowledge. (Malinvaud 1989b, 298)

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5. The search for microfoundations subject to conditions

So far, Malinvaud’s conception of macroeconomics echoes strikingly Klein’s one. He also strongly committed with methodology and practice of the macroeconometric modeling, and he certainly recognized the relevance of Klein’s Aggregation microfoundational program. When Malinvaud came to discuss the search for microfoundations per se, his starting point was also similar to Klein. He reminded the limits of the deductive approach, especially the impossibility of perfect aggregation, and, for this reason, he also argued that the search for microfoundations would better start from aggregates. The argument was similar, namely raw material in macroeconomics often appears under an aggregated form (e.g., time series, statistical indexes, national accounts, and so one), and rarely discloses relevant information on the microeconomic level (Malinvaud 1990a, 1991). In line with Klein, again, Malinvaud’s conclusion to start from aggregates does not mean he regarded them uncritically.

The realistic alternative to an unfeasible general microeconomics consists in considering aggregates directly. This alternative adopted in a lack of a better one raises a series of issues, of course. Indeed, the direct apprehension of aggregates usually involves a great deal of both uncertainty and error, which it would be wise to evaluate the proper importance. (Malinvaud 1991, 184)

While Malinvaud’s experience at the DP and the INSEE converted him to the methodology and practice of macroeconometric modeling, this also brought him to the conclusion that these models did not perform well in the 1970s and were in serious need for improvements (e.g., Malinvaud 1980a, 1986). Confronted with this urgent situation, he also believed that the search for microfoundations could be helpful if articulated with macroeconometric modeling. In other words, Malinvaud advocated for a search for microfoundations under conditions. He suggested these conditions across various papers (Malinvaud 1991, 1995, 2001a), and did it more explicitly in one paper dedicated to microfoundations and New Keynesian Economics (Malinvaud 1992, 11–15). On the whole, he retains three conditions for microfoundations being accepted in macroeconomics, hence, implemented within macroeconometric models: (i) to intend to contribute to macroeconomics; (ii) to abide by the methodological rules of macroeconometric modeling; (iii) to satisfy the needs of the macroeconometric models.

16

The condition (i) is almost intentional for it poses that microfoundations should aim at explaining macroeconomic phenomena, thus meaning that some people did not even intend to do it. Malinvaud targeted explicitly contributions in the New Classical Economics’ fashion he deemed they had little relevance in the actual search for microfoundations. He called these contributions “macroeconomic implications of microeconomics”, and identified Robert Lucas as their best expert (Malinvaud 1992, 1995).17 The way he described these contributions echoes Hoover’s (2001, chap. 1) description of Pissarides (1992), who aimed at illustrating the current “state-of-art” now that the New Classical Economics’ microfoundational program has been generally accepted in macroeconomics.

It is frequent that at the end of a mathematical study dealing with such extension of general equilibrium theory, or such issue in industrial organization, the author then suggests or claims that his results are also relevant for understanding some aspects of macroeconomic evolutions. Although the study was motivated by the will to contribute to a specific program in microeconomics that follows its own way, it would also comprise a cheap by-product for macroeconomics. (Malinvaud 1992, 12)

The condition (i) is consistent with Malinvaud’s statements on the proper limits of the deductive approach for macroeconomics. In short, microeconomics and general equilibrium theory are irrelevant because they primarily rely on unrealistic hypotheses. In general, any theoretically-based proposal issued from mathematical economics is hardly relevant for macroeconomics unless they broke with the logic of the deductive approach, that is, incorporate an element inspired by the economic reality such as short-term price rigidities.

The condition (ii) is more clearly articulated to macroeconometric modeling for it imposes to assess proposals issued from the search for microfoundations after the same rules. These rules impose to test on the empirical relevance of hypotheses and conclusions and to check aggregation effects, i.e., to verify that statistical distributions do not invalidate any attempt to

17 Note that he tempered his intentional criteria: “It could result that the mere difference in perspective would disqualify any transposition from the microeconomic to the macroeconomic level. I would not go so far, for it would break the imagination and the fertilization of ideas in formulating conjectures, which has a great role in the process of the scientific discovery.” (Malinvaud 1992, 12)

17 transpose the model at the aggregate level.18 To put it clearly, Malinvaud regarded proposals issued from mathematical economics / the search for microfoundations as conjectures that ought to demonstrate their relevance for being considered in macroeconomics.

In short, we have to interrogate microeconomic theory about the conjectures it suggests and how it expresses these within the common frameworks in macroeconomics. Then, we have to test the significance of these conjectures. (Malinvaud 1992, 14)

Far from the idea that the search for microfoundations put an end to “the division of territory between microeconomics and macroeconomics” (De Vroey 2016), Malinvaud did not regard it as threatening for the autonomy of macroeconomics. He thus claimed that “the interest of the microeconomic reference disappears when it learns nothing valuable about the actual relations between aggregates.” (Malinvaud 1991, 29) In other words, he claimed that the search for microfoundations should not result in a rebuilding of macroeconomics. In this respect, he recalls at first that the macroeconometric models used to have microeconomic underpinnings, such as savings and consumption (Malinvaud 1991, 1995). Second, he claims that microfoundations would be implemented within macroeconometric models if and only if they are informative about the actual relation between aggregates. This means in turn that whether microfoundations are not informative, the practice had better to rely on adjustment laws, such as the Phillips Curve.

The condition (iii) is more eloquent as it clearly poses that the search for microfoundations must be oriented towards the needs of the large-scale macro-econometric models. These needs were all the adjustment laws adopted in lack of better alternative and for the sake of forecasting. In Malinvaud’s perspective, the foundations of these adjustment rules should be addressed by the search for microfoundations as they challenged macroeconomic theory. Noteworthy, he dedicated an entire sub-section to “the microfoundations of the adjustment laws” in his handbook in macroeconomic theory (Malinvaud 1981c, 2:184–203). In general, the search for microfoundations should disclose every kind of microeconomic underpinning

18 For this reason, he opposed the Real Business Cycles canonical model: “[t]his may have been a respectable academic reference, but certainly not a valid microeconomic foundation when […] the model was so cavalier in its ignorance of the difficulty of aggregating heterogeneous microeconomic behaviours.” (Malinvaud 2001a, 5)

18 implied by the specifications adopted in macroeconometric models; and he points out, in particular, specific market structures and behaviors (Malinvaud 1991, 1992, 2001a).

There can be a misunderstanding about the sense of the microfoundations in macroeconomics. To me, this concerns all the theoretical contributions that clarify how and in which conditions such and such specifications in macroeconomics derive from the existence of microeconomic behaviors, or of particular market structures. (Malinvaud 1992, 12)

The condition (iii) comes to disclose Malinvaud’s main concern about the search for microfoundations, namely the goal of “consolidating the microeconomic foundations of macroeconomics” (Malinvaud 2001a, 5). Such a conception is clearly antithetic with the New Classical Economics’ reductionism and seems to fall in, arguably, Greendwald and Stiglitz' project to elaborate a macro-theory of microeconomics (1987, 1993). Although Malinvaud was hardly explicit on this matter, it is by no doubt that he endorsed such an inverted perspective of the search for microfoundations. The best illustration of that point comes to be his contributions to the disequilibrium theory during the 1970-1980s, which turned out to be connected with the large-scal macroeconometric models and oriented towards their needs.

6. Theoretical advances for improving the macroeconomic models

The need to improve the macroeconometric models’ performances enhanced Malinvaud to consecrate entirely to macroeconomics. To determine why he did not endorse Klein’s microfoundational approach for doing is undoubtedly a matter of concern, but he did not expand much on that point. However, he confessed not to be comfortable with the representation of phenomena disclosed by the large-scale models; he sometimes found it hard to interpret theoretically (Malinvaud 1980a, 1986, 1991). Also, the second reason that motivated Malinvaud’s turn to macroeconometrics was the emergence he observed of the disequilibrium theory in France, and to which he quickly adhered (Malinvaud 1987b, 1989b, 2003). Of course, he had good hope that this approach could reconcile the then distinct fields of micro- and macroeconomics. More importantly for our purpose, he also regarded this approach as capable of filling the gap between the theory and the practice:

19

There has been some interaction with the work at the "Direction de la Prevision" and with the macroeconomic work at INSEE. A good deal of my research during the past fifteen years has really concerned issues on which I thought that there was a gap, a gap between the development of practice and the state of the theory. […] I couldn't blame the economic advisors or the applied economists, because they were dealing in their own way with the real problems. My blame went, part of the time, to economic theory, which was not developed well enough to provide the background for analytical work. So, indeed, there has been more than what most people would expect in the way of interaction between my applied work at INSEE and my own direction of research. (Malinvaud 1987b, 289–90)

Malinvaud intended filling in such a gap between theory and practice, as his contributions to the disequilibrium theory not only were connected to the macroeconometric models but also oriented towards their needs. As for the connection alone, it is worth recalling that he did regard the disequilibrium theory as a specific theoretical framework in macroeconomics. While discarding the alternative approach that consisted of directly working out aggregates, he claimed to prefer to rely on “an approach more transparent, more analytical, [but also] more able to integrate the result of various investigations, whether they are of an empirical or theoretical nature.” (Malinvaud 1986, 183) Consistently with his disbelief about the feasibility of general microeconomics, the disequilibrium theory incarnated the kind of theoretical approach breaking with the logic of simple deductive approach for it introduced within pure theory (i.e., general equilibrium theory) elements inspired by observation, such as fix-prices.19 In line with Pareto, Malinvaud thus believed that such empirically-based adjunctions could bring pure theory in closer touch with reality and make it less irrelevant for macroeconomics.

That connection has certainly been obscured by the success of The Theory of Unemployment Reconsidered, which seems to be far away from the issues of applied macroeconomics and macroeconometric modeling. Indeed, Malinvaud just provided in it a synthetic presentation of the seminal and highly-theoretical contributions to the fix-price literature along with an aggregate disequilibrium model (in the fashion of Barro and Grossman) to draw its

19 In this respect, it is worth noticing that Malinvaud ever justified the fix-prices hypothesis as better founded on data evidence than, say, market-clearing. For the details of his opposition to New Classical Economics’ postulate of market-clearing (Renault 2018).

20 consequences for studying the effects of economic policies. By contrast, this connection is brought to the fore by Malinvaud in the preface for the French edition, in which he addressed the various critics that his book had received in the meantime (Malinvaud 1980b, 7–29).20 There he stressed the two main challenges of the disequilibrium theory, namely modeling dynamics and generating applications. Related to this second challenge, he noticed incidentally that the real contribution of the disequilibrium theory was to provide foundations for the practice of macroeconometric modeling.

The best way to describe the contribution thus made to the macroeconomic theory probably does not consist of the idea that involuntary unemployment changes in nature from one situation to another. Instead, it consists of stressing how should intervene in reasoning and models the so-called “indicators of tension” providing both a description of the state of markets and a measure of the unsatisfied supplies and demands. […] The econometric models used in applied macroeconomics have relied to such indicators for a while and they let appear, for instance, that the value of the Keynesian multiplier depends on them. However, the reasons for this fact have not been formalized yet, which the new developments made easier. (Malinvaud 1980b, 24–25)

The “indicators of tension” Malinvaud that referred to were statistical indexes extensively used in the French macroeconometric models. The statistical information they contained was both of a quantitative nature picked out of time series (such as the number of job vacancies, the unemployment rate, size of capacities, or the degree of capacities utilization) and qualitative nature about firms’ expectations. During the 1970s, applied macroeconomists used to rely on these indicators of tension to consider that the economy could be characterized by other states than the Keynesian equilibrium and could get stuck, in particular, by insufficient productive resources. In other words, they provided a more solid basis for the idea of a limited supply side in macroeconometrics (Bureau, Miqueu, and Norotte 1984). Such a practice established without the backing of any theory, both econometric and economic theory. That Malinvaud insisted on the variety of equilibria arising from the introduction of non-Walrasian prices was meaningful in that context. In particular, two equilibria were due to the limits of the supply-side, namely classical unemployment and repressed inflation. This result thus

20 For an analysis of these critics, see (Backhouse and Boianovsky 2013; Renault 2016, chapter 2).

21 demonstrated that the practice was not ill-founded from a theoretical point of view.

This connection with macroeconometric modeling was deeper in Malinvaud’s subsequent contribution to the disequilibrium theory from the end of the 1970s onwards, in which he handled with both dynamics and applications. This second concern then emerged more sharply, as his conviction that this theoretical framework was peculiar and flexible enough to incorporate knowledge “of an empirical or theoretical nature.” In the dynamic model he displayed in his 1978 Marshall lectures, which was later published under Profitability and Unemployment, he explicitly introduced adjustments rules for prices and wages inspired by econometric studies as they were in use in few macroeconometric models (Malinvaud 1980a, 52–58). Noteworthy, these adjustment rules did not play a minor role in his dynamic model, which was only driven by the evolution of capital accumulation (through investment and monetary assets) otherwise. Pointing out the complexity and the multiplicity of factors at play, he argued that there was no better option than sticking to econometric studies as long as prices and wages have not been adequately assessed. The way he justified his reliance to econometric studies illustrates altogether his methodological convictions in macroeconomics, his alternative view on microfoundations, and that his research was highly connected with macroeconometric modeling.

If we try to build a theoretical microeconomic model in order to find out the dynamics of changes in such macro-phenomena as [prices and wages], we may be fairly certain that we shall end up with a very partial representation of the real world […]. We must of course start from the best possible knowledge of the relevant phenomena. At present this derives from the many econometric equations that have been fitted to actual data on macroeconomic price and wage changes. Such equations may be criticized on the grounds that their theoretical foundations are weak, loose or obscure. But, to the extent that they give a good fit, they are to be preferred to supposedly rigorous specifications derived from very abstract theoretical models. For revisions in prices and wages, the proper combination of observation and logical deduction often at present favours reliance on an econometric equation rather on a purely theoretical equation. (Malinvaud 1980a, 53) 21

21 He did not only defended this position in (Malinvaud 1980a, 20–21; 52–53), but also in other contributions

22

The introduction of such peculiar adjustment rules indeed renders his dynamic model both loose and obscure. First, these adjustments rules are assumed to vary according to the regimes so that prices do not change in the same way whether the non-Walrasian equilibrium is located in a Keynesian or a Classical regime, for instance. Second, his adjustments rules were specific and far from being clear, except for a few cases (e.g., wages were assumed constant in the Keynesian regime). However, this unusual adjunction well illustrates Malinvaud’s connection with macroeconometric modeling through his willingness to scarify cardinal values of theoretical modeling (not to say pure theory), say logic and clarity, for the sake of application which often includes adhoceries. Likewise, the formula he provided to explain the rationale of his various prices adjustment rules shows up the connection of his model to macroeconometric modeling. In the following, the price dynamics depends on the expected inflation rate ( ), on the past excess demand for goods ( E1t ), and the past excess demand for labor ( E2t ); note that all variables could be freely pondered.

Pt1  Pt    1E1t  2 E2t Pt

More than disclosing a poor connection, Malinvaud’s research in disequilibrium theory aimed at improving the practice of the macroeconometric models. As he claimed it: “The achievement of the theory must consist of an improvement of the practice, of course.” (Malinvaud 1983a, 9) The improvement at stake had a twofold dimension: revising the actual econometric procedures thanks to theoretical progress in disequilibrium econometrics and providing alternative modeling for the investment function. As for the first objective, Malinvaud made quite clear that the ultimate goal of the disequilibrium theory was to generate a new family of structural macroeconometric models (Malinvaud 2006, 171). In 1982, he made a significant contribution to the literature in disequilibrium econometrics in calling into question the current approach consisting of identifying/estimating disequilibria from a straightforward manner (Malinvaud 1982a). In this paper, he also paved the way to an alternative approach that better took into account the information issued from the indicators of

(Malinvaud 1983b). Besides, it is worth noting that Malinvaud deserves sub-sections to the econometrics of both prices and wages in his textbook in macroeconomics (Malinvaud 1981c, 2:166–71)

23 tension.22 This new approach turned out to be standard throughout the 1980s, under the name of “aggregation of micro markets” (Laroque and Salanié 1995). This approach directly results from one paper he published two years earlier (Malinvaud and Fitoussi 1980). For the sake of realism, they disaggregated the standard fix-price model and considered many goods and many markets. It results a diagnostic far more complicated as the economy then could hardly be characterized by one disequilibrium regime but more often by composite situations, giving birth to the notion of “mix-unemployment” (i.e., Keynesian unemployment contaminated by Classical unemployment).

That Malinvaud’s research was oriented toward improving the practice is even more clearly illustrated by his efforts to provide an alternative specification for the investment function, notoriously-known as the poor relative of macroeconometric modeling (e.g., Bureau, Miqueu, and Norotte 1984; Norotte, Morin, and Venet 1987). Malinvaud explained that deficiency by referring to the complexity of this behavior and the evident lack of reliable statistical data in one of the papers he dedicated explicitly to the econometrics of investment (Malinvaud 1988b, 143). The specification of the investment behavior became a major concern in macroeconometrics during the 1970s. On the one hand, the (relative) mediocre performances of the macroeconomic models’ forecasting were assumed to be due in great part to the misspecifications of the investment function. On the other hand, the success of the implemented economic policies depended on the reaction of firms’ investments, which were quite volatile at the time. The accelerator effect was the only secure basis (and the most significant factor), but discussions were about the significance of secondary determinants such as the cost of relative productive factors, current and expected profits, and firms’ solvability (e.g. Bureau, Miqueu, and Norotte 1984; Norotte, Morin, and Venet 1987).

Against this background, it is worth stressing that firms’ investment was a central concern in Malinvaud’s attempts to model disequilibrium dynamics. From 1978 to 1983, investment was the main channel through which he drew mid-term evolutions starting from the short-term and static standard fix-price model. He thus highlighted that mid-term evolutions crucially depended on the way investment was specified. In line with the practice of macroeconometric modeling, he considered alternative specifications of investment. Besides the accelerator

22 Such extensive use of the indicators of tension had been experimented in the setting-up of the large-scale model METRIC (1979), which Malinvaud supervised personally.

24 effect, he introduces other determinants such as profitability, the substitution of capital for labor, relative costs of productive factors (wage and interest rates). However, he put a step forward and carried out simulations illustrating how these alternative specifications of investment influence the dynamic evolution of the economy (Malinvaud 1980a, 74–89). Likewise, Malinvaud adopted the way production functions had evolved in macroeconometric modeling.23 Whereas the firm’s production function was of a clay-clay type in the Theory of Unemployment Reconsidered, he systematically assumed a productive capacity to firms and production functions of a putty-clay or a putty-putty type afterward (Malinvaud 1978, 1980a, 1981c, 1982c, 1983a, 1983b)

From 1983, Malinvaud dedicated to fully integrate profitability within investment theory completing initial Tobin’s (1969) efforts. Accordingly, he focused on the investment behavior of a representative firm, getting back to a static (wages and prices are given) and partial equilibrium framework. The outcome of his research emerged later on in a series of three papers (Malinvaud 1986, 1987a, 1989c). The basic idea was that profitability matters since the firm is confronted with the uncertainty of future demand and the irreversibility of investment (i.e., the size of capacity and the intensity of capital). The model runs as follows.

The firm defines ex-ante both its capacity and its technique of production on an optimal basis, in a context in which all variables are known but the demand for goods is uncertain. The production function thus is of a putty-clay type, that is, factors are fully substitutable ex-ante and then fully-complementary. Ex post, the demand for labor is the single decision variable that depends on the firm’s desired level of production (the capacity, the intensity of capital

23 Noteworthy, Malinvaud no more relied on a clay-clay production function after The Theory of Unemployment Reconsidered but, as a result of his systematic introduction of a productive capacity thereafter, he assumed either a putty-clay or a putty-putty production function. In it, he followed the way investment functions evolved in the French macroeconometric models: a clay-clay function in DMS (1969), then a putty-putty function or a putty- clay by Metric (1977) and Propage (1979).

25 and the demand are given). In line with the disequilibrium theory, the firm’s production then depends on the minimum of either the capacity or the demand for goods. In working out this investment model, Malinvaud ultimately aimed at contributing to the large-scale macroeconometric models.

I see the model as one of the main building blocks of a larger system intended for the study of the medium-term equilibrium. This is the reason why the conclusions of this paper are intermediate products to be used in more embracing theories of the type of those studied by J. Tinbergen in the thirties. (Malinvaud 1989c, 14)

As Malinvaud put it, his investment model and its properties were “intermediate products” calling for further consideration. Although he explicitly worked out for macroeconometric modeling, he thus kept a respectful distance with applied macroeconomics. For the sake of clarity, he often shed light on the proper limitations of his theoretical results in regard to the aggregation effects (for he assumed a representative agent), the absence of lags and financial constraints, the static specification of expectations, and others (see in particular: Malinvaud 1980a, 90–106). In the same way, he strove to push his approach in closer touch with the application and, for instance, turned his concept of profitability into a statistical index. (Malinvaud 1983a, Part 3). Last but not least, Malinvaud embarked after (Artus 1984) on estimating and on testing the practical relevance of his investment model (Malinvaud 1986, 1987a). While discussing the results, he did not conceal either that “[…] the tests, although not negative, cannot yet be considered as fully conclusive.” (Malinvaud 1989c, 14)

7. Conclusion

The study of Malinvaud’s alternative views on microfoundations thus shed light on the compatibility of both “General equilibrium” and “Aggregative” programs throughout the 1970s and the 1980s. The compatibility at play rests on a methodological ground, and it appears Malinvaud shared Klein’s general conception of macroeconomics. First, Malinvaud argued about the unfeasibility of a general microeconomics that could account for all macroeconomic phenomena. Second, he also contended that the proper framework to make progress in macroeconomics was the methodology inherited from the Cowles and, more specifically, the way it evolved in the subsequent decades. Third, Malinvaud considered that

26 the search for microfoundations would better start from aggregates. This means in turn to impose conditions on the search of microfoundations, subsuming them to the rules and the needs of the methodology and practice in macroeconometric modeling. Finally, Malinvaud’s contributions to the disequilibrium theory throughout the 1970s and the 1980s illustrate both his alternative view on microfoundations and the kind of hybrid approach he advocated for improving the performances of the macroeconometric models.

That Malinvaud endorsed a theoretical approach to contribute to macroeconometric models, and not Klein’s approach, by no means implied that he had doubts on the relevance of his approach. This approach remained in the background all along, to which Malinvaud just experimented a way out. As a result, although he had elaborated a theoretical approach as possibly close and connected with the macroeconometric modeling, he remained aware that his research could be not directly relevant for satisfying its needs. For this reason, he regarded the results of his research as intermediate products and did not refrain from pointing out their limitations for the sake of application. In other words, Malinvaud embarked on a way that did not call into question his fundamental methodological conviction that macroeconomics can only progress by going beyond the inherent limitations of deductive and inductive methods, proceeding by a permanent back-and-forth process. Nevertheless, his research addresses the very issue to determine the proper dose of theory to introduce in specifications destinated to be implemented in macroeconometric models.

The right balance [of methods] is required. To choose this right balance is always delicate, however. Opinion varies on the dose of theory that it is legitimate and appropriate to introduce a priori. Nobody has the perfect answer to this difficult choice. Only a collective process of both theoretical and econometrical research can help us make progress, given that the regular testing of theories is a crucial element for this approach. (Malinvaud 1988b, 145)

This point could have been raised by any contributor to the macroeconometric models, such as Klein, Duesenberry, and others. It definitely concerns the methodology of macroeconomic modeling, asking to what extent a theoretical approach (even a hybrid one) was useful to build up alternative specifications that aim at improving the performances of the macroeconometric models. This point in any case contradicts the general conclusion of this paper according to which reinforces the conclusion of this paper according to which the “General equilibrium”

27 and the “aggregative” microfoundational programs were not incompatible.

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