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Theory to the Rescue of the Macroeconometric Models: Edmond Malinvaud’S Alternative View on the Search for Microfoundations

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Theory to the Rescue of the Macroeconometric Models: Edmond Malinvaud’S Alternative View on the Search for Microfoundations 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] 1 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. 4 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
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