Macroeconomic Lectures: A Modern History of Economic Thought

1. Macroeconomics Lectures Stephen Jay Silver, Ph.D.The CitadelShandong UniversityCenter for Economic ResearchNovember, 2010

2. Outline of Macroeconomic Lectures • In this lecture I will introduce myself and the topics I plan on discussing over the next four weeks • The preparation for these talks have been extremely useful for me in relearning macroeconomic topics that I have not looked at in many years as well as several new issues that have become “hot” since my Ph.D. program • I hope you will find what I have to say about the various topics and issues as I have • Think of these lectures as a short modern history of economic thought course

3. Lecture I – Self Introduction and outline of upcoming lectures Discussion of approaches to teaching graduate macroeconomics at U.S. universities • Saltwater versus freshwater debates • New Emphasis on growth theory • Brief discussion of the major issues and approaches taken by each school of thought

4. Lecture II – The Classical approach to economics • The legacy of Adam Smith and his followers: David Ricardo, John Stewart Mill and Alfred Marshall • Challenging Mercantilism with the idea of specialization, laissez-faire markets, and free trade • Classical explanations of the business cycle • The Austrian School

5. Lecture III – JM Keynes and Keynesianism • Why Keynes took his new approach: the Great Depression and the threat of Marxism • Keynes’ explanation of the business cycle and depression • Development of the Keynesian model • Keynes on money and why he preferred fiscal to monetary policy • Deficiencies of his model • Attacks of the model

6. Lecture IV – Monetarism and Milton Friedman • Friedman’s emphasis on monetary effects on aggregate demand • Weaknesses in the General Theory of Keynes • Empirical evidence that money, and only money, can influence the economy over the business cycle (except for “real” shocks) • The Phillips curve and the Natural Rate Hypothesis • Permanent Income Hypothesis

7. Lecture V – New Classical Approach to the business cycle and Robert Lucas • Rational Expectations: history and application to macroeconomics • Efficient market hypothesis • Lucas solution to applying RET theory to macroeconomic modeling • The Lucas Critique • Challenge to Keynesians • Challenges to RET

8. Lecture VI – Real Business Cycle Models • RBC explanation of the business cycle; mostly due to technology shocks • Kydland and Prescott • 70% – 30% (No, not Mao!) • Like monetarists and New Classicists, RBC argues against the use of discretionary fiscal and monetary policies • Most economists are unconvinced about the primacy of supply shocks over demand shocks in explaining the business cycle

9. Lecture VII – The New Keynesians • New explanations for why the economy will not necessarily arrive at full employment general equilibrium • Many, but not all, of these theories assume “sticky” prices • Others rely more on search theory • This year’s Nobel Prize went to a New Keynesian, Peter Diamond

10. Lecture VIII – Public Choice Economics and James Buchanan • Many of those belonging to this group are of the Austrian School • Strong belief that attempts by policy makers to influence the economy generate a mal-distribution of resources that may push the economy beyond full-employment level before elections only to have the economy fall below its full-employment level afterward • This creates the so-called “political business cycle” • Public choice economists, like their Austrian predecessors, tend to be classical libertarians with little regard for politicians • James Buchanan won the Nobel Prize for his work in this field

11. Lecture IX – Growth Theory and Robert Solow • Growth theory was a very “hot” topic back in the 1960’s and 1970’s, but lost its popularity relative to Keynesianism, monetarism, and New Classical Theories • It has re-emerged as the focus of analysis in many major Economics Ph.D. programs in the United States • After the introduction of RBC explanations of the business cycle, economists once again looked at growth models to explain the kinds of technology shocks that RBC models use to explain the cyclical behavior of the economy

12. Lecture X – The Post Keynesians • This may be a misnomer for two reasons: a. Many of the economists that belong to this group are not “post” Keynes at all, but were actually Keynes’ contemporaries. For example, Joan Robinson b. This group is very heterodox with all kinds of varying views, many of which can hardly be called Keynesian at all • I will present several of these views in this lecture

13. Lecture XI - Current state of macroeconomic theory and current world economic conditions • What some of my contemporaries are saying • The great debates that are raging within the U.S. (see Krugman vs. Cochrane) • Personally, I am concerned for the integrity of my chosen professional field when economists are about as civil toward each other as Democrat and Republican politicians • “Outsiders” will continue to view economics as a very imperfect “science” even though we agree at least 90% of the time • Some new developments in the theory and practice of macroeconomics, for example, new targeting mechanisms: nominal GDP and the Taylor rule

14. Lecture XII – Up to You • Possible topics: - Monetary approach to the balance of payments and empirical models - China - Demographics - ???

15. About myself • Current Position Professor of Business Administration at The Citadel, The Military College of South Carolina • Previous Academic Employment Assistant Professor at two other institutions: - Virginia Military Institute - Bentley College

16. More about myself - Other Work Experience • 1976 – 82 Graduate Research Asst. Economics Dept. and College of Behavioral and Social Sciences, Univ. of Maryland • 1974 – 76 Researcher Institute for Defense Analyses, Arlington, VA and Phnom Penh • 1972 – 74 Programme Officer, UNDP New York and N’djamena, Chad • 1969 – 70 High School math teacher, New York City • 1966 – 68 Peace Corps Volunteer, secondary school teacher in Kenya

17. Education • Ph.D. Economics, University of Maryland, College Park, 1983 • M.A. Economics, Queens College, New York, 1972 • B.S. Mathematics, University of Maryland, 1966 • Academic Diploma, Central High School of Philadelphia, 1962

18. Interesting facts about my youth • Born, Washington, DC 1943, where I lived from 1943 – 1957 • Father was Program Officer with US Agency for International Development USAID - We lived in Ankara, Turkey 1957 – 59 - and in Seoul, Korea, 1959 – 61 • I returned to Philadelphia to complete high school and university in 1961

19. Research Interests - Publications • Educational Testing; six or seven statistical articles on attention deficits and their impacts on IQ scores • Two macroeconomic articles on the cyclicality of real wages, one for the post-war years (Journal of Political Economy, June 1989) and the other for the interwar years (Southern Economic Journal, January 1995) both with Scott Sumner • Two finance articles in Journal of Financial Transformation: one on the impact of demographics on financial markets, the other on optimal portfolio management, both with Sykes Wilford

20. Current Research Interests • Revaluation of the Renminbi (with Wilford and Blu Putnam) • Potential output modeling using R (with Wilford and Putnam) • Exchange rate forecasting using the monetary approach to the balance of payments (with Wilford and Putnam) • Effects of demographic changes on economic performance • History of Modern Macroeconomic Theory