BOOK REVIEW: A HISTORY OF MACROECONOMICS: FROM KEYNES TO LUCAS AND BEYOND, BY MICHEL DEVROEY REVIEWED BY ROGER E. BACKHOUSE*

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1 BOOK REVIEW: A HISTORY OF MACROECONOMICS: FROM KEYNES TO LUCAS AND BEYOND, BY MICHEL DEVROEY REVIEWED BY ROGER E. BACKHOUSE* * Department of Economics, University of Birmingham, Birmingham, England. R.E.Backhouse@bham.ac.uk. This preprint is the accepted typescript of a book review that is forthcoming in revised form, after minor editorial changes, in the Journal of the History of Economic Thought (ISSN: ), volume 40 (2018), issue TBA. Copyright to the journal s articles is held by the History of Economics Society (HES), whose exclusive licensee and publisher for the journal is Cambridge University Press ( This preprint may be used only for private research and study and is not to be distributed further. The preprint may be cited as follows: Backhouse, Roger. Review of A History Of Macroeconomics: From Keynes To Lucas And Beyond by Michel Devroey. Journal of the History of Economic Thought 40 (forthcoming). Preprint at SocArXiv, osf.io/preprints/socarxiv

2 In this book, Michel De Vroey traces the history of modern macroeconomics from Keynes's General Theory to the present day. The key transition in this story is from Keynes and Keynesian macroeconomics to DSGE (Dynamic Stochastic General Equilibrium) macroeconomics, a divide that corresponds to what De Vroey, following Axel Leijonhufvud, describes as a 180-degree turn in the view of the representative macroeconomist. Though there were signifcant changes in policy prescriptions, the fundamental change was methodological. The book begins with a chapter on The General Theory of Employment, Interest and Money, by John Maynard Keynes (1936), and the emergence of modern macroeconomics. This chapter is predominantly about the General Theory, De Vroey's conclusion being that, contrary to what Keynes and many Keynesians believed, it was an argument about wage rigidity. A short concluding section covers the emergence of modern macroeconomics, doing little more than link the discussion of Keynes to subsequent chapters. The next two chapters cover the IS-LM model and the development of the neoclassical synthesis by Lawrence Klein and Don Patinkin. Subsequent chapters cover Milton Friedman and monetarism, Edmund Phelps, Friedman and the natural rate of unemployment, Robert Clower and Leijonhufvud, and the rise of non-walrasian equilibrium modelling. Part I of the book closes with an assessment of the Keynesian era. In Part II, no fewer than three chapters are devoted to Lucas. The emphasis, as one of De Vroey's chapter headings makes clear, is on the methodological breach brought about in Lucas's work. After a chapter on early reactions to Lucas, De Vroey covers what he calls "frst-generation new Keynesian" and alternative reactions to Lucas under which he include the work of Peter Diamond, Peter Howitt, John Roberts and Oliver Hart. Papers by these authors were all theoretical gems" but none of this work succeeded in instigating a new research programme. That was achieved by Fynn Kydland and Edward Prescott with real business cycle theory which marked an important turning point, on which he has three chapters. These chapters are followed by a chapter on "second-generation" new Keynesian modelling. The book then concludes with his overall assessment of the history of macroeconomics, though the lens of "the

3 Marshall-Walras divide" and reactions to DSGE modelling (including, inter alia, Roger Farmer on self-fulflling expectations, and Leijonhufvud on agent-based modelling). De Vroey's approach to history, which is the result of teaching the subject to economics students, involves evaluating the theories he surveys. Because he has chosen to evaluate macroeconomics from a perspective very close to that of Lucas and DSGE theory, the result is very different in the two parts of the book. Part II is by no means uncritical of the theories under discussion but his position is one of general sympathy. In contrast, the frst part of the book is a remorseless exposure of what he sees as logical faults of the theory, an approach that to my mind is too unsympathetic to be fair. He claims that the theories he discusses represented important steps in macroeconomic thinking but the inevitable result of his perspective is to denigrate them. There is no recognition of the possibility that the economists whose work he covers might have rejected the criteria against which he is evaluating their work. He fails to address the key question of whether his criteria are appropriate. His criteria would no doubt be accepted by many contemporary macroeconomists but this does not justify them. As I worked through the frst section my irritation at his failure to assess theories on their own terms rose progressively. This irritation disappeared as I got into Part II, which is where the real value of the book lies. To my knowledge, though others have discussed parts of this story, no-one has provided such a comprehensive account documenting the twists and turns in DSGE modelling after Lucas. Some of the material is very technical, making passages difcult for those unfamiliar with the material, but this was probably inevitable. Part II is on its own enough to justify the book. One of the important features of this part of the book is the way empirical work is woven into the story of how the models developed to an extent not true of Part I. In part this refects changes in macroeconomics -- econometrics did become closer to macroeconomic theory with the move to stochastic models. But though macroeconomics and macroeconometrics became closer after Lucas, I wonder whether the contrast between the two parts of the book arises, at least in part, because of the

4 material on which De Vroey has chosen to focus. There is a welcome discussion of the Klein-Goldberger model, in which De Vroey criticises Klein's claim to have distinguished empirically between Keynes and the classics, but the resulting surge in large-scale econometric modelling is dismissed in a paragraph. He mentions the Brookings and MIT-Penn-SSRC models, but notes simply that as they got bigger, they were taken over by applied mathematicians who did not share Klein's theoretical interest, and as a result Klein's theoretical purpose was lost.the developers of these models may have had other purposes, but I see no justifcation for seeing them as applied mathematicians. The real problem with this account, however, is that this discussion of the Klein-Goldberger model appears as an interlude in the story that is of more interest to De Vroey: the attempt to synthesise Keynes and Walras. Empirical work crops up sporadically, as in the discussion of monetarism, but the extensive engagement of Keynesian economists with empirical work is ignored. James Tobin, to cite one example among many, was as much an econometrician as an economic theorist. Paying closer attention to the ongoing interaction between economic theory and empirical work would, I suggest, have produced a different story. It might even have led to the conclusion that modern macroeconomics did not begin with the General Theory and that, perhaps, it began earlier with, for example, the dynamic models of Ragnar Frisch. There is much more in this book that is worth discussing. De Vroey s arguments about Marshall and Walras, which occur throughout the book, unfortunately raise questions that are too big to address in a short review. Instead, I will pick out the section "The birth of the Phillips curve" in which De Vroey claims that "It all started" with Phillips. He did not have the beneft of Forder's recent (001)) book that calls this myth into question. However, it is puzzling that he does not see the Klein-Goldberger wage equation, discussed only two pages earlier, in which unemployment affects wage changes with a negative coefcient, as raising doubts about his claim about Phillips. The existence of such curves before Phillips (and the Klein-Goldberger equation was one of many) is surely prima facie evidence that what we now call the Philips curve had a longer history. The key question in the history of macroeconomics is surely why certain assumptions came to be accepted and others were not. Keynesian

5 models were undoubtedly imperfect, for reasons De Vroey cites and for other reasons, but the methodological shift that led to their rejection involved accepting a set of models with problems that might been considered even more serious. De Vroey takes Keynesian economists to task for working with models that fail to provide a sufciently rigorous account of involuntary unemployment, yet fails to take new classical and real business cycle modellers to task for working with models that have no role for money and in which it is hard to explain why fnancial assets are bought and sold. It was clear to many Keynesian economists that agents were heterogeneous and, even if they could not construct formal mathematical models in which individuals had different preferences, different endowments and different beliefs about the future, they were convinced that such problems should not be neglected. Is there no possibility that future generations of economists may look back and treat Lucas's methodological revolution with the skepticism with which De Vroey treats the Keynesian era? They may have criticisms far stronger than that DSGE theories were botched and a conceptual mess (words used by De Vroey to evaluate Keynesian theory). De Vroey has clearly written an important book from which there is much to learn. For the reasons I have given, and because theories of involuntary unemployment have been covered in his previous work (notably De Vroey 0007), the book s main novelty lies in its account of the history of DSGE modelling. The book may not be an account of the entire history of modern macroeconomics but it covers a very large part of it. Roger E. Backhouse University of Birmingham, UK, and Erasmus University Rotterdam References De Vroey, Michel Involuntary Unemployment. London: Routledge. Forder, James. 001). Macroeconomics and the Phillips Curve Myth. Oxford: Oxford University Press. Keynes, John Maynard The General Theory of Employment, Interest and Money. London: Macmillan.