Tuesday, December 25, 2012

Economic History Matters

Recently I've been debating which elective courses to take in the coming years and which fields to specialize in. One of the two fields will almost certainly be monetary economics. For the other, I’m currently leaning towards economic history. With that subject in mind, I was pleasantly surprised to stumble across a new paper by Kenneth Carlaw and Richard Lipsey, “Does history matter? Empirical analysis of evolutionary versus stationary equilibrium views of the economy.” (h/t David Glasner) Although I’ve yet to read the full paper, here is the abstract to whet your appetite (emphasis mine):
The evolutionary vision in which history matters is of an evolving economy driven by bursts of technological change initiated by agents facing uncertainty and producing long term, path-dependent growth and shorter-term, non-random investment cycles. The alternative vision in which history does not matter is of a stationary, ergodic process driven by rational agents facing risk and producing stable trend growth and shorter term cycles caused by random disturbances. We use Carlaw and Lipsey’s simulation model of non-stationary, sustained growth driven by endogenous, path-dependent technological change under uncertainty to generate artificial macro data. We match these data to the New Classical stylized growth facts. The raw simulation data pass standard tests for trend and difference stationarity, exhibiting unit roots and cointegrating processes of order one. Thus, contrary to current belief, these tests do not establish that the real data are generated by a stationary process. Real data are then used to estimate time-varying NAIRU’s for six OECD countries. The estimates are shown to be highly sensitive to the time period over which they are made. They also fail to show any relation between the unemployment gap, actual unemployment minus estimated NAIRU and the acceleration of inflation. Thus there is no tendency for inflation to behave as required by the New Keynesian and earlier New Classical theory. We conclude by rejecting the existence of a well-defined a short-run, negatively sloped Philips curve, a NAIRU, a unique general equilibrium, short and long-run, a vertical long-run Phillips curve, and the long-run neutrality of money.
This final statement sets forth very lofty goals that appeal to my biases and probably those of many readers.

Related to economic history, but from a different angle, Lord Keynes presents a historical look at the Austrian perspective on the Government’s Ability to Increase Employment and Output:
Robert Murphy tells us that it is not at all clear that we “should credit QE1 and/or [sc. the] Obama stimulus” with the US recovery in 2009. That reflects a most extreme view that some Austrians can now be found peddling: the idea that expansionary government fiscal policy does nothing or little to increase private investment and consumption, and that government stimulus programs do not work.
How strange it is, then, to see that other Austrians have never denied that government fiscal and monetary policies can increase employment and output.
Take this statement by Huerta de Soto (who is himself an advocate of a most extreme Rothbardian program):
What should be done if, under certain circumstances, it appears politically ‘impossible’ to take the measures necessary to make labor markets flexible, abandon protectionism and promote the readjustment which is the prerequisite of any recovery? This is an extremely intriguing question of economic policy, and its answer must depend on a correct evaluation of the severity of each particular set of circumstances. Although theory suggests that any policy which consists of an artificial increase in consumption, in public spending and in credit expansion is counterproductive, no one denies that, in the short run, it is possible to absorb any volume of unemployment by simply raising public spending or credit expansion, albeit at the cost of interrupting the readjustment process and aggravating the eventual recession.
The whole excerpt from Huerta de Soto includes similar views from Hayek and Lachmann. Due to the current lack of economic history classes in today’s universities, I fear many Austrians will be surprised to learn that government intervention was previously accepted as a short run remedy, albeit with longer run consequences. From the other side, I worry that Post-Keynesians downplay historical lessons about the difficulty and long run costs of ameliorating short run pain.

Regardless of one’s side on the matter, the above posts highlight the benefits of learning and studying economic history (or history of economic thought). The current push to eliminate these courses at most colleges and universities is a huge disservice to the future of economics as a social science (which it inherently is). Hopefully the trend can be reversed, in part, so that I may one day have the opportunity to teach courses in this field.

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