Center for the History of Political Economy Summer School, June 2014 1 History of Modern...
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Transcript of Center for the History of Political Economy Summer School, June 2014 1 History of Modern...
Center for the History of Political Economy Summer School, June 2014 1
History of Modern MacroeconomicsLecture 1. The Background to Modern Macroeconomics (before the 1930s)
Kevin D. HooverDepartment of EconomicsDepartment of Philosophy
Center for the History of Political EconomyDuke University
Center for the History of Political Economy Summer School, June
2014 2
Macroeconomic Issues are Old
Sir William Petty (1623-1687)
Center for the History of Political Economy Summer School, June
2014 3
The Distinction Between Macroeconomics and
Microeconomics is Recent Ragnar Frisch in Cassel Festschrift (1933): microdynamics vs. macrodynamics
Frisch in mimeographed lectures (1933/34): mikroøkonomiske vs. macroøkonomiske
Jan Tinbergen in Revue de l'Institut International de Statistique/Review of the International Statistical Institute (1936): macroéconomique
J.M. Fleming in Economica (1938): macro-economic
Ultimate source: Frisch; diffused through early meetings of the Econometric Society
Ragnar Frisch (1895-1973), Norwegian economist, winner of
the first Nobel Prize in Economics
Center for the History of Political Economy Summer School, June
2014 4
The Slow Diffusion of the Micro/Macro Distinction
Figure 1The Diffusion of "Microeconomics" and "Macroeconomics"
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Per
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"Macroeconomics"
"Microeconomics"
Center for the History of Political Economy Summer School, June
2014 5
Macroeconomics Before 1930: Main Concerns
1. Monetary Theory
2. Theory of the Trade Cycle (later Business Cycle)
Center for the History of Political Economy Summer School, June
2014 6
David Hume and Classical Monetary Theory
International Quantity Theory of Money:
Principal Doctrines The Classical Dichotomy Domestic Quantity
Theory of Money (short run and long run)
The International Specie-Flow Mechanism
The Independence of Money and Finance
David Hume (1711-1776)
Center for the History of Political Economy Summer School, June
2014 7
The Classical Dichotomy: Hume on the Nature of Money
“[Money] is none of the wheels of trade: it is the oil which renders the motion of the wheels more smooth and easy.”
David Hume “Of Money”
Center for the History of Political Economy Summer School, June
2014 8
Domestic Quantity Theory of Money: Hume on the Neutrality of Money
Suppose that four-fifths of all the money in GREAT BRITAIN to be annihilated in one night, and the nation reduced to the same condition, with regard to specie, as in the reigns of the HARRYS AND EDWARDS, what would be the consequence? Must not the price of all labour and commodities sink in proportion, and every thing be sold as cheap as they were in those ages?
David Hume “On the Balance of Trade”
Center for the History of Political Economy Summer School, June
2014 9
Domestic Quantity Theory of Money:
Hume on the Short and Long Run Effects of Money. . . though the high price of commodities be a necessary
consequence of the encrease in gold and silver, yet it follows not immediately upon the encrease; but some time is required before money circulates through the whole state, and makes its effect be felt on all ranks of people. At first, no alteration is perceived; by degrees the price rises, first one commodity, then of another; till the whole at last reaches a just proportion with the new quantity of specie which is in the kingdom. . . it is only in this interval or intermediate situation, between the acquisition of money and rise of prices, that the encreasing quantity of gold and silver is favorable to industry. . . It is easy to trace the money in its progress through the whole commonwealth; where we shall find, that it must first quicken the diligence of every individual, before it encrease the price of labor.
David Hume “Of Money”
Center for the History of Political Economy Summer School, June
2014 10
The International Specie-Flow Mechanism
Spain imports gold (pSpain / pEngland) ↑ demand
for English goods & gold flows into England
pSpain↓ & pEngland ↑ until trade balanced and gold
flow stops
The gold of Spain becomes the gold of England;
the real wealth of Spain or England little changed
Center for the History of Political Economy Summer School, June
2014 11
Independence of Money and Finance
Center for the History of Political Economy Summer School, June
2014 12
Hume Ignored Financial Innovation
English gold guinea (George III, 1776) Scottish paper guinea (Paisley Banking Company, 1785)
Center for the History of Political Economy Summer School, June
2014 13
The Gold Standard Was Not Automatic
Suspensions Panic of 1797: Suspension of convertibility of Bank of
England notes into gold, 1797-1821 U.S. Civil War Britain in World War I
The Problem of management of paper currency Banking School (Real Bills Doctrine) Currency School (U.K. Bank Charter Act of 1844; U.S.
National Banking Acts of 1863 & 1864)
Management of interest rates: The rules of the game
Center for the History of Political Economy Summer School, June
2014 14
The Quantity Theory of Money: The Equation of Exchange
MV = PQ
M = money V = velocity of
circulation (average turnover time per dollar)
P = general price level Q = transactions
(dollars per unit time)
Simon Newcomb
(1835-1909)
Irving Fisher
(1867-1947)
Center for the History of Political Economy Summer School, June
2014 15
The Quantity Theory of Money: The Cambridge Equation
M/P = kY
M = money P = general price level k = fraction of income
held as money Y = income (pounds
sterling per unit time)
Alfred Marshall (1842-1924)
Center for the History of Political Economy Summer School, June
2014 16
Comparison of Two Approaches to the Quantity Theory
Equation of Exchange MV = PQ V = speed of turnover of
money “ . . . money on the wing”
Dennis Robertson Cambridge Equation
M/P = kY k = size of money
holding “. . . money sitting”
Dennis Robertson Equivalence: V = 1/k if
Q Y Dennis Robertson (1890-1963)
Center for the History of Political Economy Summer School, June
2014 17
Wicksell: Cumulative Process and the Natural Rate of Interest
real rate of interest (rr) = nominal rate (r) – inflation rate (P) (Fisher)
Stable Economy: M Y & I and P constant at the natural rate of interest (rN)
M > needed ↓r below rN ↓ rr ↑I & ↑ P further ↓ rr further ↑I & ↑ P . . .
Self-limited under gold standard as ↑ P gold outflow ↓M offsetting first cumulative process
Not self-limiting in pure credit economy need for active monetary policyKnut Wicksell (1851-1926)
Center for the History of Political Economy Summer School, June
2014 18
Business Cycles: Main Issues
Good and bad times alternate
Develop data indices (price and others) business cycle barometers
Theory identify patterns are patterns regular?
Center for the History of Political Economy Summer School, June
2014 19
Data and Patterns: Warren Persons Harvard Business-Cycle
Barometer
Center for the History of Political Economy Summer School, June
2014 20
Natural CyclesTides – Morro Bay, California
Musical Instruments
Center for the History of Political Economy Summer School, June
2014 21
Wesley Clair Mitchell (1874-1948): Cycles are Qualitatively Not
Quantitatively Similar
Center for the History of Political Economy Summer School, June
2014 22
Cycles Have Deep Hidden Causes
Business cycles are like the tides, only vastly more complex
Hierarchy of cycles: Kitchen (40 month) Juglar (9-10 years = 3
Kitchen’s) Kondratieff (60 years
= 6 Juglar’s)
Joseph Schumpeter (1883-1950)
Center for the History of Political Economy Summer School, June
2014 23
Clément Juglar: Credit Cycles
Every cycle has a proximate trigger – the straw that breaks the camel’s back
But cycles have a deeper root cause – the ebb and flow of financial credit
Clément Juglar (1819-1905)
Center for the History of Political Economy Summer School, June
2014 24
Cycles Have Real Causes
Jevons: business cycles follow agricultural cycles, which follow the cycle of sunspots
Moore: business cycles are closely correlated to cycles in the orbit of Venus
William Stanley Jevons (1835-1882)
Henry Ludwell Moore (1869-1958)
Center for the History of Political Economy Summer School, June
2014 25
Problem of the 1920s and 1930s
Monetary theory is theoretically more developed
Business cycle analysis is the premier empirical analysis of the whole economy
How can they be brought into contact: Frisch Tinbergen Keynes and many others Foundation of the Econometric Society (1933)
Center for the History of Political Economy Summer School, June
2014 26
Thanks
The End