The Evolution of Economic Science: Macroeconomics, Growth, and Development
Daron Acemoglu, James Killian Professor of Economics, MIT; Peter Diamond, PhD '63, MIT Institute Professor; Esther Duflo, PhD '99, Abdul Latif Jameel Prof of Poverty Allev & Develop Department of Economics; Robert Hall, PhD '67, Robert and Carole McNeil Professor of Economics and Senior Fellow, Hoover Institution, Stanford University; Robert M. Solow, MIT Institute Professor, Emeritus 1987 Nobel Laureate in Economics
Description: This panel first looks inward, at the evolution of macroeconomics in the past century, and the emergence of microeconomic foundations in macroeconomics, then shifts outward, to the application of economic analysis to such issues as structural unemployment, the ongoing U.S. recession, and the best ways to help developing nations.
When he took his first economics course in 1940, Robert Solow tells us, "There was no such thing as macroeconomics." The general framework for discussing large"scale fluctuations in economies , "born in Keynes' general theory in 1936," took a while to evolve. Keynes, says Solow, wanted a "macroeconomics that would keep closely in touch with data and with actual events." From the 1950s through the 1970s, macroeconomics "was all Keynesian," but there was "lots of room for ideology to be dragged in." A sea change occurred in the late '70s, driven by stagflation. Macroeconomists could not explain the phenomenon, providing an opening "for opponents of this way of doing macroeconomics." After the '70s, "paying close attention to events got to be a bad thing," says Solow. Some economists declared it was time to erase the distinction between macro and microeconomics, but says Solow, "You can't answer the questions macro has asked by modeling whole economies as the interaction of tens of millions of households, firms and products It's like trying to design an airplane molecule by molecule."
Peter Diamond was part of a generation of researchers in the 1960s who hoped to construct a micro foundation to macroeconomics. In particular, he worked to incorporate into the basic general equilibrium model two Keynesian ideas that didn't fit so comfortably: the significance of current income, and "the stickiness of wages." Economists explored how the labor market functioned in the economy, and learned to model vast flows of workers moving in and out of employment. Analyzing such flows helps inform policy discussions about unemployment insurance, says Diamond. While these approaches have been incorporated into "otherwise conventional macro models," he looks forward to "a big expansion of range of micro foundation models that will be consistent with the general equilibrium views of thinking about the whole economy, and Keynesian views that we get events that really affect things."
Robert Hall defends economists attacked for not predicting "the big slump." Says Hall, "We did a lot of research that turned out to be highly material." He boils down the financial crisis to such factors as deregulation of financial institutions, a massive build"up of consumer debt and the overshooting of housing prices. Financial fallout from the 2008 crisis continues today: credit card interest rates remain high, and available credit is extremely restricted, impeding recovery. The Federal Reserve's hands are tied, because it can't lower interest rates anymore; "the normal equilibrium process of the economy fails in a situation like this," says Hall. Paradoxically, a little inflation would be good, because it might "get people to perceive that now is a great time to buy stuff instead of later." Over the next four years, Hall believes unemployment will get back to normal, and households will work down accumulated debt. He frets that current legislation has "only scratched the surface" of correcting the regulatory lapses that triggered the crisis. Says Hall, "We need robust financial institutions with lots of capital."
For years, people have debated the effectiveness of aid to developing nations. Development economics is trying "to move away from big questionsto smaller questions for which we might possibly have the answer," says Esther Duflo. She studies the economics of public health aid in poor countries, where diseases like malaria are responsible for millions of deaths. Even where the benefits of aid are clear, there are still "heated arguments, ideology and passion." Studies by Duflo and her colleagues have largely quieted concerns that people offered free health services such as bed nets for malaria, or immunizations, decline them, or after receiving them, refuse to purchase subsidized healthcare in the future. This research is changing policies: Kenya has begun distributing bed nets for free, for instance. Small investments in health pay large dividends. Duflo cites a study that school children who are de"wormed for a year longer than their peers earn 20% more each year when they are adults. "A patient step"by"step approach is a productive way of trying to understand how the poor behave and how we can possibly help them get out of poverty traps."
About the Speaker(s): Daron Acemoglu studies political economy, economic development and growth, technology, income and wage inequality, human capital and training and labor economics, among other fields. He has taught economics at MIT since 1993. Previously, Acemoglu was a lecturer in economics at the London School of Economics, where he also received his M.Sc. and Ph.D.
Acemoglu is a fellow of the Society of Labor Economists, a fellow of the American Academy of Arts and Sciences, a fellow of the Econometric Society and a fellow of the European Economic Association. He is the author of Introduction to Modern Economic Growth.
Host(s): Office of the President, MIT150 Inventional Wisdom
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