Michel De Vroey at Budapest Business School: detailed program

On 5-6th October 2017 Prof. De Vroey gives two lectures on the general evolution of modern macroeconomics.

In cooperation with the Institute of Economics and Methodology of Budapest Business School we invite you and your colleagues to Michel De Vroey’s lectures as the opening event of the new BGE Workshop series ‘Contemporary Thinkers in Economics’.
MICHEL DE VROEY, a celebrated and emblematic figure of the historiography of modern macroeconomics, is a professor emeritus at the Université catholique de Louvain and a visiting scholar at Sorbonne University (Paris) and Duke University (Durham, NC). Prof. De Vroey’s research area covers the history of economic analysis and the 20th century theories of the business cycle, in particular the history of macroeconomics. His recent book ‘A History of Macroeconomics from Keynes to Lucas and Beyond’ (Cambridge University Press, 2016) has become a widely acknowledged account of the history of modern business-cycle theory.


Prof. Peter Mihályi is a leading figure of the Hungarian academic life in economics and a researcher of the heterodox critique against modern macroeconomics. Currently Prof. Mihályi is the head of the Department of Macroeconomics at Corvinus University of Budapest and a visiting scholar at Central European University.



5 October, 17:00pm

Mainstream economics. Its rise and transformation
6 October 10:00am

The Lucas/Kydland and Prescott transformation of macroeconomics: An assessment
Location: Lotz-room, Budapest Business School, H-1055 Budapest, 29-31 Markó Str.



Lars Syll’s ‘elegant’ fantasies

Yesterday I came across one of the lates blog posts of well-known mainstream critic Lars Syll. Prof. Syll is a very interesting figure of modern economic thinking, even if I cannot appreciate his rather passive and destructive critique. I think I can understand his most fundamental claim: neoclassical orthodoxy is irrelevant to real-world economic problems, thus we should drop the whole consruct as completely useless. The reason why I find his critique troublesome and destructive is that he discredits something without suggesting a more approriate framework. It is okay that neoclassical economics was aimed at imitating Newtonian physics. It is okay that Newtonian physics – similarly to neoclassical economics – as a direct description of reality is erroneous. But to say that neoclassical economics and Newtonian physics are failures is something different. Admittedly, the connection between these theories and reality is complex and subtle and one needs to perform a careful analysis in order to assess this relationship. This is the analysis Prof. Syll refuses to carry out. Instead, he draws his conclusions without building a solid footing. Why is economics a failure in understanding reality? Prof. Syll fails to underpin even his own ideas. Philosophy of science and philosophy of physics have been analysing this relationship for centuries. Modern methodology of economics in the realist tradition is in a favourable position for philosophers have a plethora of arguments for the relevance of abstract mathematical sciences such as physics or economics. Any counterarguments that miss considering these powerful philosophical foundations are troublesome . Prof. Syll’s arguments have only one basis: his insistance on the claim that mainstream economics describes nothing. This is almost nothing.

Now let me turn my attention to his current topic, the DSM-theorem.

DSM-theorem (referred to as SMD-theory sometimes) can be regarded as really disturbing, but it rather concentrates on the contradicting relationship between micro- and macroeconomics and not on the (micro-level) postulates of neoclassical. However, it would be a huge mistake to play down the significance of the DSM-theorem (named after the elaborators, Gérard Debreu, Rolf Ricardo Mantel, and Hugo Freund Sonnenschein), since, eventually, it questions the justification of the microfoundations of macroeconomics. The fundamental problem was posed by the relationship between individual and aggregate excess demand functions. As aggregate-level excess demand functions are important for macroeconomics, huge efforts were made to ground these functions at a micro-level. The seminal papers on this topic (Sonnenschein 1972, 1973; Mantel 1973; Debreu 1974) called attention to the fact that however precise we are in specifying the micro-level characteristics, the excess demand function for an economy is not restricted at all by these features. A consequence of the mathematical demonstration of the DSM-theorem was that the general equilibrium of a multi-market macro-system is not necessarily unique (the lack of uniqueness), i.e., we can find multiple price vectors that guarantee equilibrium and the emerging equilibrium states may be unstable in dynamic terms (Giraud 2009). It seems as if DSM-theorem could have dealt mainstream economic theory a final and destroying blow. The relation of mainstream economics to DSM-theorem is portrayed well by the Handbook of Monetary Economics (B. Friedman and Hahn 1990), in which the achievements underlying the theorem were not mentioned even in the References. Mainstream economics disregarded DSM-theorem the same as the inconsistency from the quantity theory and Walras’ law. Frank Hahn (1975) was one of the few who regarded DSM-theorem as the most dangerous critique of mainstream economics. It is understandable somehow, if we consider that the object of the critique, viz. mainstream economics, is an economic theory—while DSM-theorem (however impressive it is) is a mathematical demonstration. Even if we admit that the mathematical grounds of mainstream economic theory are wrong in some respects, the theory was still successful in resolving a lot of economic problems—while DSM-theorem could hardly support us in such a context. The prevailing paradigm is not required to be perfect at all but only to give solutions to several scientific problems. After all, mainstream theory performed well in these terms, and it is also sure that DSM-theorem is never going to help us (say) establish the theoretical grounds for the best operative monetary policy or finding the ultimate causes of cyclical fluctuations to found countercyclical economic policies.


Debreu G (1974) Excess demand functions. J Math Econ 1(1):15–21

Friedman BM, Hahn FH (1990) Handbook of monetary economics. North-Holland, Amsterdam

Giraud G (2009) From non-tâtonnement to monetary dynamics within general equilibrium theory. The limit-price exchange process. CNRS–Paris School of Economics, Paris

Hahn F (1975) Revival of political economy–the wrong issues and the wrong argument. Econ Rec 51(135):360–364

Mantel RR (1973) On the characterization of aggregate excess demand. J Econ Theory 7(3):348–353

Sonnenschein H (1972) Market excess demand functions. Econometrica 40(3):549–563

Sonnenschein H (1973) Do Walras’ identity and continuity characterize the class of community excess demand functions. J Econ Theory 6(4):345–354

Gérard Debreu


Hugo Sonnenschein


Rolf Mantel


On a methodologically underpinned history of business-cycle theories

Understanding business cycles has been a central topic in modern macroeconomics for decades. Business cycles are complex phenomena, so it is difficult to disentangle the underlying causal structure. The phenomenon itself is the only clear thing: capitalist economies suffer from recurrent episodes of falls and rises in general macroeconomic performance. Different schools of the economic thought have attributed different causes to the same event. Neoclassical orthodoxy tries to address the problem in a choice-theoretic framework, whilst heterodox currents challenge this approach by emphasizing a multitude of possible social, institutional or even political causes. Due to these efforts, by now we have had several explanations each of which highlights some selected facets of the business cycles. As a result, our understanding of the business cycles is made up of partial truths, and such partial truths oftentimes seem to contradict one another. However, a synthesis is possible, thus partial truths as building blocks can form a coherent big picture. Such a synthesis requires us to understand how selective models connect to reality, that is, how models represent the selected parts of our socio-economic reality. Understanding the way models connect to reality requires a methodological analysis, thus the understanding of the different methodologies must be the first step to the understanding and the reconciliation of the different thoughts in economics.

Today multiple disciplines regard modern business-cycle theories as their centres of interest. First, history of economics reconstructs the theoretical content and evaluates the economic policy consequences. However, the analysis of the methodological background is only of marginal importance here. Studies regarding methodological analysis as a crucial constituent has appeared only very recently. These efforts ought to be regarded as pathbreaking initiations; for the most important item, see (De Vroey, 2016). Blaug (1992) is also one of the exceptions. Second, modern philosophy of economics has put the study of modern business-cycle theories under the general interest in economic methodology. The discourse here addresses the methodology of economics as such rather than the methodologies of individual currents. One of the few exceptions (Mäki, 2009) analysed the methodological recommendations of Friedman’s business-cycle theory. This is the book that opened the avenue for a methodological analysis of modern business-cycle theory. However, it is still a question whether its ideas can be extended to the post-Friedmanian achievements.

Today these two approaches (the history of economics and the methodology of economics) constitute two distinct directions. Considering methodological aspects in the history of economics is further hindered by the fact that initially the historiography of economics treated methodology as troublesome and void (Weintraub, 1989). One of the most worrying consequences of this situation is that new insights occurring in methodology cannot or can only slowly and superficially build into the historiographical narratives. A methodologically underpinned history of modern business-cycle theories can fill this lacuna.

The positive content of a theory is inseparable from its methodological background. What we conceive of the possibility of accumulating knowledge of the surrounding reality; of the roles our assumptions play; or of the relationship between our theory and the rival approaches: these considerations require solid methodological footing that may change how we interpret the very theoretical content. How we know something determines what we can know and whether we know something at all (Epstein, 2015). It is particularly true of modern business-cycle theories. When new classical macroeconomics (Lucas, 1972) assumed voluntary unemployment, it seemed as if Lucas and his followers had cancelled the study of involuntary unemployment from the agenda. By contrast, their purpose was to scrutinize whether the workers’ decision to reject job offers contributes to unemployment dynamics. In other words, whether there is a voluntary component in unemployment. Simply put, their focus was on only one component of unemployment dynamics. Unless we clearly recognize this selective strategy, it would seem as if modern business-cycle theory by assuming voluntary unemployment placed the blame on the workforce for remaining unemployed. However, modern business-cycle theory succeeded in revealing how the real structure of the economy without any inference from the institutional environment can lead to large-scale macroeconomic fluctuations. Methodology is crucial for us even to evaluate the economic policy consequences. If only particular mechanisms are selected from the complex causal structure, these particular approaches, if taken at face value, necessarily contradict one another. A thorough methodological analysis will lead to a consensus in which all the rival approaches can find their adequate scopes.

The way business-cycle models connect to reality is unclear. The fundamental question regards whether these models can give approximately true descriptions of the causal structure—or they are useful instruments only capable of generating predictions with considerable empirical performance. This is the conflict that underlies the debate between economic realism and instrumentalism. Realists make efforts to argue for the truth of models, while for instrumentalists, models are only constructs for predictive purposes. However, an instrumentalist model fails to teach us anything about the underlying causes: this leads to no knowledge in the strict sense. Although Mäki (2009) provided strong arguments for the realism of economics, according to the standard interpretation Friedman put economics on an instrumentalist track. Both Lucas and the succeeding RBC-theory are conceived as further steps along this line, so today modern business-cycle theory is regarded as useless in terms of creating true knowledge of the economy. This is a rather worrying interpretation that can deprive economics of the possibility of understanding the causes of business cycles. This interpretation may delimit even the scope of economic policy applications (Elson, 2017).

Admittedly, the full-blown realism of economics seems untenable for some apparent instrumentalist tendencies in modern times. However, Kevin Hoover (2009) made efforts to argue for Friedman’s realism along a more modest line of reasoning. For Hoover, Friedman set up instrumentalist agent-level assumptions to achieve causal realism at a macro-level. However, our knowledge of a causal realism built on agent-level instrumentalism in economics is rather limited.

The main purpose is to consider the plausibility of this mix and to suggest a framework for a methodological history of modern business-cycle theory. This framework is Epistemic Structural Realism (ESR) suggested by John Worrall (1989). In the general philosophy of science Anjan Chakravartty (2007) and Stathis Psillos (2006) clarified structuralist ideas. ESR describes the relations connecting entities (in economics: agents) so that the structure is described at the level of the structure, whilst ignoring the entity-level properties. As causal mechanisms work along the relations that connect entities, ESR is the general philosophical framework in which it can be analysed whether structural/causal realism underpinned by entity-level instrumentalism is a viable option both as an interpretation for the history of economics and as a research strategy for economics.

According to my hypothesis, the answer is negative. Knowledge of the way economic agents connect with their fellows requires knowledge of the properties of the agents. Individuals and their features are prior to the structure, so the structure is derived from the individuals. In economics, the microfoundations carry the macro-level. Providing a realistic description of a structure is impossible through assumptions that abandons the idea of realistic descriptions of individuals. Thus, the proposed project clarifies the relationship between the microfoundations and the macro-level, thus the microfoundations will turn out to be our instruments of connecting with reality. Based on the critically reconsidered ESR, we can judge which chapters of the theoretical evolution are properly anchored to socio-economic reality.

To sum up, the purpose is to analyse how modern theories of the business-cycle have changed in terms of their relation to reality. Through this methodological analysis, I can offer a narrative of the changes in the relevance of theories to understanding socio-economic reality. This narrative can be the first step to a deeper understanding of the relationship of the rival theoretical approaches of the business cycle.


Blaug, M. (1992). The methodology of economics. Cambridge: Cambridge University Press.

Chakravartty, A. (2007). A metaphysics for scientific realism. Knowing the unobservable. Cambridge: Cambridge University Press.

De Vroey, M. (2016). A history of macroeconomics from Keynes to Lucas and beyond. Cambridge: Cambridge University Press.

Elson, A. (2017). The global financial crisis in retrospect. New York: Palgrave Macmillan.

Epstein, B. (2015). The ant trap. Oxford: Oxford University Press.

Hoover, K. (2009). Milton Friedman’s stance. The methodology of causal realism. In U. Mäki (Ed.), The methodology of positive economics (pp. 303-320). Cambridge: Cambridge University Press.

Lucas, R. E. (1972). Expectations and the neutrality of money. Journal of Economic Theory, 4(2), 103-124.

Mäki, U. (Ed.). (2009). The methodology of positive economics. Cambridge: Cambridge University Press.

Mäki, U. (2009). Unrealistic assumptions and unnecessary confusions. Rereading and rewriting F53 as a realist statement. In U. Mäki (Ed.), The methodology of positive economics (pp. 90-116). Cambridge: Cambridge University Press.

Psillos, S. (2006). The structure, the whole structure, and nothing but the structure? Philosophy of Science, 73(5), 560-570.

Weintraub, E. (1989). Methodology doesn’t matter, but the history of thought might. The Scandinavian Journal of Economics, 91(2), 477-493.

Worrall, J. (1989). Structural realism. The best of both worlds? . Dialectica, 43(1-2), 99-124.