The Friedman-Lucas transition in macroeconomics. A structuralist approach

These months I am working on my new book project. There is a lot to do since I would like to complete all the chapters that I can finish here at home to have only a minor part of the project to be completed in Chicago, at Duke and at Arizona State University. In the meatime the title of the forthcoming book seems to have got a final form: it is

The Friedman-Lucas transition in macroeconomics. A structuralist approach.

In this post I would like to provide a bird-eye view of the contents as planned in the current stage.

Chapter 1. The introduction of the book is devoted to demonstrating the idea that methodology plays a crucial role in forming our ideas in economics. The discussion of this basic tenet in this chapter is twofold. First, I will review some methodological aspects of the neoclassical–institutional controversy. Their special theoretical problems directed both institutionalism and mainstream economics to unique methodological ways. Consequently, it has become impossible for the camps to mutually cultivate their approaches. Due to the special interests and the accompanying methodologies, these schools have been unable to pay attention to certain mechanisms of socio-economic reality.

Second, as the realism of theories or models can be doubted on multiple grounds, in this chapter I will characterize realism as a purpose, desire or ambition. This is the only thing we have for sure: a realist wants to be realist. The most we have about realism is our ambition to be realists. This is the purpose along which we can distinguish realists and instrumentalists. Accordingly, I will underlie that any methodological analysis of theories in the realism-instrumentalism context cannot be complete without scrutinizing the purpose of the theorists. Here understanding (i.e. providing causal knowledge as a purpose) stands in the focus as a feature of realists—in contrast to instrumentalists’ emphasis on mere predictive purposes (or to have knowledge only of the observable phenomena while denying the possibility of knowing the unobservable: e.g. causes).

Chapter 2. This chapter is devoted to a historical overview, as the reviewers wanted to read more about the THEORIES and the changes in econometric practice and the empirical performance of these models. Here I can talk about RBC and new Keynesian models as alternatives to Lucas’ line. I think this is going to be a very interesting chapter since a lot of details will be included about Chicago economics, the transition from Friedman to Lucas, etc. The line of reasoning can be summarized along the line from Hume’s thesis to the rethinking of the role of the government.

Chapter 3. This is the core of the book: here I will introduce the methodological framework to be used for evaluating the Friedman-Lucas transition. This is hard core philosophy of science, but customized for economists – so it is going to be an easy read hopefully. In this chapter, the chosen framework for a structuralist analysis of modern business-cycle theory is considered. In order to respond to the debates around the realist and instrumentalist interpretations of the works of Friedman I will provide a framework in which the tension between the opposite standpoints can be overcome. Based on epistemic structural realism, first, I will identify Friedman’s stance as a mix of agent-level instrumentalism and macro-level causal realism and, second, I will scrutinize the consistency of this epistemic strategy. I will argue that causal realism requires one to be realist regarding the assumptions defining agents as well.

Within the framework of ESR the problem I can solve is whether the representation of relations can be separated from the representation of entities. I will argue that structural realism cannot do without entity realism. In other words, a structuralism detached from the representation of entities (i.e. from the approximately true descriptions of agents) is not a viable option in economics. Structure and causality are of primary importance in creating scientific knowledge. In these terms, the only problem is that knowledge of a structure cannot be separated from the knowledge of entities. Their causal properties and dispositions for behaviour are of crucial importance in forming their (causal) relations. Entities having other properties stand in other relations, thus properties of entities are not neutral in terms of relations. This is the reason why the micro-foundations are so important in establishing the macro-level causal connections.

Chapter 4. This chapter is devoted to an assessment. One strength is the extensive reading of Lucas’ unpublished manuscripts with lots of word-to-word citations. Here I will provide an interpretation based on Max Weber’s traditional neoclassical methodology that can help us to find the adequate territory of abstract-idealized mainstream models. Special attention is paid to the intellectual connection between Weber and the subsequent business-cycle theorists. It is argued here that scrutinizing the relationship between models and reality should reach beyond the oversimplifying approach of empirical tests. Simultaneously, this assessment gives us a refined set of aspects by the application of which to contemporary macroeconomics some methodological breaks can also be highlighted. These breaks would not have been revealed by a linear narrative.

Here Max Weber’s social scientific methodology is introduced as an adequate strategy to establish the macro-level causal connections on realistic agent-level properties.

Chapter 5. In this concluding chapter I will consider the chances of a new theoretical consensus placed upon methodological grounds. I will argue that the complementarity of the approaches applied in macroeconomics and the related fields makes it possible to reconcile the competing approaches with one another without modifying the research traditions.


Fulbright chronicle #3

Hungarian Fulbright grantees — researcher, lecturers and students — of academic year 2018/2019 showing off after our farewell party, yesterday evening. Kriszta stands in the middle, our leading intructor and program officer, our honorary fellow mate — to whom we are all so grateful for her unremitting enthusisasm and kind support. My tall figure is rising on the left — proud and happy. I am so delighted to have met so many talented and open-minded people. Good luck and safe travels to everyone.


Foundations of Business Cycle Research, Vol. 1

The subject matter of conventional macroeconomics is strictly dichotomized: separate macroeconomic theories are developed for the long run and for the short run. In long-run macroeconomics the economy is analyzed as if relative prices are fully adjusted to their long-run equilibrium values in each period, the fundamentals of the economy such as preferences and technology evolve smoothly and predictably, and expectations are correct all the time. Macroeconomics for the short run is about understanding the annual or quarterly fluctuations around trend in the most important macroeconomic series, thus seeking explanations for business cycles. Drawing on Austrian capital theory the alternative approach presented in this book, which is the first part of a 2-volume work, features the real coupling between the short run and the long run by identifying the relative-price effects of a monetary disturbance as a major source of economywide distortions in the intertemporal allocation of resources and hence as an important cause of business cycles. Various conceptualizations of macroeconomic cyclicality are critically examined from the perspective of capital-based macroeconomics. This work is situated at the crossroads of monetary theory, macroeconomics, and the new institutional economics.


Reading Charles I. Plosser’s ‘Understanding real business cycles’

Charles Plosser’s review paper entitled ‘Understanding real business cycles‘ is a must for all those interested in the modern theories of the business cycles. A major advantage of the paper that it is written in plain English, it has a well-organized structure and summarizes by giving a clear vision of future development. Some of the most important suggestions of the paper:

  1. Keynesian macro is not a theory judged by the modern choice-theoretic standards. Keynesian models had significant empirical success but failed to trace the macro-level back to solid microfoundations.
  2. The aim of general equilibrium modelling is to help us to understand the role played by optimization and equilibrating tendencies at the agent-level. It makes no sense to postulate a disequilibrium framework or market failures before understanding the contribution of a general macroeconomic equilibrium.  Large-scale fluctuations may be triggered even in the absence of market failures.
  3. RBC-theory has common roots with Lucasian macro with the very nature of the stochastic shocks as a major difference. Shocks, be they technological disturbances or monetary noises, exhort the agents to dynamically adjust to the new situation. Business cycles emerge as the outcome of the equilibrating-optimizing responses of rational agents.
  4. RBC-theory is the unified theory envisioned by Lucas in his ‘Understanding business cycles‘. As Lucas puts it:

Though there is absolutely no theoretical reason to anticipate it, one is led by the facts to conclude that, with respect to the qualitative behavior of co-movements among series, business cycles are all alike. To theoretically inclined economists, this conclusion should be attractive and challenging, for it suggests the possibility of a unified explanation of business cycles, grounded in the general laws governing market economies, rather than in political or institutional characteristics specific to particular countries or periods.

RBC-theory is a highly flexible framework that can be tailored to the needs of a researcher, according to the nature of the problem under scrutiny. Early-stage RBC-models were constructed to analyze the effects of technological shocks, but it is easy to modify the general framework in order to scrutinize the effects of seemengly all kinds of macroeconomic shocks: modifications in tax policy, changes in consumer taste, changes in monetary or fiscal policy and the like. RBC-theory seems to signify the end of macroeconomics: the time of the grand theories is over – once and for all?


Absorbed in James Forder’s Phillips curve myth

An outstanding book.

It was my first thought after reading James Forder’s seminal work ‘Macroeconomics and the Phillips curve myth‘. Dr. Forder breaks down a plethora of age-old fallacies written in the historiography of economics and reshapes the 20th century history of our discipline.

Personally, I am not a researcher of the Phillips curve per se. Only two chapters of this long story are most interesting for me, Friedman’s and Lucas’ Phillips curves, which are highly influential episodes of the story. I clearly remember, I was afraid to start reading the book a couple of weeks ago, because Dr. Forder promises his readers to get the facts straight. This is his very program: to read everything that belongs to the Phillips curve literature and correct all the errors we inherited from the previous decades. And this is the program Dr. Forder accomplishes.

For me personally, the most interesting part is the chapters in which the author clears up the true role of Milton Friedman‘s Nobel lecture in the distortion of the history of the Phillips curve and how Friedman came up with a brand new narrative. This was a shocking experience to realize that the commonly believed story is Friedman’s invention. In Friedman’s reading the Phillips curve was a high-ranked constituent of both theoretical economics and economic policy discussions from the early post-war years. In Friedman’s account, the Phillips curve was the most important analytical tool of Keynesian economics and Friedman places the blame on the Phillips curve (and the believers) for all the allaged mistakes of theoretical economics and economic policy. In a nutshell, it is failure of the Phillips curve that economics derailed – and Friedman’s ambition was to put economics back on the right track. His soultion was the inclusion of expectations in order to call attention to the fact that there is no stable trade-off between inflation and unemployment. On the contrary, Phillips’ contribution was only one element in the vast literature on the trade-off between inflation and employment/unemployment (and what is more, not the most important or most inspiring one) and the Phillips-curve was not widely used in Keynesian economics to argue for inflationary politics in favour of lower unemployment rates. Friedman was unable to change the game in terms of the Phillips curve because such a game had hardly existed. However, thanks to Friedman, after his reinterpretation the Phillips-curve really came to the fore: it became the common language, the common denominator through which monetary-interested authors could express their views. In this term the Friedman-Lucas transition is particularly interesting. Setting aside the famous Marshall-Walras divide, the central feature of the debate between Friedman and Lucas was the focus on the shape of the Phillips curve and whether there is a distinction between the short-run curve(s) and the long-run vertical line.

From time to time we need to face the fallacies of our thinking. Some courageous authors like James Forder are not afraid to rebuild our science from the ultimate grounds. To be perfectly honest, sometimes I feel tempted to think there is no real progress in our discipline. Oftentimes it seems as if the cornerstones of economics and the history of economic thought are established once and for all. But some ambitious books such as Forder’s Phillips curve myth can be successful in reopening our most important questions. This is the reason why Forder’s book is a must: it can teach us how reshape our knowledge through sound reasoning.

Here is a review from Kevin D. Hoover, and another one from Michel De Vroey. Both are worth reading.



On the margin of the 2018 elections in Hungary

I’ve been considering for days to write something about the shocking outcome of the 2018 parliamentary elections in Hungary, held last Sunday. The first idea came to my mind was to write a detailed analysis on this historical phenomenon in order to explain what happened. But this is beyond my power and such an endeavour would be inevitably subjective – something I’d like to avoid. So I spent the last couple of days considering the events in the hope of finding something worth sharing. Something which might be subjective, but still my own opinion.

I don’t want to talk about the flow of migrants directly – evben if it was the leading and almost sole topic of the campaign. This is a threat to the whole Western World, not exclusively to Hungary. But the ultimate cause of this victory is somewhere here for sure. Hungarian people see the migrants as a threat, whilst our Western counterparts have a radically different vision. Admittedly, such a strong difference of opinion can be regarded as a result of the overwhelming media-hype over the migration crisis, but I don’t believe that a media-hype could have created something which is not inherent in the Hungarian people. Do Hungarian people hate strangers, driven by a reflex? Is this my opinion?! I don’t think so. The problem is the social status of the ‘average’ Hungarian voters. It is an age-old debt of Hungarian politics to ‘uplift’ the people, to do something about the poverty and the deprivation of the rural population. These people are justified to see the migrants as a threat since these people still live on the dole, sadly enough. Simultaneously, Western people are not afraid. For them the flow of migrants is a chance to recrute new workforce for jobs they are reluctant to do. The radical difference of opinion can be traced back to a radical and even more fundamental difference is social status. Once the Hungarian population can catch up with the Western standards in terms of income and wealth, this difference of attitude towards the migration crisis will disappear.

The sad thing is that we have politics in which it proved to be a merit to make good use of people’s deprivation and their lack of adequate information. Time will tell whether it is a viable option.


A structuralist approach to the methodology of modern macroeconomics

I am proud to say that a new book project of mine has started. In the forthcoming book to be published at Elsevier I am studying the relationship between agent-level assumptions and the possibilities of an adequate macro-level causal analysis. Following a realist philosophy of science I am interested in demonstrating that we are to distinguish causal adequacy and descriptive accurace when it comes to discuss the performance of abstract models along the Friedman-Lucas-RBC line.


The problem in analysing assumptions in economics

The common problem in discussing the design of assumptions in economics is rooted in merging two independent aspects into each other. One is descriptive accuracy: how our assumptions can provide true or realistic descriptions of reality. It is a heritage of neoclassiccal economics to abandon this purpose. The more “unrealistic” a model, the more useful it is – this is the summary of the widely believed tenet. However, this aspect tells us nothing about the causal adequacy of a model: highly abstract models with highly unrealistic assumptions (unrealistic is descriptive terms) can do a great deal about causal understanding. So this is the second aspect: causal adequacy. We are to check whether our descriptively unrealistc and false assumptions are adequate in causal terms. And they can be. The only thing to do is to highlight relevant and causally active entity properties. Unrealistic models can have unrealistic assumptions (again: unrealistic in descriptive terms) which are realistic in causal terms. This is the most important consequence of the structuralist reconstruction of business-cycle models and the famous microfoundations project along Anjan Chakravartty’s philosophy of science exerted in his A Metaphysics for Scientific Realism (Cambridge University Press, 2007).


How to write a Fulbright application?

It is a part of my mission to share the Fulbright idea and to help future candidates to submit well-established applications. After reaching a decision about your application, the next step must be to start planning. In this short note I will try to give you some useful advice on how to write a successful Fulbright application to become a visiting research fellow. Let’s see what I have…

  1. Start planning as early as possible. Completing a Fulbright application is not easy. It takes time. It is well enough to refer to the huge amount of documents you need to submit as attachments. A letter of invitation, letters of recommendation, a medical certificate, a bibliography and so forth. Moreover, fine-tuning your application is also a time-consuming phase: it is only a fairytale that one being kissed by a muse can set up a research proposal in a week. You’d better devote the necessary time to rephrase and rephrase your application time and again. Further improvement is always possible and may perfectionism be your standard. You are likely to have rigorous anonymous referees: don’t make them disappointed.
  2. Have adequate questions. When it comes to set up a research proposal, you need to show your strength and originality. You need to have something which as a scientific problem is worth attention and to which you are determined to find answers. You need to ask something that is missing from the literature, to find a gap in knowledge. What is more, you need to shed light on the nature of this gap: why and how is it there and what can you do to fill this lacuna. This is the most important aspect of an application. Your referees and – if selected – your interviewees are keenly interested in your ambitions, your questions and hypotheses. This is the level at which you can strengthen your application the most. A well-established application is established at the level of your questions and hypotheses.
  3. Have an excellent host. Reputation is not the only concern. It is more than great if you have a high-flying professor from a high-flying insitution in sight. But his or her reputation is only one part of the game. Your host has a lot to do during your preparation period, and writing your letter of invitation is only a minor part of the project. His or her excellence is a multi-dimensional variable among which his scientific fame is only one aspect. Your host’s support, i.e. the support you can receive from him or her is more important than you think. First, for intance, a great host really wants to make your story happen. Second, he or she takes it serious to assist you in writing your application: this assistance may not be more than honest criticism – but how many colleagues do you have on whom you can really rely when it comes to discussing a Fulbright application…? If you are still dubious, just think of the form of the letter of invitation. Do you think it is indifferent whether he or she writes a formal short letter…? No it isn’t. A letter saying ‘we understand you are working on a Fulbright application and if you are awarded then you will be here’ is almost nothing. If you have something like this… well, you might as well postpone submitting your application. On the contrary, a letter written in a truly warm tone can actually work as an additional letter of recommendation – and this recommendation from your host is the most important one. Your referees can judge you by this letter: how badly an American colleague wants to work with you. A great host is an expertise in his or her field and clearly knows what kind of support you need in writing your application. You are lucky if you have such a host in sight.
  4. Have excellent colleagues to write the letters of recommendation. The three letters of recommendation is also a crucial part of your project. The Fulbright Commission gives clear guidelines to your promoters as for the required content of the letters. Ask your promoters to follow these guidelines as closely as they can. They are required to introduce you to the referees and decision-makers as thoroughly as possible. Admittedly, this is demanding. Writing a good letter takes hours if not a day – you must be sure your promoters will really take the trouble to do what they are instructed to do. All in all, this is the same story as with your host: good promoters want to make your story happen and they are ready to act accordingly. So, similarly, it is not about reputation only. You need good and thick letters full of content and information about you. You need promoters who are ready to help you and whose words are worth attention.
  5. Get ready for being interviewed. If your application performed well in the hands of your referees, you will be invited to an interview. This is a great experience, I promise. Intelligent people sit in front of you, who – even if they don’t understand a single word from your project – make efforts to understand your mission. They are kind, polite and curious. But this is not an easy or informal chat. This is a lively and exciting conversation, but it really matters. Depending on the number of the interviewed applicants and the number of funded positions, the final decision is chiefly based on the impressions you made in this interview. So stay focussed.fulbright25

Remembering EIPE 20th Anniversary Conference: ‘A world to win’


On this day a year ago this fantastic conference started. It was a great experience, so I am happy to recall the flight, the city, the beautiful university and all the friendly people. I spent three wonderful days in the city, taking long walks from my hotel to the sessions every morning. Rotterdam is too big to discover in three days, so I needed to rely on some travel books and videos to get to know something about the city. Here is my favourite one, with a short summary of the conference: all the great figures of EIPE talking about the birth and the implementation of the idea. Inspiring.