Conversations with Economists

Conversations with Economists is a 1983 book by Arjo Klamer.

Quotes

• Herbert A. Simon... was rightly complaining about some, if not a lot, of the economic literature at the time that he was moving away from economics. I have a couple of comments. I think a lot of the models that we have now, with the dynamics and the uncertainty, address a lot of the observations that were troubling Herb Simon. He is, by the way, a big proponent of positive economic methods.
  • Conversation with Robert M. Townsend

Conversation with Alan S. Blinder

Alan S. Blinder, in Conversations with Economists (1983) by Arjo Klamer

• Some of the new classical economists are extremely ideological. If you give them evidence, for example, that fully anticipated money matters, evidence counter to their world view, they say that you're wrong. And if you say that their evidence is wrong, they'll say you're wrong again. I give up! Barro once said to me that there isn't any evidence in the world that fiscal policy is effective. Just open your eyes and see episodes of tax cutting and government-spending increases. How about World War II? That had big effects on real output. His response? ... He sometimes shrugs, he sometimes gives a clearer alternative explanation.
  Sargent is much more serious. He doesn't come to these economic views from a rigidly maintained ideological position. He's a sort of tinkerer, playing an intellectual game. He looks at a puzzle to see if he can solve it in a particular way, exercising these fancy techniques. That's his thing, so to speak.
  I think Lucas is a blend of those two, actually. He's not extreme as Barro, he's more open. And he's not quite as technical as Sargent.

• Keynesian economics is the economics of nominal rigidities basically, nominal rigidities everywhere. Fully anticipated money does affect output. Everybody can see that! So, it's right. The fact that it's not as theoretically tidy as Lucas's 1972 Journal of Economic Theory paper is not a reason to throw it away. That's become a minority view in this profession, unfortunately. It wouldn't have been in the '60s.

Conversation with Robert E. Lucas

Robert E. Lucas, in Conversations with Economists (1983) by Arjo Klamer

• Another big influence was Samuelson's Foundations, which I read when I stated here at Chicago. It's a "how-to-do-it" book. a great book for first-year graduate students. It says, "Here's the way you do it." It lets you in on the secret of how you play the game, as opposed to cutting you off with big words. I think the combination of Samuelson's book plays Friedman's class was what got me going.

• The hypothesis was more or less buried during the '60s. Arrow used it in his paper on learning-by-doing in the '60s. Prescott and I used it in that paper of ours on investment. People were aware of it, I didn't understand then how fundamental a difference it mad econometrically. I didn't realize that if you took it seriously you had to rethink the whole question of testing and estimation. I guess no one else did either, except for Muth.

• The only way I feel I understand something is if I can write it down in a model and make it work. I felt that from the beginning. That's why I liked Samuelson's book. He'll take these incomprehensible verbal debates that go on and on and never end and just end them; formulate the issue in such a way that the question is answerable, and then get the answer.

• Herbert A. Simon... used to give us a hard time. He likes to take on the devil's advocate role. In his Sciences of the Artificial he's pretty balanced.

• I do not consider the term "Keynesian revolution" appropriate. [...] It seemed to be a more political event than a scientific event. The Depression discredited the whole profession, people were alarmed about it. The General Theory is a political response to the Depression and to the discrediting of conventional economics that resulted from it.

  But I should acknowledge that Keynes left an opening for younger econometricians and mathematical economists to take over and to write down models. When their senior colleagues criticized their models, they could say, "Well, these are Keynesian models." And since the older people still hadn't caught up with Keynes, that shut them up. So people like Klein and Tinbergen took over because they had the exciting new methods.

• If you look back at the 1929 to 1933 episode, there were a lot of decisions made that, after the fact, people wished they had not made; there were a lot of jobs people quit that they wished they had hung on to; there were job offers that people turned down because they thought the wage offer was crappy. Then three months later they wished they had grabbed. Accountants who lost their accounting jobs passed over a cab-driver job, and now they're sitting on the street while their pal's driving a cab. So they wish they'd taken the cab-driver job. People are making this kind of mistake all the time. Anybody can look back over the '30s and think of decisions which would have made millions—purchasing particular stocks, all kinds of things. I don't see what's hard about this question of people making mistakes in the business cycle. From the individual point of view, it's obvious.

Conversation with Franco Modigliani

Franco Modigliani, in Conversations with Economists (1983) by Arjo Klamer

• I think that Keynes was certainly a good example of a new paradigm. His work is possibly the best example of a case for which I think Kuhn's theory fits as well as it can in the domain of the social sciences. In a fairly short period of time, Keynes gave a new way of looking at the economy, a way which was widely accepted, at least by the younger generation.

• Macro rational expectations, as I have labeled the hypothesis, seems to say that expectations in an economist's model must be perfectly consistent with his model that embodies these expectations. In other words, the agents of his model must all share his views of the relevant economic mechanisms, as well as his data. Why? Because if he holds them they must believe they are God's truth and, if so, rational people can have no other views (and of course we should never ask how they would come by these views and data, that not even other specialists may have heard of yet, let alone accepted). I submit that this view is pretty absurd--I would almost say offensive! I certainly believe that I know more about economics and the economy than (almost) everybody else, and i can even prove it: If everybody shared my vies, then the economy could not be in today's troubles (though it might conceivably be in some different ones!).

• I believe people can solve complex problems eventually. By repeated trial and error they will get there; but they need a long time. At this point I agree with Herbert Simon. People do not learn immediately, as those rational expectations models seem to imply. I don't believe that.
  The statement that assumptions do not matter is nonsense. It is funny. Yes, I assume people are consistent in their behavior. I assume that not because I believe everybody actually is, but because I believe, on the average, you do not get too far from it.

Conversation with Thomas J. Sargent

Thomas J. Sargent, in Conversations with Economists (1983) by Arjo Klamer

• I do not have a theory, nor do I know somebody else's theory that constitutes a satisfactory explanation of the Great Depression. It's really a very important, unexplained event and process, which I would be very interested in and would like to see explained.

• Koopmans complained that macroeconomic models weren't satisfactory because they didn't handle randomness. He talked about building models in continuous time, which is something we're trying to do now.

• Hurwicz talked in 1949 about the need to model strategic behavior. He said that Keynesian models were ignoring the fact that individuals aren't just stupid players who responded passively to what the government did, but that they had the option to change their strategy when the government changed its strategy. That's the rational expectations program. He was ignored for 20 years or more.

Conversation with Robert Solow

Robert Solow, in Conversations with Economists (1983) by Arjo Klamer

• I think that today Keynesian economists primarily distinguish themselves from other economists through their belief that you cannot understand the behavior of our economy on the assumption that it is always at or near a full, or Walrasian, equilibrium, and that you cannot account for the movements that you see in output and employment on the assumption that everything you see is at the intersection of traditional supply and demand curves, and that the movements are only accounted for by shifts in those curves
  People who think of themselves as Keynesian economists can be divided as to what they would put in place of Walrasian equilibrium. Some of them think that what we observe in the world is a disequilibrium. If the economy is moving toward Walrasian equilibrium, it is doing so very slowly. Another group of Keynesian economists, who are in some ways closer to Keynes, believe that the economy is characterized by multiple equilibria; a modern capitalist economy is capable perhaps of producing a good Walrasian equilibrium, but also a bad equilibrium, that is, a situation with bad welfare properties and without forces that move the economy away from such a situation.
  I find myself halfway between those two schools of thought. I used to think that the correct analysis would emphasize disequilibrium. Now I have some doubts about that. Either of these approaches is a Keynesian alternative to the idea that the economy should be regarded as being in a Walrasian equilibrium.

• I am very unsympathetic to the school that calls itself post-Keynesian. First of all, I have never been able to understand it as a school of thought. I don't see an intellectual connection between a Hyman Minsky, on the one hand, who happens to be one of the oldest friends I have, and someone like Alfred Eichner, on the other, except that they are all against the same thing, namely the mainstream, whatever that is.
  The other reason why I am not sympathetic is that I have never been able to piece together (I must confess that I have never tried very hard) a positive doctrine. It seems to be mostly a community which nows what it is against but doesn't offer anything very systematic that could be described as a positive theory. I have read many of Paul Davidson's articles and they often do not make sense to me. Some of post-Keynesian price theory comes forth from the belief that universal competition is a bad assumption. I have all my life known that. So I have found it an unrewarding approach and have not paid much attention to it.