Analytical TOC For Athreya

I finally finished Kartik Athreya's book, Big Ideas in Economics: A Nontechnical View. I have already offered two comments on it. I do not expect it to be successful. Do not look here for a discussion of the theory of the second best, the aggregation of production functions, the distinction between risk and uncertainty, or the problems with microeconomics (despite its point being that macroeconomics, as the author understands it, is applied microeconomics). Athreya does select and address some theoretical objections, such as the Sonnenschein-Debreu-Mantel theorem, related difficulties with using a representative agent, and the folk theorem in game theory. I was disappointed not to see an informed discussion of the relationship of steady state models, such as the Solow growth model, to very short run models such as the Arrow-Debreu model. On the other hand, you will find a lot of rationalization of assumptions on the ground that they are needed (useful?) to get definite conclusions, independent of any discussion of whether or not models with those models work empirically.

Anyways, I read the book on my Kindle. I found it difficult to keep the thread. So I have prepared the following analytical table of contents for my own use, if I should reread sections. I think Athreya could have gone through a couple more edits, reconsidering this structure. For example, maybe the book would have been more understandable with shorter and more chapters.

• Acknowledgements
• I. Introduction
• I.1 Why do Macroeconomists Think What They Think and Do What They Do?
• I.2 Whom Do I Want to Reach?
• I.3 Some Key Features
• I.4 Pictures, Talk, and Homework
• 1. The Modern Macroeconomic Approach and the Arrow-Debreu-McKenzie Model
• 1.1 Introduction
• 1.2 What is a Macroeconomic Model?
• 1.2.1 Macroeconomics as Hyperorganized Narrative with Hard-Nosed Data and Logic Checks
• 1.2.1.1 Ensuring Internal Consistency
• 1.2.1.2 informed Criticism
• 1.3 How Do Macroeconomists Account for the Facts?
• 1.3.1 How Macroeconomists Argue with Each Other (or, How to Argue with a Macroeconomist, if You Must!)
• 1.3.1.1 Step 1: They Tell Each Other Who Is in Their Model Economy, and What Those Participants Want to Do: Household Preferences and Firm Profit Maximization
• 1.3.1.2 Step 2: They Tell Each Other What Their Model's Participants Have: Endowments and Technology
• 1.3.1.3 Step 3: They Tell Each Other How Model Participants Can Interact: Trading Arrangements
• 1.3.1.4 Step 4: They Tell Each Other How Participants Will Interact: Equilibrium as Prediction
• 1.3.1.5 It Takes a Model to Beat a Model
• 1.4 Macroeconomic "Equilibrium": What It Does and Does Not Imply
• 1.5 Payoffs from the Standard Macroeconomic Model Building Recipe
• 1.5.1 Making Logical Errors Easier to Spot
• 1.5.2 Disciplining Claims about Causal Relationships
• 1.5.3 Better Policy Analysis: Welfare Economics
• 1.5.4 Better Policy Analysis: The "Lucas Critique"
• 1.5.4.1. All Models Are Susceptible to the Lucas Critique, but Some More Than Others
• 1.5.5 Making the Tent Bigger
• 1.6 The Benchmark Macroeconomic Model: Arrow-Debreu-McKenzie
• 1.6.1 Understanding the Basic ADM Structure Is a Must
• 1.6.2 ADM Terminology
• 1.6.2.1 Households: Preferences and Endowments
• 1.6.2.2 Firms
• 1.6.2.3 Profit Maximization
• 1.6.2.4 Markets and Prices
• 1.6.2.5 Pareto Efficiency and the Core
• 1.6.2.6 Don't Misunderstand Pareto Efficiency
• 1.6.3 The ADM Model: An Example and a Picture
• 1.7 Concluding Remarks
• 2. Prices, Efficiency, and Macroeconomics
• 2.1 Introduction
• 2.2 A Fanciful Macroeconomic Trading Institution: The Walrasian Clearinghouse
• 2.3 Why Is This Trading Process Interesting?
• 2.3.1 The First Welfare Theorem
• 2.3.2 Why Are Walrasian Outcomes So "Coordinated"? Some Intuitions
• 2.3.3 The Incentival Role of Prices
• 2.3.4 The Informational Role of Prices
• 2.3.4.1 Prices as Aggregators of Information
• 2.3.4.2 Prices as Conveyers of Information
• 2.4 Walrasian Prices Will Exist
• 2.4.1 Time and Uncertainty
• 2.4.2 Convexity and Existence
• 2.5 Decentralized Outcomes and the First Welfare Theorem
• 2.5.1 Decentralized Trade Seems to Generate "Workable" Outcomes
• 2.5.2 Decentralized Trade Seems to Centralize (and Locate Ownership) Sensibly
• 2.5.3 "ADM Minus Some Markets" Seems Like a Useful Description of the Real World
• 2.5.3.1 Externalities as Missing Markets
• 2.6 Should the Real World Look Like One in Which Most Trading Is Run Via a WCH, and If So, Why? Theoretical Foundations for Walrasian Equilibria
• 2.6.1 The Axiomatic or "Cooperative Game Theory" Approach
• 2.6.1.1 The Equivalence Principle
• 2.6.2 The Noncooperative Approach
• 2.6.2.1 Nash Equilibrium: The Most Important Kind of Equilibrium in Social Science
• 2.6.2.2 Why Look at "Nash" Outcomes? Because "Not Nash" Means "Not Likely"
• 2.6.2.3 What If Interactions Are Repeated and Not Anonymous
• 2.6.2.4 When Should Households and Firms Take Prices as Given?
• 2.6.2.5 Market Games
• 2.6.2.6 Summary of the Noncooperative Approach
• 2.6.3 The Experimental Approach
• 2.6.3.1 Markets as Calculators
• 2.6.3.2 Experiments, the Invention of New Trading Institutions, and Mechanism Design
• 2.7 The ADM Model Does Not Require "Perfect Information" to Deliver Pareto-Optimal Outcomes; It Requires a Complete Set of Walrasian Prices
• 2.7.1 The Interpretation of Prices: What's at Stake?
• 2.8 Some Real-World Complications
• 2.8.1 Walrasian Prices Are Sufficient, but Not Necessary
• 2.8.2 Costless Enforcement
• 2.8.3 Market Power
• 2.8.4 Imperfect Monitoring
• 2.8.4.1 The Myerson-Satterthwaite Theorem
• 2.8.4.2 The Revelation Principle
• 2.8.4.3 Further Reading
• 2.9 The Observational Implications of the ADM Model
• 2.9.1 Sonnenschein-Mantel-Debreu...
• 2.9.2 ...and Boldrin-Montrucchio
• 2.9.2.1 Does It Mean That "Anything Will Happen"? No
• 2.10 A Macro-Hippocratic Moment
• 2.11 Concluding Remarks
• 3. Macroeconomists, Efficiency, and Inequality
• 3.1 Economists, Efficiency, and Inequality
• 3.1.1 Decentralized Trading and Inequality
• 3.1.2 Economists' Preoccupation with "Efficiency"
• 3.1.3 Deadweight Loss from Taxation
• 3.2 The Second Welfare Theorem
• 3.2.1 The Welfare Theorems Inspire a Form of Central Planning!
• 3.2.2 A General Lesson of the Second Welfare Theorem: Taxes Can Hurt
• 3.2.3 Caveat 1: What's an "Initial" Endowment, Anyway?
• 3.2.4 Caveat 2: Knowledge and the Limits to Lump-Sum Redistribution
• 3.2.5 Caveat 3: Lump-Sum Redistribution Might Require Surprising People
• 3.2.6 The Second Welfare Theorem Does Not Require More Assumptions than the First Welfare Theorem
• 3.3 What's Right with Non-Lump Sum Taxes? Or, Sometimes Lump-Sum Taxes Are Bad for "Insurance"
• 3.3.1 Jargon Digression" "Ex-Ante" and "Ex-Post" Pareto Efficiency
• 3.3.2 Back to Lump-Sum Taxes Being Bad for Insurance...
• 3.3.3 Why Shouldn't I Trade Ex-Ante Efficiency for Equity?
• 3.3.3.1 Why Efficiency Is Important
• 3.4 A General Approach to Thinking about Allocations and Trading Institutions: Mechanism Design
• 3.4.1 Limits on Mechanisms
• 3.4.1.1 Implementing Social Outcomes: Gibbard-Satterthwaite and the Importance of the "Solution Concept"
• 3.4.1.2 Why Do Macroeconomists Care about Mechanism Design, and Why Should Policymakers?
• 3.5 Concluding Remarks
• 4. Macroeconomic Shortcuts
• 4.1 Introduction
• 4.1.1 Our Four Sin: Aggregation, Rationality, Equilibrium, and Mathematics
• 4.2 Macroeconomic Compromises
• 4.2.1 Aggregation
• 4.2.1.1 Aggregation of Producers
• 4.2.1.2 Aggregation of Consumers
• 4.2.1.3 Aggregation of Commodities
• 4.2.1.4 Aggregation and Modeling Tradeoffs
• 4.2.1.5 An Example: The Breeden-Lucas "Fruit Tree"
• 4.2.2 Rationality
• 4.2.2.1 No Rationality, No Utility Function
• 4.2.2.2 Bounded Rationality
• 4.2.2.3 Rational Expectations
• 4.2.2.4 Expected Utility
• 4.2.2.5 A Provisional Summary
• 4.2.3 Equilibrium Analysis
• 4.2.3.1 Steady States and Transitions
• 4.2.3.2 An Interesting Criticism of Steady-State Analysis
• 4.2.3.3 Equilibrium Analysis: A Provisional Summary
• 4.2.3.4 Race as an Equilibrium Outcome: The Work of Glenn Loury
• 4.2.4 Mathematics, Practicality, and Some Examples
• 4.2.4.1 Mathematics and Forecasting
• 4.2.4.2 Mathematics as a Language to Protect the Public from Economists
• 4.2.4.3 Example: The Continuum Assumption
• 4.2.4.4 Example: Infinitely Lived Households
• 4.2.4.5 Example: "Social Planning Problems"
• 4.3 Concluding Remarks
• 5. Benchmark Macroeconomic Models
• 5.1 ADM and the Real World
• 5.2 Time, Uncertainty, and the ADM Model
• 5.2.1 The Long Arm Attached to the Invisible hand
• 5.2.1.1 The Impossibility of Literal Arrow-Debreu Market Completeness
• 5.3 The Radner Version of the ADM Economy
• 5.3.1 A Summary of Radner Trading
• 5.3.2 Spot Markets and IOU Markets: Radner and How Macroeconomists Think about Market Dysfunction
• 5.3.2.1 Spots Are OK
• 5.3.2.2 IOUs, Maybe Not So Much?
• 5.3.2.3 Radner and the Real World: A Brief Recap
• 5.4 Many Important Macroeconomic Models Are Mainly Versions of Radner Economies
• 5.5 Macroeconomic Policy: A Brief General Discussion
• 5.5.1 What Is a Policy?
• 5.5.2 Two Questions to Ask before "Doing Policy"
• 5.5.2.1 Question 1: How Are the Preconditions for the First Welfare Theorem Violated?
• 5.5.2.2 Question 2: Why Do You Think You Can Do Better?
• 5.5.2.3 One Reason to Think You Can Do Better: Coordination Failure
• 5.5.3 Coordination Failure and Macroeconomics
• 5.6 Important Macroeconomic Models and Policy Implications
• 5.7 The Mother of All Walrasian Macroeconomic Models: Neoclassical Growth Models
• 5.7.1 Step 1: The Malthusian Growth Model: No Capital
• 5.7.2 Step 2: The Solow Growth Model: No Fixed Inputs
• 5.7.2.1 Labor-Saving Devices
• 5.7.2.2 Balanced-Growth Steady States
• 5.7.2.3 The Role Savings Rates Play in Living Standards
• 5.7.2.4 The Solow Model as a First Unified Model of Growth and Fluctuations
• 5.7.3 Step 3: The Modern Neoclassical Growth Model: Enter the Consumer
• 5.7.4 What Happens When There Is Uncertainty? The Stochastic Neoclassical Growth Modek
• 5.7.4.1 Deterministic and Stochastic Steady States
• 5.7.5 What Payoffs Do Stochastic Neoclassical Growth Models Offer Us?
• 5.7.5.1 A Step Toward a Unified Theory of Growth and Fluctuations
• 5.7.5.2 They Operationalize the ADM Model
• 5.7.5.3 Stochastic Neoclassical Growth Provides a Benchmark
• 5.7.6 The Influence of Neoclassical Growth Models on How We Think about Some Key Macroeconomic Issues
• 5.7.6.1 Macroeconomics Can Be Stable
• 5.7.6.2 Technological Progress is the Gift Horse
• 5.7.6.3 The Lives of Indian and American Barbers
• 5.7.6.4 Higher Tax Rates Mean Lower Income Levels, but May Not Lower Long-Run Growth Rates
• 5.7.6.5 The ADM Model Is Silent on Innovation
• 5.8 How Do Macroeconomic Models Provide Quantitative Information? Calibration and Estimation
• 5.8.1 Calibration and Estimation: Taking a Model Very (Too?) Seriously
• 5.9 The SGM and Keynesian Macroeconomics
• 5.9.1 Keynesian Economics and the SGM I: Coordination Failures
• 5.9.2 Keynesian Economics and the SGM II: Sticky Prices
• 5.9.2.1 Is Monopolistic Competition a UFO?
• 5.9.2.2 Tensions, Tensions
• 5.10 Less-Than-Perfect Worlds: The Standard Search Model, the Standard Incomplete Markets Model, and the Overlapping Generations Model
• 5.10.1 Who Knew?
• 5.10.2 No Representative Agent: Heterogeneity Galore
• 5.10.2.1 Equilibrium Doesn't Mean "Good": Redux
• 5.11 The Reality of Decentralized-Decentralized Trade: The Search Model
• 5.11.1 Optimal Decisions and Stationary Equilibria
• 5.11.2 What Kinds of Questions Can We Address with Search Models?
• 5.11.3 Keynesian Economics and the Search Model
• 5.11.3.1 Search Is Not Really about Searching
• 5.11.3.2 Search Models and Voluntary versus Involuntary Unemployment
• 5.11.3.3 What, Exactly, Is Being Traded? Walrasian Economics and the Importance of Defining the "Commodity Space"
• 5.12 The Reality of Missing Markets: The Standard Incomplete-Market Model
• 5.12.1 The Income Fluctuation Problem (IFP): The Lynchpin of Modern Macroeconomics
• 5.12.1.1 SIM Models: "IFPs in GE"
• 5.12.1.2 Stationary Equilibria
• 5.12.1.3 SIM as a Macroeconomic Model of Bounded Rationality
• 5.12.1.4 What Search and IM Models Give Us (I): Insurance vs. Incentives: The First Quantitative Pass
• 5.12.1.5 What Search and IM Models Give Us (II): Competitive Theories of Inequality
• 5.12.1.6 What Search and IM Models Give Us (III): Maybe "Competition" Isn't All That Great?
• 5.12.1.7 How Incomplete Are Decentralize Trading Arrangements?
• 5.12.1.8 It's the IOU Markets
• 5.13 The Reality of Life and Death: The Overlapping-Generations Model
• 5.13.1 Economists Get Precise about Policy, Inequality, and Intergenerational Conflict
• 5.14 Concluding Remarks
• 6. Macroeconomic Theory and Recent Events
• 6.1 Introduction
• 6.2 The Financial Crisis of 2007-2008: What Are the Questions?
• 6.2.1 The Facts: A Crisis Reading List
• 6.2.2 Radner and Financial Intermediation
• 6.2.3 What (Good) Are Financial Markets, and How Does the ADM Model Influence How Macroeconomists View Them?
• 6.3 Models for Question 1: Why Did Asset Prices Rise So Much?
• 6.3.1 Demand and Supply
• 6.3.2 Principal-Agent Conflicts
• 6.3.3 Financial Markets and the Importance of Beliefs
• 6.3.4 Differences of Opinion
• 6.3.5 Bubble Detection
• 6.3.5.1 What "Efficient Financial Markets" Means (Hint: It Does Not Mean Pareto Efficiency)
• 6.3.5.2 The EMH and "Random Walks"
• 6.4 Models for Question 2: Why Did Initial Changes Get Amplified
• 6.4.1 Debt
• 6.4.2 Models of Banks and Bank Runs
• 6.5 Models for Question 3: Why Has the Recovery Been So Slow?
• 6.5.1 Labor and Asset Market Search Models
• 6.6 Macroeconomics and the Financial Crisis of 2007-2008 Implications for Policy
• 6.6.1 (Try to End) "Too Big to Fail"
• 6.6.2 Asset Prices and Policy
• 6.6.2.1 The Great Price Diagnosis Dilemma for PolicyMakers
• 6.6.3 Spillovers and Ronald Coase
• 6.6.4 Ronald Coase and Macroeconomics
• 6.6.5 Dynamic Games
• 6.6.5.1 Things "off the Equilibrium Path" Can Matter for Things on It
• 6.6.5.2 The Limited Commitment of Benevolent Policymakers: Time Inconsistency
• 6.6.5.3 Consumer and Sovereign Debt
• 6.6.5.4 Ex-Ante versus Ex-Post Efficiency...Again
• 6.7 Macroeconomics and the Financial Crisis of 2007-2008: Navel Gazing and a Response to Those Gazing at Our Navels
• 6.7.1 Does Modern Macroeconomics Favor Laissez-Faire?
• 6.7.2 Where Did We Fail?
• 6.7.3 Criticism of DSGE Models
• 6.7.4 Reforming Macroeconomics
• 6.7.5 Policy: Some Perspective and a Caution
• 6.7.5.1 Global Policy Coordination
• 6.7.5.2 A Caution
• 6.8 What Should Macroeconomists Be Doing?
• Notes
• References
• Index

Philip Mirowski And Adolph Reed, Jr.: Separated At Birth?

I want to highlight the similarity in conclusions in Mirowski's recent book and Reed's controversial essay (see references below). Their understanding of the current conjuncture is fairly dispiriting. The right is winning in mass consciousness, despite their ideas being incoherent and vicious from an intellectual perspective. And their ideas extend over the entirety of the political spectrum, at least if one restricts oneself to what is seen to be practical. Arguments over how to make existing markets work better or to address current problems by constructing new markets, for example, accept the inevitability of capitalism.

Both Mirowski and Reed have something to say about what must be done by the left now. What is needed is a collective development of a leftist alternative. Those developing such an alternative need to be part of a group, like the Mont Pelerin Society was for the development of neoliberalism. And those developing this alternative, at least in their role in such a group, should not be overly concerned with the vagaries of this or that election in this or that country. This is a long term project, which, if successful, will spawn other groups over decades more concerned with implementation in specific times and places.

Are these authors correct in arguing the left does not currently have an inspiring vision to put before the public? You can talk about social democracy, but is that a way forward now? Are there powerful institutionalized groups working to improve our societies based on an architectonic view of what is possible? It seems to me more of a rearguard movement in advanced industrialized countries. And what about further left? I am aware of various statements of ideals - for example, Davidson and Davidson (1996), Rorty (1999)- but, without being built upon by a movement, these seem kind of idiosyncratic and quixotic to me.

An aside: If Mirowski is going to read literature produced by well-known writers who taught at Syracuse University, I wish he would mix some Raymond Carver in with the David Foster Wallace he has been reading.

References

• Greg Davidson and Paul Davidson (1996). Economics for a Civilized Society, M. E. Sharp. [I HAVEN'T READ THIS]
• Philip Mirowski (2013). Never Let a Serious Crisis Go to Waste: How Neoliberalism Survived the Financial Meltdown, Verso.
• Adolph Reed Jr. (2014). Nothing Left: The Long, Slow Surrender of American Liberals, Harper's (March).
• Richard Rorty (1999). Achieving Our Country: Leftist Thought in Twentieth-Century America.

Athreya Untrustworthy On History Of Thought

I continue to read Kartik Athreya's supposedly popular account of contemporary macroeconomics. Today I focus on the misleading presentation of the theory of economic growth.

Athreya presents the Solow-Swan Neoclassical Growth Model (NGM) as a contrast to Malthus' model of economic growth. He briefly alludes to Real Business Cycle (RBC) theory as the result of appending random shocks to the Solow-Swan model. He then goes on to discuss what he calls the Ramsey-Cass-Koopmans model. There are two problems here. (I bracket off the grouping of the Ramsey model of a central planning authority determining an optimal savings rate with models of household savings decisions.)

First, Solow developed his model in the context of many other economists also developing growth models. This setting is totally missing from Athreya's book. Neither "Harrod" nor "Domar" appear anywhere in the book. Yet Solow's work was a neoclassical response to the Harrod-Domar model. The Post Keynesian approach to steady-state growth, associated with such economists as Richard Kahn, Nicholas Kaldor, and Joan Robinson provided an alternative at the time. (I might also mention Michal Kalecki and Frank Hahn's doctoral thesis, if I recall correctly.) Maybe this approach is missing because Athreya is not aware of its existence.

Second, Athreya does not even get classical growth theory correct, as presented by Malthus or others. According to Athreya, Malthus' theory abstracts from the existence of capital. I guess income is supposedly distributed only in the form of wages and rents. Athreya then claims to consider the effects of a technological innovation, namely, the introduction of a vaccine in Malthus' theory. Supposedly, the effect is to lower the death rate, while leaving birth rates unchanged. That is, population increases. Since the quantity of land is fixed, the theory exhibts diminishing marginal returns to labor. So Athreya misrepresents Malthus as claiming that improved technology, while increasing total output, ultimately leads to lower average income per worker.

In the classical theory of value, the natural wage is given by habit and custom. Malthus, building on his predecessors, argued that transitory wages higher than the natural wage might lead to changes in habits, through what we now might call hysteresis. This effect would be to increase the natural rate of wages. At any rate, population was expected to increase when wages exceeded the natural wage. But, maybe, the classical economists emphasized more reactions to opportunities for jobs than reactions to wages. They accepted that unemployment could be persistent and expected lower and higher periods of unemployment to encourage increases and decreases of the rate of growth of population. Anyways, Athreya is right, at least, about the response to increased productivity being an initial increase in the population of workers.

But he is mistaken about the ultimate effect. Suppose the market wage falls below the natural wage, in a period in which the accumulation of capital has declined. Then the classical economists, such as Malthus, expected the rate of increase in population to fall. Emigration would increase, birth rates would fall, and workers would form families later in their lives. (It is unclear to me how the classical economists envisioned such mechanisms to kick in fast enough for their theories. At any rate, I can quote Ricardo suggesting that the stationary state was far away.) The ultimate effect of declining population would be for workers to obtain their natural wage, with the level of employment and distribution between wages, profits, and rent being consistent with technological possibilities after a change. That is, the ultimate effect, in Malthus' theory, of an improvement is not lower real wages. (I am here bracketing out any consideration of whether Malthus presented a stylized theory consistent with the empirical experience in the centuries prior to his time or overlooked the effects of the ongoing industrial revolution.)

I cannot recommend Athreya's book, either for the general reader curious about macroeconomics or for the advanced undergraduate or beginning graduate student. It is too misleading. The above is only one of many examples. I suppose some professional economists might find it of interest to catalog the misconceptions, mistakes, inconsistencies, tendentious statements, and occasional insights.

Update: I want to recall the comments of David Glasner, John Quiggin, Noah Smith, and Stephen Williamson.

References

• Kartik B, Athreya (2014). Big Ideas in Macroeconomics: A Nontechnical View, MIT Press.
• Nicholas Kaldor (1956). Alternative Theories of Distribution, Review of Economic Studies, V. XXIII: pp. 83-100.
• Antonella Stirati (1994). The Theory of Wages in Classical Economics: A Study of Adam Smith, David Ricardo and their Contemporaries, Edward Elgar,