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.
- 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,