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Methodological Foundations of Macroeconomics: Keynes and Lucas.

The author, Alessandro Vercelli, in this volume examines and compares the fundamental macroeconomic theories of John Maynard Keynes and Robert E. Lucas. The volume also presents the works of many eminent writers such as T. J. Sargent, J. A. Schumpeter, C. W. J. Granger, and P. Suppes. The new classical economic theory and heuristic models of Lucas are in direct conflict with the Keynesian economic theory. A lucid debate has been presented that encompasses various facets of macroeconomics on issues such as: theory, policy, methodology, and empiricism. The notions of equilibrium, stability, and determinism have been contrasted with those of disequilibrium, instability, and uncertainty. An alternative title for this volume could be: The Great Economic Debate: The Two Sides. To fully cover the debate numerous volumes are required, however, Vercelli has presented it very efficiently and effectively in one short volume.

The book is divided into two parts. The first part examines the methodological foundations of macroeconomics, while the second part presents and compares the theories of Keynes and Lucas. Altogether there are 14 chapters. In the first chapter, the author provides perspicuous introductory comments, while in Chapter 14, the author provides very thoughtful and comprehensive concluding remarks.

Part I consists of Chapters 2-7 and covers a wide range of methodological issues that include: equilibrium, disequilibrium, and economic theory; dynamic instability and economic models; structural instability and economic change; uncertainty, predictability, and flexibility; rationality and expectations; and probabilistic causality and economic analysis. In Chapter 2, the author defines the syntactic and semantic concepts of equilibrium and provides the epistemic reasons for equilibrium. Establishing the distinction between equilibrium and disequilibrium, the author explains the paradoxes of a pure equilibrium method. Concepts of dynamic instability and ergodic theory are introduced in Chapter 3. Collecting the views of ancient scholars such as Heraclitus, Pythagoras, Plato, and Aristotle, the issues pertaining to structural instability and economic change are explored in Chapter 4. A discussion on the role of singularities and the problem of morphogenesis is also presented. Specifying the roots of regularity in economic behavior, a lucid discussion on uncertainty, predictability, and flexibility is provided in Chapter 5. The stationary and nonstationary processes are compared. Rationality concepts in reference to expectations and equilibrium is introduced in Chapter 6. Adaptive rationality is compared with creative rationality. The views on probabilistic causality of Suppes, Keynes, and Granger are compared in Chapter 7. The author is of the view that the Granger causality is not superior to the other theories of causality.

Part II consists of Chapters 8-13 that present an illuminating debate on the two schools of economic thought--one founded by Keynes and the other led by Lucas. The part has a colorful title: Keynes after Lucas. The issues covered in this part include: Lucas's scientific paradigm and heuristic model, general observations and methodological aspects of Keynes's heuristic model, real equilibrium business cycle and Lucas's synthesis, and money and production in Schumpeter and Keynes. Chapters 8 and 9 lay down the fundamentals of economic theories and models of Robert E. Lucas. The fundamental economic issues such as business cycle, economic shocks, and instability and policy in Lucas's economic framework have been highlighted. Chapter 9 provides a comprehensive analysis of Lucas's general and operational heuristic economic models. The concepts of equilibrium, disequilibrium, dynamic instability and ergodicity, structural instability, and rationality and causality are accentuated. The appendix of this Chapter briefly covers the theories of C. A. Sims. The real business cycle theory introduced by F. E. Kydland and E. C. Prescott ("Time to Build and Aggregate Fluctuations," Econometrica, 1982) and J. B. Long and C. I. Plosser ("Real Business Cycles," Journal of Political Economy, 1983) is compared with the monetary business cycle theory of Lucas (Studies in Business-Cycle Theory, 1981) in Chapter 10. This chapter also presents Lucas's synthetical approach for the real and monetary business cycles. It is pointed out that "productivity shocks" differ from "technological shocks" and therefore the notion of "technological shocks" need to be clearly defined. A general observation on Keynesian heuristic model is made in Chapter 11, where the author surveys Keynes's famous book, General Theory of Employment, Interest and Money |1936~. All the markets (labor, goods, capital, and money) of the Keynesian economic model are analyzed. The author elaborates upon the partial and general equilibrium economic models emphasizing the notions of "fixprice" and "flexprice." Keynes used only one diagram in his book, whereas the subsequent interpreters of Keynesian economics have provided numerous diagrams. To clarify the Keynesian theory, the author makes use of the graphs to depict: labor market and effective demand, income-expenditure feedback, capital market, money market, liquidity trap, fixprice and flexprice model, among others. Keynesian and Schumpeterian works are simultaneously analyzed in Chapter 12, where the author presents the two institutional and methodological dichotomies. Varieties of structural stability and instability are elaborated upon: flexibility, fragility, solidity, and rigidity. The methodological aspects of Keynesian model are provided in Chapter 13. The role of expectations is undoubtedly a confusing point in Keynesian analysis.

The contribution of Keynes and Lucas and the interpretations of their theories by others lie fragmented in various places. Vercelli is one of the few writers who has attempted to present and compare the theories of the two schools in a consolidated form. A free market economic system is the key to the proper allocation of resources, as is made evident by the continuous economic changes taking place in Europe and around the world. Lucas has unwavering support for this. Perhaps, Keynes would have realized and modified his theories, had he witnessed the European economic events of 1990s. The recent world events support the classical economic theories. The book provides a rigorous theoretical study of the two schools of economic thought that are skillfully compared and contrasted. The book provides a strong theoretical framework to understand the contributions of Keynes and Lucas; however, an empirical substantiation of the conclusions presented herein will significantly enhance the readers' understanding of the subject matter.

The book provides an extensive and up-to-date list of references and helpful subject and author indices. The book is well written and will be a valuable source to academicians. The book will also bring awareness of the stark differences that lie between the various economic theories. The new classical economic theory has too many implications and has received too wide an appeal over the past several decades to be contained in one volume. To give a fair treatment to the subject of "macroeconomic debate," another volume is warranted. It should include Monetarism, Supply-Side Economics, Reaganomics, and Rational Expectations.

Vercelli is a seasoned author who has numerous publications to his credit. A companion volume covering all aspects of the Demand-Side and Supply-Side schools of economic thought, along with empirical substantiation, is warranted and would be welcomed. The world economic events of the past several decades attest to the fact that it is the principle of laissez faire, espoused by the Classical School in varied forms, that seems to deliver the optimality.
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Author:Tiwari, Kashi Nath
Publication:Southern Economic Journal
Article Type:Book Review
Date:Oct 1, 1992
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