Econ 502: Macroeconomic Theory
Course Module Syllabus
Macroeconomic Coordination
(Masters-Level)
Last Updated: 13 May 2004
Latest Offering: Fall 2003 (Nov 11th-End of Semester), TR
11-12:50, Food Science 2319
- Course Module Instructor:
- Professor Leigh Tesfatsion
- Department of Economics/Heady 375
- Iowa State University
- Ames, Iowa 50011-1070
- (515) 294-0138
-
http://www.econ.iastate.edu/tesfatsi/
tesfatsi@iastate.edu
- Office Hours: TR 1-2:30pm, and by appointment
-
Course Module Home Page
Course Module Objectives
From Keynes' General Theory (1936) through the mid-nineteen
seventies, macroeconomic models primarily consisted of highly aggregated
relationships for consumption, investment, and other key economic activities
using some version of the IS-LM framework. Over the past twenty-five years,
however, macroeconomic theorists have developed a variety of different
macroeconomic models that are based more explicitly on microfoundations.
These models include: (1) new classical macro models based on rational
expectations and a Walrasian conception of continual market clearing; (2)
post-Walrasian macro models based on bounded rationality, asymmetric
information, and possible market disequilibrium; and (3) agent-based
computational economic models in which macroeconomic regularities are viewed
as evolving (by chance, necessity, and design) from the interactions over
time of autonomous microeconomic agents with learning capabilities.
This course module will focus on macroeconomic coordination issues for
decentralized market economies. After an introductory discussion of these
issues, we will critically investigate the distinct ways in which these
issues are addressed by each of the three modeling approaches outlined above.
Each approach will be examined for logical coherence, empirical relevance,
and practical policy implications.
Course Module Topic Outline
- Macroeconomic Coordination: Introduction
- Walrasian Equilibrium: Benchmark of Coordination
Success?
- Post-Walrasian Macroeconomics
- A Constructive Approach to Macroeconomic
Coordination
- Comparative Illustration: Labor Markets and
Macroeconomic Performance
Required and Background Materials:
- Required Course Materials:
- There is no required textbook for this course module. All required
readings will either be posted on-line with indicated syllabus links, placed
on closed reserve for Econ 502 in the Reading Room (Heady 368), or handed out
in class.
- On-Line and Library Macro Resources:
-
Macro Source Materials:
This site provides an annotated list of pointers to a
variety of online and library materials
focusing on macro policy, macro theory, and empirical macro data.
Students can browse this site for additional materials related
to in-class discussion questions of interest.
- Additional Background Texts (Closed Reserve, Reading Room, Heady 368):
- George A. Akerlof and Janet L. Yellen (eds.), Efficiency Wage
Models of Labor Markets, Cambridge University Press, 1986.
- David Colander (ed.), Beyond Microfoundations: Post Walrasian
Macroeconomics, Cambridge University Press, Cambridge, MA, 1996.
- David Colander (ed.), The Complexity Vision and the Teaching of
Economics, Edgar Elgar, Cheltenham, UK, 2000.
- Joshua Epstein and Robert Axtell,
Growing Artificial Societies: Social
Science from the Bottom Up,
The MIT Press, Cambridge, MA, 1996.
- G. Feiwel (ed.), Issues in Contemporary Macroeconomics and
Distribution, State University of New York, Albany, 1985
(paperback).
- Kevin D. Hoover, The New Classical Macroeconomics: A Skeptical
Inquiry, Blackwell, Oxford, 1988.
- Peter Howitt, The Keynesian Recovery and Other Essays, The
University of Michigan Press, Ann Arbor, MI, 1990.
- J. M. Keynes, The General Theory of Employment, Interest,
and Money, Macmillan, 1936, reprinted edition.
- T. Sargent, Bounded Rationality in
Macroeconomics, Oxford U Press, 1993.
Note: This book is reviewed by Peter Howitt in the Journal of
Economic Literature 33 (September 95), 14-16.
Detailed Outline of Topics, Discussion Questions, and
Readings
Please Note: A double asterisk ** means that a reading
contains basic required material for answering exercises and exam questions.
All required readings under a particular topic area are listed in suggested
reading order. A single asterisk * means that a reading contains
recommended material of a more general contextual nature that may be useful
for answering exercises and exam questions.
All required readings will be available to you either at an indicated
on-line site, on closed reserve in the Econ/Soc Reading Room (Heady 368), or
as a class hand-out. The form of availability for each required reading is
indicated after its citation information. Suggested readings for more
specialized study are also given for each topic area.
Updated or new materials (required or recommended readings,
discussion questions, exercises, exam guides,...) might be added to
the on-line syllabus at a later time. Such materials will be marked
on the syllabus with an "updated" or "new" icon, respectively, for
at least one week, and their inclusion will also be announced in
class.
Finally, in the readings cited below, the expression
op. cit. is an abbreviation for the Latin expression
opere citato, which means "in the work cited (above)."
I. Macroeconomic Coordination: Introduction
Key Questions for In-Class Discussion:
- How should macroeconomics be defined?
- To what extent should macroeconomic analysis be based on
explicit microfoundations?
- To what extent should macroeconomic analysis attempt to incorporate
institutional constraints -- in particular,
realistic renderings of market processes?
- To what extent should macroeconomic analysis be concerned with
coordination issues?
- What does the "coordination" of a macroeconomy mean? Is it synonomous
in some sense with "equilibrium"? with "optimization"? with "stability"?
Required and Recommended Readings:
- ** K. Hoover, The New Classical Macroeconomics: A Skeptical
Inquiry, Basil Blackwell, 1988, Chapter 1: The Varieties of
Macroeconomics (pp. 3-19). BOOK ON CLOSED RESERVE
- ** Robert King, "New Classical Macroeconomics"
(html,8pp),
entry in the Concise Encyclopedia of Economics, 1993. ON-LINE
- ** N. Gregory Mankiw, "New Keynesian Economics"
(html,7pp),
entry in the Concise Encyclopedia of Economics, 1993. ON-LINE
- Note: New Keynesian economics is an early strand of the
"Post-Walrasian" macroeconomic literature, which will be more carefully
defined below in Section III.
- * G. R. Feiwel, "Quo Vadis Macroeconomics? Issues,
Tensions, and Challenges", Chapter 1 (pp. 1-100) in G. R.
Feiwel, ed., Issues In Contemporary Macroeconomics
and Distribution, op. cit.. BOOK ON CLOSED RESERVE
- Unusually thoughtful critique still highly relevant for
macro today, despite the 1985 publication date. Students might wish
to skim rather quickly through this survey for
now, to get a general overview, and re-read it later with more care
as additional topics are covered in class.
- John McMillan, Reinventing the Bazaar: A Natural History of
Markets, W. W. Norton & Co., 2002.
- From the author: "New ideas in economics, and some old ones, are used
in the chapters that follow to dissect exotic, innovative, and everyday
marketplaces -- some in physical space, others in cyberspace. How do markets
work? What can they do? What can't they do? These are the questions I will
address."
- The Alliance for Innovative Manufacturing (AIM) at Stanford University
maintains an interesting site titled How Everyday Things Are Made
(html).
- The site provides manufacturing video (virtual factory tours)
covering the manufacturing processes for over forty types of common products
(cars, planes, chocolate, glass bottles, etc.). These videos stress the
extraordinary degree of coordination among input suppliers, producers, and
distributors required to bring to market even seemingly simple products such
as a jelly bean.
II.
Walrasian Equilibrium: Benchmark of Coordination Success?
Key Questions for In-Class Discussion:
- What is a "Walrasian equilibrium"?
- How is individual welfare measured?
- How is social welfare measured?
- In what sense are individual and social welfare optimized in a Walrasian
equilibrium?
- Is Walrasian equilibrium an appropriate benchmark of coordination success
for macroeconomics? (Or does Walrasian equilibrium instead represent "the
celestial mechanics of a non-existent world," as suggested by Kenneth
Boulding?)
- How robust is the concept of Walrasian equilibrium to various
plausible weakenings of its assumptions?
Required and Recommended Readings:
- ** L. Tesfatsion,
"Walrasian Equilibrium: A Critique"
(pdf,122K). HAND-OUT
- ** L. Tesfatsion, Brief Notes on Game Theory: Basic Concepts and
Terminology
(pdf,37K). ON-LINE
- * Samuel Bowles and Herbert Gintis, Walrasian Economics in
Retrospect
(pdf,28pp),
Quarterly Journal of Economics, November 2000, 1411-1439. ON-LINE
Other Suggested Readings
III.
Post-Walrasian Macroeconomics
Key Questions for In-Class Discussion:
- Must economic equilibrium necessarily entail Walrasian market
clearing?
- What does "coordination failure" mean for a macroeconomy? How
is it distinct from disequilibrium?
- How (and why) have economists attempted to distinguish between
"voluntary" and "involuntary" unemployment?
- Can economies become stuck
in situations with persistently positive unemployment?
- Can unemployment arise in macroeconomies for reasons other
than sticky prices?
- Why might credible signalling of purchasing intentions be important in
circular flow economies?
- What was Clower's distinction between notional and effective demands and
supplies, and how does this relate to the issue of credible signalling?
- How can self-fulfilling expectations lead to the existence of multiple
equilibria for an economy in a given structural state?
- What constitutes "rational" expectations and "rational" planning in the
presence of behavioral uncertainty?
- How might coordination failure arise in the presence of behavioral
uncertainty?
- What kinds of institutions (private or public) might help to
induce coordination on socially desirable outcomes?
Required and Recommended Readings:
- ** David Colander, "Overview", Chapter 1 (pp. 1-17, stress on
pages 1-10) in David Colander (ed.), Beyond Microfoundations: Post
Walrasian Macroeconomics, Cambridge University Press, Cambridge, UK,
1996. BOOK ON CLOSED RESERVE
- ** L. Tesfatsion, "NonWalrasian Equilibrium: Illustrative
Examples"
(pdf,187K).
HAND-OUT
- ** L. Tesfatsion, "Adaptive vs. Rational Expectations".
HAND-OUT
- * L. Tesfatsion, "Introduction to Rational Expectations"
(pdf,105K). ON-LINE
- * Perry Mehrling, "The Evolution of Macroeconomics: The Origins of
Post-Walrasian Macroeconomics", Chapter 5 (pp. 71-86) in David Colander
(ed.), Beyond Microfoundations: Post Walrasian Macroeconomics,
Cambridge University Press, Cambridge, UK, 1996. BOOK ON CLOSED RESERVE
- Note: Parts of this "history of economic thought" article will
be difficult to understand if you have not had a broad undergraduate macro
training. What you should try to grasp from this article is a general
understanding of how macro theory has evolved since World War II (according
to Mehrling) from Keynesian roots to current Post-Walrasian approaches.
- * John Bryant, "Team Coordination Problems and Macroeconomic
Models", pp. 157-171 in David Colander, Beyond Microfoundations:
Post-Walrasian Macroeconomics, Cambridge University Press, 1996. BOOK ON
CLOSED RESERVE
- * Robert Clower and Peter Howitt, "Taking Markets Seriously: Groundwork
for a Post Walrasian Macroeconomics", Chapter 2 (pp. 21-37) in David
Colander (ed.), Beyond Microfoundations: Post Walrasian
Macroeconomics, Cambridge University Press, Cambridge, UK, 1996. BOOK ON
CLOSED RESERVE
- * Peter Howitt, "Introduction: Prices and Coordination in Keynesian
Economics", Chapter 1 (pp. 1-23, focus on 1-19) in Peter Howitt, The
Keynesian Recovery and Other Essays, The University of Michigan Press,
Ann Arbor, MI, 1990. BOOK ON CLOSED RESERVE
- * Peter Howitt, "The Keynesian Recovery", Chapter 5 (pp. 70-85)
in Peter Howitt, The Keynesian Recovery and Other Essays, The
University of Michigan Press, Ann Arbor, MI, 1990. BOOK ON CLOSED RESERVE
- George A. Akerlof, "Behavioral Macroeconomics and Macroeconomic
Behavior", The American Economic Review, Volume 92, No. 3, June
2002, pages 411-433. ARTICLE ON CLOSED RESERVE
- This is a revised version of the Nobel Lecture Akerlof delivered in
Sweden on December 8, 2001.
- Robert Gibbons, "An Introduction to Applicable Game Theory",
Journal of Economic Perspectives, Volume 11, Number 1 (Winter 1997),
pages 127-149. ARTICLE ON CLOSED RESERVE
Other Suggested Readings
IV.
A Constructive Approach to Macroeconomic Coordination
Key Questions for In-Class Discussion:
- What is the basic agent-based computational economics (ACE) approach?
- Key coordination issues that are being experimentally studied using ACE
frameworks:
- Learning effects (under what conditions will expectations come to be
coordinated?)
- Interaction effects (under what conditions will buyers and sellers
efficiently match? efficiently trade?)
- Effects of institutional constraints (hindrance or help for achieving
macroeconomic coordination?)
Required and Recommended Readings:
- ** Leigh Tesfatsion, "Macro Coordination: More General
Considerations"
(pdf,25K). HAND-OUT
- ** Leigh Tesfatsion, ACE Tutorial
(pdf,101K). ON-LINE/CLASS PRESENTATION
- ** Leigh Tesfatsion, "Agent-Based Computational Economics: Modeling
Economies as Complex Adaptive Systems"
(pdf preprint,72K),
Information Sciences, Volume 149, 2003, 263-269.
HAND-OUT
- Leigh Tesfatsion, "Universal Principles for Decentralized Market
Economies?"
(pdf,18K).
ON-LINE
- Jonathan Rauch, "Seeing Around Corners"
(html,13pp),
The Atlantic Monthly, April 2002, pp. 35-48. ARTICLE ON CLOSED
RESERVE.
- Rauch surveys early and ongoing research on the computational
modeling of artificial societies. Interested readers can also view
animations
in QuickTime format of some of the artificial societies discussed in Rauch's
article.
- Joshua Epstein and Robert Axtell,
Growing Artificial Societies: Social
Science from the Bottom Up
(html),
The MIT Press, Cambridge, MA, 1996. BOOK ON CLOSED RESERVE
- The authors use a relatively simple agent-based computational
framework (Sugarscape) to illustrate how the complex adaptive systems
paradigm can be applied to the study of social phenomena. This monograph is
reviewed (ps,28K)
by L. Tesfatsion in the Journal of Economic Literature (Vol. XXXVI,
March 1998, 233-234).
- Agent-Based Computational Economics (ACE) Website
(html).
- Introductory Materials on ACE
(html)
- ACE course syllabus (self-study eBook)
(html)
Other Suggested Readings
V.
Illustration: Labor Markets and Macroeconomic Performance
Key Questions for In-Class Discussion:
- ACE labor market model with preferential job search and evolution of
work-site behaviors
- What might "equilibrium" mean in such a model?
- Is it meaningful to characterize unemployment as "involuntary" vs.
"voluntary" in this model?
Required and Recommended Readings:
- ** Mark Pingle and Leigh Tesfatsion,
Evolution of Worker-Employer Networks and Behaviors Under Alternative
Non-Employment Benefits: An Agent-Based Computational Study",
pp. 256-285 in A. Nagurney (ed.), Innovations in Financial and Economic
Networks, Edward Elgar, 2003, presentation
(pdf,87K). ON-LINE
- NOTE: This presentation, to be given in class, constitutes
the required reading. However, if anyone is interested, a preprint of the
full published paper (not required reading) is available on-line
(pdf preprint,269K).
Tutorials, source code (including an automatic installation utility), and
other information about the Trade Network Game (TNG) Laboratory used to run
all experiments reported in the Pingle/Tesfatsion paper can be found
on-line at the
TNG Home Page.
- ** Richard Rogerson, "Theory Ahead of Language in the Economics of
Unemployment", Journal of Economic Perspectives, Vol. 11, No. 1
(Winter 1997), 73-92. ARTICLE ON CLOSED RESERVE
- This article explores the usefulness of conceptions such as the
natural rate of unemployment, involuntary vs. voluntary unemployment, and
equilibrium vs. disequilibrium unemployment in the context of a labor market
model with job search. It provides an interesting background reading for the
above Pingle/Tesfatsion labor market study of preferential job search with
evolution of work-site behaviors.
- * Leigh Tesfatsion, "The Efficiency-Wage Debate",
(pdf,110K). ON-LINE
- These notes provide general background materials for a key issue
raised in the above Pingle/Tesfatsion labor market job search study: What
determines the effort levels exerted by workers and employers on the
work-site?
- Giorgio Fagiolo, Giovanni Dosi, and Roberto Gabriele, Towards an
Evolutionary Intepretation of Aggregate Labor Market Regularities
(pdf,35pp,387K),
Working Paper, Sant'Anna School of Advanced Studies, Pisa, Italy, January 21,
2004.
- The authors study job matching and bargaining, wage and price setting,
and output demand and supply formation in the context of an agent-based
computational model of a decentralized market economy consisting of a labor
and a product market. The objective of the authors is to provide possible
"bottom up" micro explanations for well-known macro empirical regularities
(e.g., the Beveridge curve, Okun's Law, and wage data patterns).
- Richard B. Freeman, War of the Worlds: Which Labour Market
Institutions for the 21st Century?", Labour Economics, Vol. 5
(1998), 1-24. Available on-line at
Elsevier Publishers.
Other Suggested Readings
Copyright © 2004 Leigh Tesfatsion. All Rights Reserved.