Econ 604 (Team-Taught): Macro Coordination Section (Tesfatsion)

Syllabus for Econ 604
Course Section Two (Last Five Weeks) on
Macroeconomic Coordination

Syllabus Last Updated: 16 November 2003
Latest Offering: Fall 2002 (Last Five Weeks)

Home Page: Econ 604 (Macro Coordination Section)

Section Two 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 and Office Hours: Heady 375, TR 1:10-3:00pm, and by appointment

Section Two Objectives

Achieving an accurate understanding of the way in which key macro variables (output, employment, price levels, capital stocks,...) move together over time in decentralized market economies is a fundamental problem of macroeconomic theory. At present there is no consensus regarding which theory best explains this movement. At one end of the spectrum, new classical macroeconomists work within frameworks in which the macroeconomy is assumed to be in a continual state of equilibrium characterized by strong efficiency properties. At the other end of the spectrum, post-Walrasian macroeconomists argue that macroeconomies regularly exhibit coordination failure (various degrees of inefficiency) and even lengthy periods of disequilibrium. Given these fundamental differences, it is not surprising to see major disagreements among macroeconomists concerning the extent to which government policy makers can and ought to attempt to influence macroeconomic outcomes.

This section of this year's team-taught Econ 604 will explore alternative perspectives on macroeconomic coordination in an attempt to clarify why macroeconomists exhibit such strong, passionate, and persistent disagreement on this issue.

Section Two Topics:

  1. Introduction
  2. Walrasian Equilibrium: A Benchmark of Coordination Success?
  3. Expectations and Time Inconsistency Issues
  4. Post-Walrasian Macroeconomics
  5. Towards a Constructive Macroeconomic Theory
  6. Exam Review Materials Coordination

Required and Background Materials

Detailed Outline of Section Two Topics, In-Class Discussion Questions, and Required and Recommended Readings

Please Note: The exact selection of required readings for Section Two of Econ 604 will depend on the interests and backgrounds of the students.

Required readings will be marked with a double asterisk **. The required readings contain basic material for answering exam questions and exercises. All required readings will be listed in a suggested reading order, and copies of these readings will either be handed out in class or will be available on closed reserve in the Econ/Soc Reading Room, Third Floor, Heady Hall, Room 368.

Recommended readings will be marked with a single asterisk *. Recommended readings cover material of a more general contextual nature that might be useful for answering exam questions and exercises.

Additional materials (required readings, recommended readings, lecture notes, exercises, discussion questions,...) might be incorporated into this on-line syllabus as the course section proceeds. Such materials will be marked on the syllabus with an "updated" or "new" icon, respectively, for at least one week following their incorporation, and their incorporation 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. INTRODUCTION

Key Questions for In-Class Discussion:

  • What does "coordination failure" mean for a macroeconomy? How is it distinct from disequilibrium?
  • Do macroeconomies exhibit coordination failure?
  • If so, are these coordination failures simply a matter of prices being too "sticky"?
  • Or can coordination failures arise in macroeconomies for reasons other than sticky prices, thus challenging the Walrasian view that all economically-relevant interactions are mediated through prices and enforceable contracts?

Required and Recommended Readings:

  • ** Leigh Tesfatsion, "Coordination Issues: An Overview" HAND-OUT (5pp)

  • ** Samuel Bowles, "Prologue" (pdf,19pp), Microeconomics: Behavior, Institutions, and Evolution, Princeton University Press, Princeton, N.J., 2003.

  • ** Kevin D. Hoover, "The Varieties of Macroeconomics," Chapter 1 (pages 3-19) in Kevin D. Hoover, The New Classical Macroeconomics, op. cit.. BOOK ON CLOSED RESERVE FOR ECON 502

  • ** 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, op. cit.. HAND-OUT (BOOK ON CLOSED RESERVE)

  • ** Peter Howitt, "The Keynesian Recovery," Chapter 5 (pp. 70-85) in Peter Howitt, The Keynesian Recovery and Other Essays, op. cit.. HAND-OUT (BOOK ON CLOSED RESERVE)

  • * George R. Feiwel, "Quo Vadis Macroeconomics? Issues, Tensions, and Challenges," Chapter 1 (pages 1-100) in George R. Feiwel (ed.), Issues in Contemporary Macroeconomics and Distribution, op. cit.. BOOK ON CLOSED RESERVE FOR ECON 502
    A sophisticated and exceptionally thoughtful survey of the "varieties of macroeconomics" through the mid-nineteen eighties, still very relevant for current macroeconomics today.

II. WALRASIAN EQUILIBRIUM: A BENCHMARK OF COORDINATION SUCCESS?

Key Questions for In-Class Discussion:

  • What is 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:

  • ** Leigh Tesfatsion, "Walrasian Equilibrium: A Critique" (pdf,119K) HAND-OUT (17pp)

  • * Leigh Tesfatsion, "Intertemporal Extensions of the Walrasian General Equilibrium Model," Lecture Notes. HAND-OUT (8pp)

  • * Leigh Tesfatsion, "Walrasian General Equilibrium with a Government Sector," Lecture Notes. HAND-OUT (3pp)

  • Christopher D. Mackie, Canonizing Economic Theory: How Theories and Ideas are Selected in Economics, M. E. Sharpe, Inc., 1998.

Other Suggested Readings

III. EXPECTATIONS AND TIME INCONSISTENCY ISSUES

Key Questions for In-Class Discussion:

  • What's the big deal about rational versus adaptive expectations?
  • In what sense is "rational expectations" a coordination device?
  • How does the possible existence of multiple rational expectations solutions pose logical difficulties for the application of rational expectations as a coordination device?
  • Why does the existence of strategic (behavioral) uncertainty pose problems for the very definition of rational expectations?
  • How do credible commitment and time inconsistency problems cause intertemporal coordination problems for government policy makers?

Required and Recommended Readings:

  • ** L. Tesfatsion, "Adaptive vs. Rational Expectations" HAND-OUT (1p)

  • ** L. Tesfatsion, "Introduction to Rational Expectations" (pdf,105K) HAND-OUT (20pp)

  • ** L. Tesfatsion, "Notes on the Lucas Critique, Time Inconsistency, and Related Issues'' (pdf,98K), HAND-OUT (14pp)

  • ** F. S. Mishkin,"The Rational Expectations Revolution: A Review Article of Preston J. Miller, ed., The Rational Expectations Revolution: Readings from the Front Line," Journal of International and Comparative Economics, Volume 5, 1996. A preprint of the paper is online as NBER Working Paper W5043 (pdf,1026K). ARTICLE ON CLOSED RESERVE

  • * Axel Leijonhufvud, "Towards a Not-Too-Rational Macroeconomics," Chapter 3 (pp. 39-55) in in David Colander (ed.), Beyond Microfoundations: Post Walrasian Macroeconomics, op. cit.. BOOK ON CLOSED RESERVE
    Leijonhufvud contrasts current macroeconomic theory -- the study of "incredibly smart people in unbelievably simple situations" -- with what he believes ought to be the subject of macroeconomic theory, the study of "believably simple people (coping) with incredibly complex situations."

  • * Lars E. O. Svensson, "Comments on Nancy Stokey: `Rules versus discretion after twenty five years'" (pdf,9pp), comments prepared for the NBER Macroeconomics Annual, Princeton University, April 2002. ARTICLE ON CLOSED RESERVE

  • * Allan P. Kirman, "Whom or What Does the Representative Individual Represent?," Journal of Economic Perspectives 6 (Spring 1992), 117-136. ARTICLE ON CLOSED RESERVE
    A highly influential critique of the use of "representative agents" in economic theorizing.

  • * K. Hoover, New Classical Macroeconomics, op. cit., Chapter 8: "Econometrics and the Analysis of Policy" (pp. 185-202). BOOK ON CLOSED RESERVE FOR ECON 502
    Hoover examines the Lucas Critique and assesses various attempts to apply new classical macro principles to the econometric analysis of policy.

  • * T. Sargent, Chapter 1: "Rational Expectations and the Reconstruction of Macroeconomics" (pp. 1-18), in T. Sargent, Rational Expectations and Inflation, op. cit.. BOOK ON CLOSED RESERVE FOR ECON 502

Other Suggested Readings

IV. POST-WALRASIAN MACROECONOMICS

Key Questions for In-Class Discussion:

  • Must markets clear in the traditional Walrasian sense in order for an economy to be in "equilibrium"?
  • What is meant by "involuntary unemployment"? Can economies become stuck in situations with persistently positive involuntary unemployment?
  • 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?
  • How might coordination failure arise in the presence of behavioral uncertainty?
  • What constitutes "rational" planning in the presence of behavioral uncertainty?
  • Are "institutions" essential coordination devices for macroeconomies? If so, which ones, and why?

Required and Recommended Readings:

  • ** David Colander, "Overview," Chapter 1 (pp. 1-17) in David Colander (ed.), Beyond Microfoundations: Post Walrasian Macroeconomics, op. cit.. HAND-OUT (BOOK ON CLOSED RESERVE)

  • ** Leigh Tesfatsion, "Non-Walrasian Equilibrium: Illustrative Examples" (pdf,147K) HAND-OUT (32pp)

  • ** 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, op. cit.. HAND-OUT (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. HAND-OUT (ARTICLE ALSO ON CLOSED RESERVE)
    This is a revised version of the Nobel Lecture Akerlof delivered in Sweden on December 8, 2001.

  • * Russell Cooper, Coordination Games: Complementarities and Macroeconomics, Cambridge University Press, Cambridge, UK, 1999.

  • * Douglas C. North, The New Institutional Economics and Development (pdf,30K), Working Paper, Washington University at St. Louis, 1993. ARTICLE ON CLOSED RESERVE
    This paper briefly summarizes the essential characteristics of the "new institutional economics," describes how the approach differs from neoclassical theory, and applies its analytical framework to problems of development.

  • * 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

  • * Vincent Crawford (University of California at San Diego, CA), "John Nash and the Analysis of Strategic Behavior" (pdf,7pp), Working Paper, Department of Economics, UCSD, January 2000. ARTICLE ON CLOSED RESERVE

  • * Michael Spence, "Signaling in Retrospect and the Informational Structure of Markets," The American Economic Review, Volume 92, No. 3, June 2002, pages 434-459. ARTICLE ON CLOSED RESERVE

  • * Joseph E. Stiglitz, "Information and the Change in the Paradigm of Economics," The American Economic Review, Volume 92, No. 3, June 2002, pages 460-501. ARTICLE ON CLOSED RESERVE

Other Suggested Readings

V. TOWARDS A CONSTRUCTIVE MACROECONOMIC THEORY

Key Questions for In-Class Discussion:

  • Does the real understanding of a system (sandpile, washing machine, cockroach, city, economy,...) require knowing how to construct it? And what does "constructing it" mean?
  • Should economics strive to be a constructive "culture-dish" science, in the sense that persistently observed regularities in real-world economies can reliably be reproduced in artificially constructed economies by growing these economies "from the bottom up," starting from specified initial conditions?
  • What role does structure (e.g., institutions, protocols, laws) play in supporting "intelligent" market outcomes?
  • If you had to construct a workable decentralized market economy from scratch, how would you do it?
  • Are there any "universally applicable" structural features that you believe you would have to incorporate in your constructed economy in order for it to function properly?
  • Under what circumstances might learning and network effects prevent the structural features of a macroeconomy from being a reliable predictor of macroeconomic outcomes?
  • What potential roles do increasing returns, path-dependence, and lock-in play in economic processes? Are these effects important for macroeconomic outcomes, or are they "washed out" in the aggregate and over time?

Required and Recommended Readings:

  • ** Leigh Tesfatsion, "Macro Coordination: More General Considerations" (pdf,22K) HAND-OUT (2pp)

  • ** Leigh Tesfatsion, "Agent-Based Computational Economics: Modelling Economies as Complex Adaptive Systems," Information Sciences, Volume 149, 2003, 263-269. A preprint is available (pdf,72K). HAND-OUT (7pp)

  • ** Jonathan Rauch, "Seeing Around Corners", The Atlantic Monthly, April 2002, pp. 35-48. HAND-OUT (ARTICLE ALSO ON CLOSED RESERVE)
    Rauch surveys early and ongoing research on the computational modeling of artificial societies. He discusses early seminal work by Thomas Schelling (University of Maryland) in the 1970s on the evolution of spatial segregation in cities. He also discusses work on artificial societies (e.g., Sugarscape) carried out at the Brookings Institution (Washington, D.C.) by Joshua Epstein, Robert Axtell, and Ross Hammond (now at the University of Michigan). A third pursuit surveyed by Rauch is the effort by Joshua Epstein, in collaboration with two University of Arizona archaeologists (George Gumerman and Jeffrey Dean), to build an artificial society exhibiting the known characteristics of the actual Long House Valley Anasazi culture that existed in the southwest from approximately A.D. 800 to A.D. 1350. Interested readers can also view animations in QuickTime format of some of the artificial societies discussed in Rauch's article.

  • ** Leigh Tesfatsion, "Universal Economic Principles?" (pdf,18K), HAND-OUT (3pp)

  • * Pointers to research on Technical Change and Economic Growth using agent-based and/or evolutionary computational modeling.

  • * Pointers to research on Labor Markets using agent-based and/or evolutionary computational modeling.

  • * Agent-Based Computational Economics (ACE) Website.

  • * Joshua Epstein and Robert Axtell, Growing Artificial Societies: Social Science from the Bottom Up, op. cit.. 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. Illustrative applications include trade, migration, group formation, combat, interaction with an environment, transmission of culture, propagation of disease, and population dynamics. This monograph is reviewed (ps,28K) by L. Tesfatsion in the Journal of Economic Literature (Vol. XXXVI, March 1998, 233-234).

  • * Charles F. Manski, "Economic Analysis of Social Interactions," Journal of Economic Perspectives, Volume, No. 3 (Summer 2000), pp. 115-136. ARTICLE ON CLOSED RESERVE

  • * Leigh Tesfatsion, "Agent-Based Computational Economics," in F. Luna, A. Perrone, and P. Terna (eds.), Agent-Based Theories, Languages, and Practices, Routledge Publishers, 2003, to appear. A preprint (pdf,208K) is available (ISU Economics Working Paper No. 1, Revised July 2002). WORKING PAPER ON CLOSED RESERVE
    Abstract: Agent-based computational economics (ACE) is the computational study of economies modelled as evolving systems of autonomous interacting agents. Starting from initial conditions, specified by the modeler, the computational economy evolves over time as its constituent agents repeatedly interact with each other and learn from these interactions. ACE is therefore a bottom-up culture-dish approach to the study of economic systems. This paper discusses the key characteristics and goals of the ACE methodology. Eight currently active research areas are highlighted for concrete illustration. Potential advantages and disadvantages of the ACE methodology are considered, along with open questions and possible directions for future research.

  • Andy Clark, Being There: Putting Brain, Body, and World Together Again, MIT Press, 308 pp., 1998 (paperback edition), ISBN 0-262-53156-9.
    From the book jacket: "Brain, body, and world are united in a complex dance of circular causation and extended computational activity. In Being There, Andy Clark weaves these several threads into a pleasing whole and goes on to address foundational questions concerning the new tools and techniques needed to make sense of the emerging sciences of the embodied mind. Clark brings together ideas and techniques from robotics, neuroscience, infant psychology, and artificial intelligence. He addresses a broad range of adaptive behaviors, from cockroach locomotion to the role of linguistic artifacts in higher-level thought."

  • Nicolaas J. Vriend, "Was Hayek an ACE?", Southern Econonomic Journal 68(4), 2002, 811-840.
    The author argues that agent-based computational economics (ACE) researchers could benefit from the methodological insights developed in Friedrich von Hayek's work on cultural evolution, and that Hayekian researchers could benefit from the opportunity provided by ACE frameworks to test constructively some of Hayek's more abstract methodological insights.

Other Suggested Readings

VI. EXAM REVIEW MATERIALS

Final Exam Review Guide:

Copyright © 2003 Leigh Tesfatsion. All Rights Reserved.