Econ 606 (Team-Taught): Macro Coordination Section (Tesfatsion)

Econ 606: Advanced Macro Topics

Course Module Syllabus
Macroeconomic Coordination
(Ph.D. Level)

Last Updated: 13 May 2004
Latest Offering: Spring 2004 (First Five Weeks)
Time/Bldg/Room: MW 12:40-2, Heady 272

Course Module Home Page

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 and Office Hours: Heady 375, TR 12:20pm-1:50pm and by appointment

COURSE MODULE 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 course module for Econ 606 will explore alternative perspectives on macroeconomic coordination in an attempt to clarify why macroeconomists exhibit such strong, passionate, and persistent disagreement on this issue.

COURSE MODULE TOPIC OUTLINE

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

REQUIRED AND BACKGROUND MATERIALS

DETAILED OUTLINE OF TOPICS, DISCUSSION QUESTIONS, AND READINGS

Please Note: The exact selection of required readings for this Econ 606 course module 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 exercoses and exam questions. All required readings under a particular topic area are listed in suggested reading order.

Recommended (but not required) readings are also given, with highly recommended readings marked with a single asterisk *. Recommended readings cover material of a more general contextual nature that might be useful for answering exercises and exam questions.

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. 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:

  • ** 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

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

  • ** 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.. 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.. BOOK ON CLOSED RESERVE

  • ** Robert King, "New Classical Macroeconomics" (html,8pp), entry in the Concise Encyclopedia of Economics, 1993. ON-LINE/CLOSED RESERVE

  • ** N. Gregory Mankiw, "New Keynesian Economics" (html,7pp), entry in the Concise Encyclopedia of Economics, 1993. ON-LINE/CLOSED RESERVE
    Note: New Keynesian economics is an early strand of the "Post-Walrasian" macroeconomic literature, which will be more carefully defined below in Section IV.

  • * 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
    A sophisticated and exceptionally thoughtful survey of the "varieties of macroeconomics" through the mid-nineteen eighties, still very relevant for current macroeconomics today.

  • 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: A BENCHMARK OF COORDINATION SUCCESS?

Key Questions for In-Class Discussion:

  • What is a "Walrasian equilibrium"?
  • How should an individual person's welfare be measured?
  • How should social welfare be measured for an economy?
  • 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). ON-LINE/HAND-OUT/CLASS PRESENTATION

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

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

  • * Samuel Bowles and Herbert Gintis, Walrasian Economics in Retrospect (pdf,123K,28pp), Quarterly Journal of Economics, November 2000, 1411-1439. ON-LINE/CLOSED RESERVE

  • 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 distinguishes rational from 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/CLASS PRESENTATION

  • ** L. Tesfatsion, "Introduction to Rational Expectations" (pdf,130K). HAND-OUT/CLASS PRESENTATION

  • ** L. Tesfatsion, "Notes on the Lucas Critique, Time Inconsistency, and Related Issues" (pdf,114K). HAND-OUT/CLASS PRESENTATION

  • * 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). ON-LINE/CLOSED RESERVE

  • * 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. ON-LINE/CLOSED RESERVE

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

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

  • * Alan 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.

  • 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"? How should "equilibrium" be defined for macroeconomies?
  • What does "coordination failure" mean for a macroeconomy? How is it distinct from disequilibrium?
  • What is meant by "involuntary unemployment"? Can economies become stuck in situations with persistent involuntary unemployment?
  • Can involuntary 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). ON-LINE/HAND-OUT/CLASS PRESENTATION

  • ** 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.. 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.

  • * 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."

  • 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. ON-LINE/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.

  • 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. ON-LINE/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. A CONSTRUCTIVE APPROACH TO MACROECONOMIC COORDINATION

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?
  • 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?)
  • If you had to construct a workable decentralized market economy from scratch, how would you do it?
  • Are there any "universally applicable" features that you believe you would have to incorporate in your constructed economy in order for it to function properly?
  • Illustrative Example: An ACE labor market with preferential job search and evolution of work-site behaviors

Required and Recommended Readings:

  • ** Leigh Tesfatsion, "Macro Coordination: More General Considerations" (pdf,25K). ON-LINE/HAND-OUT/CLASS PRESENTATION

  • ** 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. ON-LINE/HAND-OUT

  • ** 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/CLASS PRESENTATION
    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) and on CLOSED RESERVE. 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 11(1), Winter 1997, pp. 73-92. HAND-OUT
    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?

  • * Leigh Tesfatsion, "Universal Principles for Decentralized Market Economies?" (pdf,18K). ON-LINE

  • Richard B. Freeman, War of the Worlds: Which Labour Market Institutions for the 21st Century?", Labour Economics, Vol. 5 (1998), 1-24. ARTICLE ON CLOSED RESERVE, and ON-LINE at Elsevier Publishers.

  • Roberto Gabriele, Labor Market Dynamics and Institutions: An Evolutionary Approach, LEM Paper 2002-07, Laboratory of Economics and Management, Sant'Anna School of Advanced Studies, Pisa, CLOSED RESERVE and ON-LINE at EconPapers.

  • Jonathan Rauch, "Seeing Around Corners" (html), The Atlantic Monthly, April 2002, pp. 35-48. ON-LINE/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.

  • Joshua Epstein and Robert Axtell, Growing Artificial Societies: Social Science from the Bottom Up (html), 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).

  • Other Introductory Materials on Agent-Based Computational Economics (ACE) (html)

  • Research Portal on ACE Multiple-Market Modeling (html)

  • ACE Course Syllabus (Self-Study eBook) (html)

VI. EXAM REVIEW MATERIALS

Final Exam Review Guide:

Copyright © 2004 Leigh Tesfatsion. All Rights Reserved.