Review of Conversations with Economists, Fortune magazine, July 9, 1984, pp 215-216 (Site admin: this article was re-created with CSS. To view the original (with its photo of young Arjo) click here)
|BOOKS & IDEAS|
BY DAVID R. HENDERSON
ECONOMISTS AND REALITY
Away from their equations, the theoreticians of modern economics seem quite interested in the real world.
Arjo Klamer, an assistant professor of economics at Wellesley [College], has pulled off a remarkable stunt. He has produced a book that deals seriously with the fundamental issues of contemporary economic theory--and that is fun to read. The stunt was made possible by Klamer's somewhat unacademic methodology: instead of interpreting the cryptic texts in the scholarly journals, he turned directly to the authors and talked to them about economics while the tape recorder ran. In Conversations with Economists (Rowman & Allanheld, $18.95), we get to hear 11 eminent members of the profession, ranging from the stars of the "rational expectations" school like Robert Lucas (of the University of Chicago) to neo-Keynesians like Robert Solow (MIT) to Marxists like David Gordon (New School for Social Research). They tell us in plain English what they like about their own models of how the economy works. They also describe the intellectual pilgrimages and accidents of life that led them to those models, and discuss their colleagues' competing models with respect, condescension, and everything in between.
Because of its conversational format, Conversations with Economisits is a book you can profitably browse through. Pick it up, turn to any page, and if you have any interest at all in economics you'll probably find yourself reading on. One endlessly fascinating theme in the book is the relationship between those various economic models and "reality." Many people believe--indeed many economists believe--that economic theories are too often accepted on the basis of their methodological sophistication, and without regard to their underlying factual assumptions. Yet Klamer's conversations show his economists worrying a lot about reality. Lucas, the best-known proponent of "rational expectations," confesses at one point: "Sometimes I get so deep into a problem that I just lose the ability to hang on to all the pieces, and start being afraid that I'm thinking about everything in the wrong way. I read criticisms of my work that seem to me important, pointing up serious deficiences in these models."
Lucas then adds that he has a "general confidence" that the criticisms don't really undermine his work, "although I don't know why." Like a lot of other social scientists, economists depend in the end on gut feelings about where the truth lies, and it's refreshing to see some of them acknowledging this.
As Klamer observes in a useful introductory chapter which offers a fast guide to the main points at issue in modern economics, the vision of reality being put forward by the rational expectations school represents a fundamental challenge to other academic models. Lucas and his occasional collaborator Thomas Sargent (of the University of Minnesota) argue that people act as if they're using all available information in trying to anticipate the future, including even the information built into quite sophisticated econometric models; if the argument is valid, then Keynesian interventions won't have the intended effect. As Sargent puts it, individuals can always foil the interventionists by changing their own strategies when the government changes its strategy.
The Keynesians represented in Conversations — they include Solow, Franco Modigliani (MIT), Alan Blinder (Princeton), John Taylor (Harvard), and James Tobin (Yale) — have naturally not been kind to rational expectations. They deride the view that ordinary consumers will develop expectations consistent with elaborate theoretical models.