Review of Macroeconomics by Charles Jones

This quarter we shifted to a new textbook for teaching undergraduate macroeconomics at UCSD, which is Macroeconomics by Stanford professor Charles Jones. Here are some of my reactions to the book.

At UCSD we now use Jones’s text in a two-quarter sequence for intermediate macroeconomics, with the first quarter covering long-run growth and the second, which I’m teaching this quarter, dealing with economic fluctuations. One of the things I like about the book is that it allows me to teach an empirically oriented course in which I can put more emphasis on the facts and less on stylized theories. Two full chapters are devoted to describing what happened during the Great Recession, which can serve as an extended case study around which much of the course can focus. To my mind that’s the best way to make the course interesting and relevant to students.

One innovation of Jones’s text is that it dispenses completely with the IS-LM framework, replacing it with a formulation that simply puts the central bank’s choice of the nominal interest rate as a starting point for studying the effects of monetary policy. This follows more closely modern theoretical treatments like Woodford (2003) and Romer (2000), is more consistent with how monetary policy is actually implemented, and saves the instructor the embarrassment of centering the theoretical structure on a concept of money demand that completely breaks down in describing the most recent data.

The text expresses more skepticism than many others about the efficacy of fiscal policy as a short-run tool for demand management, and is also unusual in including a serious discussion of long-term budget constraints. Personally that focus suits me well, though in this dimension it’s not a text that would appeal to Paul Krugman.

One certainly has to be impressed by Jones’s skill (almost paralleling Greg Mankiw’s) at finding a way to cut to the heart of very complicated issues and explain them in a very simple way– to read his text is to admire an artist at work. At times I worry though whether all the details left out will be a hindrance for the best students, and found I wanted to supplement the book’s treatment of topics such as the term structure of interest rates, the details of how monetary policy is implemented, and exactly how the “long-run” and “short-run” models are reconciled. What Jones and many instructors will have in mind is a log-linearization around a long-run growth model in which most of the coefficients have been set to zero for simplicity. But the book never communicates exactly what this entails, having for example taken great pains never to even use the term “logarithm”, plotting instead variables on what is called a “ratio scale”, and just introducing key parameters and “shocks” as defined ratios. I ended up following the text as written just taking the various shocks as given objects, but will want to give some thought next time I teach it to see if there’s another way to sketch for the better students exactly what is going on.

Overall, I’m very happy with the switch to the new text, and would encourage any teachers dissatisfied with the macro texts they’ve been using to give it a look.


55 thoughts on “Review of Macroeconomics by Charles Jones

  1. Richard Fox

    There are a few token articles but on the whole it still teaches the same failed policies that have brought massive inflation and the worst economic recessions in our nation’s history. It teaches demand side economic stagnation.

    Professor, it would be courageous to include some reading from the classical economists and alternative theories. But I fear that as in the past students will have to go outside the classroom to lean real economic theory. It would be good for you to surprise me.

    1. PeakTrader

      Richard, there’s been great progress in economics, e.g. in macro, micro, international trade, money & central banking, etc..

      The result has been steeper improvements in living standards.

      For example, compare how Americans lived and worked in the 1970s to today.

      Americans live in bigger and better houses, drive bigger and better autos, the environment is much cleaner, there are more shopping malls, workplaces are much better, etc..

      I’m sure, there are some good things about 19th century medicine too. However, is 19th century medicine better?

      1. Ricardo


        Consider that the Keynesian economics taught in this book are based on 16th and 17th Century mercantilism. The 19th Century economics was revolutionary evidenced by the huge growth in the late 19th Century to early 20th Century. When Keynes brought back mercantilism we experienced the Great Depression, the Great Inflation, and the Great Recession. Added to that is over a 90% loos in value of the dollar.

        Concerning 19th Century medicine don’t you realize that the foundation of modern medicine is based on discoveries in the 19th Century? If medicine had followed the path of economics we would be bleeding our victims, Pasteurization would be ridiculed, vaccinations would be non-existent, and on and on.

        I am not calling for a duplication of the 19th Century economics. But I am against a duplication of 16th and and 17th Century economics. How many introductory economic classes discuss Adam Smith, or Bastiat, or Ricardo, or Mill, or Menger, or Böhm-Bawerk, or Mises, even Schumpeter and Hayek? And that is only a partial list.

        1. SPENCER

          Could you explain so I can understand how Keynes bring back mercantilism and caused the depression before his policies were implemented.

          I keep being amazed at the people who believe policies have a retrospective influence.

          1. Ricardo


            Let me refer you to chapter 23 of Keynes’ General Theory of Employment, Interest, and Money entitled “Return to Mercantilism?” But many say Keynes never said he was a mercantilist. He only praised mercantilist thought. His contemporaries also saw him as a mercantilist as can be seen in Eli Heckscier’s Mercantilism and Jacob Viner’s Studies in the Theory of International Trade,

            On when Keynes policies were implemented I will let Mises speak for me.

            The great economists were harbingers of new ideas. The economic policies they recommended were at variance with the policies practiced by contemporary governments and political parties. As a rule many years, even decades, passed before public opinion accepted the new ideas as propagated by the economists, and before the required corresponding changes in policies were effected.
            It was different with the “new economics” of Lord Keynes. The policies he advocated were precisely those which almost all governments, including the British, had already adopted many years before his “General Theory” was published. Keynes was not an innovator and champion of new methods of managing economic affairs. His contribution consisted rather in providing an apparent justification for the policies which were popular with those in power in spite of the fact that all economists viewed them as disastrous. His achievement was a rationalization of the policies already practiced. He was not a “revolutionary,” as some of his adepts called him. The “Keynesian revolution” took place long before Keynes approved of it and fabricated a pseudo-scientific justification for it. What he really did was to write an apology for the prevailing policies of governments.

        2. PeakTrader

          Ricardo, government can be a positive or a negative force.

          However, U.S. per capita real GDP grew faster in the 20th century than in the 19th century.

          And, real GDP growth in the 20th century understates the improvements in living standards.

          Economics, like medicine, built upon prior work.

          When you say there’s been a 90% loss in the value of the dollar, you ignore the fact there are more dollars that raised real income tremendously.

          Average annual per capita real GDP growth

          1871-1914: 1.56% (height of the Industrial Revolution)
          1982-2007: 2.30% (height of the Information Revolution)
          1814-1913: 1.39%
          1914-2013: 2.15%

          I’m sure, I don’t have to explain the power of compound interest.

          And, I don’t have to explain it’s easier for small economies to double than large economies.

          Economic boom/bust cycles (not to be confused with asset booms and busts) are inefficient both in the boom and bust phases, because of periods of strain and slack. Sustainable growth is optimal growth (rather than feasts and famines or floods and droughts). Monetary and fiscal policies smoothed-out business cycles.

          1. Ricardo


            I don’t know where you got your numbers from but Menzie gave us a link to a great GDP calculator.

            1871-1914 Nominal GDP 3.72; Real GDP 3.67
            1982-2007 Nominal GDP 6.04; Real GDP 3.37
            1814-1913 Nominal GDP 3.70; Real GDP 3.97
            1914-2013 Nominal GDP 6.38; Real GDP 3.36

            I am not exactly sure why you picked those periods but those are the numbers.

        3. Davidw

          There is widespread aggrement among all the authors you mention and most of the economists today that aggregate flucuations in the economy are caused by price stickiness. Most economists believe the government can do something about this, either through money or government spending.

          People who study history too much are doomed to repeat it.

  2. PeakTrader

    I think, economics is a very difficult field to understand.

    For example, there are hundreds of major forces – invisible forces – in hundreds of dimensions pushing and pulling a large, dynamic, and diversified macroeconomy.

    And, we know there has been dumb, if not diabolical, economic policies, e.g. “cash-for-clunkers,” when people were paid with their own money to destroy their cars, which also caused used car prices to spike.

    It’s important to learn the fundamentals and scientific methodology before building-upon the rigorous work of economists.

    Unlike “dead fields,” e.g. statistics, there’s still a lot to learn in economics.

    1. Ricardo


      Economics is not difficult to understand if you approach it as behavior and study is as behavior, but not mind control. Modern economics is all about mind control and forcing the behavior of economic actors. Economics is simple when we understand that it is behavioral and works best in an environment of liberty and freedom, as free from coercion and theft as possible. Economics has turned from seeking how to make men free to striving to make men behave.

      1. PeakTrader

        Incentives, and disincentives, matter. However, there are many moving parts. One change causes many changes – some good and some bad. Economists determine, sometimes very crudely, if society is better or worse off from those changes.

        1. Ricardo


          Government economists do not simply determine if society is better or worse off. They strive to make economic actors do their bidding in an attempt to reelect the politicians.

  3. Garrick

    how can you support such a biased and ideological presentation of macro? To claim IS/LM has no value bc monetary policy is conducted by setting target rates(nod to monetarism). You’re leaving out how monetary policy is implemented which is by open market purchase affecting- the ‘supply of money’ – big part of is/Lm.
    And the focus on long term budget constraints? Again, a ideological focus that is more partisan than academic. I’d better your text gives no space to the new ideas about permanent shifts in equilibrium based on shocks.
    I can only imagine what your text postulates about the Great Recession- I’m sure it involves irresponsible home owners and the govt CRA push for home ownership – speculative partisan assumptions much less credible than inadequate regulation

    1. James_Hamilton Post author

      Garrick: It’s obvious you understand zero of what’s in Jones’s text or what I just wrote, which explains I suppose your desire to spew such made-up spittle. What exactly are you claiming to be your credentials, anyway?

      1. XO

        That’s a dumb response, James. He does not need credentials, no one does. They just need insight. You do not get to snicker at him just because you have credentials. It’s clear from your description that this textbook is not going to be prefered by the old Keynesian commenters on this blog. Rather than explaining your reasons for liking the book in greater detail, you try to argue from authority. And your defensive ad hominem response just comes off as sad.

        1. James_Hamilton Post author

          XO: Here’s the problem: Garrick’s statements have absolutely nothing to do with what anything I said or anything that’s in the book. He simply has no clue what he’s talking about.

          Focusing on the importance of monetary policy in terms of the interest rate as opposed to the money supply is as nonmonetarist as you can get. And in any case, there is nothing remotely ideological about such a focus. David Romer, by the way, is husband of the former chair of Obama’s Council of Economic Advisers.

          The book (and I) do discuss the need for better regulation of financial markets. The book does not (and I do not) discuss the CRA.

          Garrick is simply making up things that aren’t true.

          1. Ricardo

            XO, the professor is generally correct, but that is one of the problems. The book includes an article by Paul Krugman on the 1997 “Asian Flu.” In a significant way Krugman caused the crisis when he convinced Thailand to institute capital controls due to “hot money” when their problem was more liquidity than their economy demanded. Then Krugman claimed credit for predicting the crisis he caused. One can easily predict a robbery when he is the thief.

          2. Michael Gauss


            I have zero credentials and freely admit I do not know what I am talking about.

            But when I read Krugman on IS-LM, especially when discussing the zero lower bound, I come away with: “okay, that seems to make sense”.

            Are you saying that IS-LM is not of value?


          3. James_Hamilton Post author

            Michael Gauss: Jones’s text is basically just an update of IS/LM, replacing the LM curve (which in traditional texts is based on the Fed’s control of the supply of money) with a direct claim that the central bank can control the interest rate, for example by offering to borrow or lend to banks at a specified rate, noting as an addendum to the chapter that such control has a side effect in terms of the supply of money. On this feature neither Krugman nor any other Keynesian should have any objections– the framework is still at its core something pretty similar to the old IS/LM. Replacing the LM curve in this way has no ideological implications that I am aware of, but I think is a much more defensible way to describe how monetary policy interacts with the economy.

      2. Steven Kopits

        Made me laugh. Garrick, it takes something special to evoke such sheer exasperation from Jim. He is, let me assure you, just about the most patient man God ever created. To draw such a reaction on a book review, well, that’s an achievement.

        Jim, on a completely unrelated note, I think the Greeks are going to walk on the Euro. I think Syriza thinks it’s now-or-never, so now it is. That’s my sense. If you have a chance, could I ask you to write a post on your view of the matter and its implications? Thanks.

          1. Ricardo

            Michael Gauss:Are you saying that IS-LM is not of value?

            Michael, Where is capital in the IS-LM model? At best it is a derivative from Investment or Savings or Liquidity Preference or Money Supply, but capital is not their derivative. This is based on demand theory assuming investment, savings, liquidity preference, and the money supply have magic powers, the mystical animal spirits.

      3. Thorstein Veblen

        Yes, how dare someone without a Ph.D., or who isn’t a professor of Macroeconomics at at top 20 department question your decision to discard IS-LM for what sounds like an incredibly dubious rationale. In the LM curve, the Fed chooses the supply of money and the interest rate simultaneously. This is more-or-less what happens in practice. It would have been more honest for you to write instead that you would like to discard IS/LM because you don’t like it implies a role for government.

        One can only guess at how well the Jones book treats the Great Depression, the Great Recession, and the Euro Crisis. It would probably make for some fun reading…

        1. Rick Stryker

          Well, if you do question it, you really should know what you are talking about. You don’t necessarily have to have a PhD or teach macro, but it certainly helps to have those things to know what you are talking about.

          If you knew what you were talking about, you would not be saying that IS-LM is being discarded “for what sounds like an incredibly dubious rationale.” You’d know the rationale. You’d know that IS-LM is being modified to IS-MP, not being discarded. You’d know that the modification has no ideological overtones and does not deny a role for government.
          In fact, if you knew what you were talking about, you’d know that Jones is following the recommendation of Berkeley economist David Romer, who advocated a shift to this variation of the model for undergraduate education about 14 years ago in his Journal of Economic Perspectives article Keynesian Macroeconomics without the LM Curve. In that article, Romer argues that the IS-LM model is no longer the best choice for a basic model to teach to undergraduates. The traditional LM curve was more appropriate in the 60s and 70s when central banks targeted monetary aggregates. However, Romer argues, an assumption that central banks follow a real interest rate rule is more realistic today. Romer goes on to list the pedagogical advantages to making the change he recommends. You might disagree with it, but it’s hardly dubious.

          Moreover, you really don’t need to guess at how Jones treats the great recession, etc. You can just read the book to find out. Your comments about the book would be more informed if you actually read it instead of speculating about what’s in it.

    1. James_Hamilton Post author

      Johny: What in the world are you talking about? Jones is at Stanford, Woodford is at Columbia, Romer is at Berkeley. I made only a passing reference to Greg Mankiw, who is at Harvard Econ, not Harvard Business School.

      1. Johnny

        Sorry, that was my fault due to general overload. It was not intended to offend you. May I ask you to please forgive me.

  4. tom m

    A better choice would have been Wendy Carlin and David Soskice’s new text at Oxford. Unlike Jones, it does not oversimplify. The chapters on the financial crisis are terrific–mostly inspired by Hyun Song Shin’s work. 3-equation model is given a serious treatment with a loss function (and like Jones, no LM curve). Not shy about logarithms at all. I’ve taught it to my students successfully (at a top 25 liberal arts school but still not OxBridge or Harvard).

  5. Rick Stryker

    I would agree that Charles Jones’ “Macroeconomics” is an excellent choice. I have that book as well as his economic growth book and think very highly of both of them.

    The essential problem with economics texts, and especially macro texts, is presenting where the research is in a way that’s accessible to undergraduates. Macro is a very technical field. You can make the textbook very technical and accurate but then you lose most of the students. Alternatively, you can present stylized theory that’s really unrepresentative of what professional economists actually believe. Unfortunately, that’s the strategy of too many intermediate texts and the students end up with a misleading picture of modern macro.

    Jones’ great strength is that he manages to present what modern macro is really about in an accessible way. Along with Mankiw, he’s one of the best writers in macro text writing. Jones, for example, devotes a chapter to explaining what DSGEs are and why they are important and does it in a way that is understandable to undergraduates.

    I like the fact that Jones begins with the long run and really emphasizes the economics of growth. Growth tends to get short shrift as texts tend to concentrate on the business cycle. But growth is arguably the most important topic in macro. I also like the empirical focus of the book.

    The chapters on the great recession are very good. I’d agree that they can serve as case studies. Of course, many instructors might disagree with particular assertions in these chapters. I, for example, don’t agree with Jones that securitization led to lax credit standards. However, these chapters can organize discussions and the instructor is obviously free to bring in other material or views.

    If Jones wanted to improve an already great book, I’d suggest two additions:

    1) I think a chapter on income inequality would be very useful. That’s a hot topic today and the students are very interested in it. Jones has very nice article in the Journal of Economics Perspectives on Piketty which he could perhaps adapt
    2) I’d suggest a little more emphasis on policy questions–this is where Mankiw’s book shines.

    Anyway, great choice JDH.

    1. Ricardo


      Generally you and I agree.

      Can you tell me what you like about how Jones treats the question of growth?

      Second point, I think Jones does discuss inequality. Are you suggesting he devote more to it?

      1. Rick Stryker

        Hi Ricardo,

        Jones gives a very good exposition of the state of the art in growth economics. I’m very impressed with how clear the treatment is. He starts with the standard Solow model, which is the workhorse in modern macro. The Solow model explains how wealthy countries come to be in the steady state and the conditions that determine that wealth: investment, productivity, and rate of depreciation. Jones also shows clearly how the Solow model can explain differences in growth rates between countries in terms of transitional dynamics.

        However, the Solow model fails to explain how economic growth can be sustainable. As capital accumulates, the marginal productivity of capital declines. Ultimately growth stops in the Solow model since the marginal productivity of capital will decline until it matches the rate of depreciation. Why then do we have continuing economic growth?

        Jones then goes into Paul Romer’s endogenous growth model. (That’s Paul Romer, the former Stanford now NYU professor, not David Romer, the Berkeley professor and husband of Christina Romer). In Romer’s model, the goods are divided into physical things and ideas. Ultimately, Romer’s theory is about the economics of ideas. Ideas are “non-rivalrous” meaning that my consumption of an idea does not impede your consumption of an idea. Non-rivalrly leads to increasing returns to scale, which leads into a world of non-pure competition and endogenous, sustainable growth.

        Romer’s model is one of the most important advances in economics in the last 50 years and he will certainly win a Nobel Prize for it. Jones does an excellent job explaining the Solow as well as Romer’s model and integrating the two. The new growth theory has focused economists on the important questions of what kinds of institutions and policies promote capital investment and the development of new ideas. Basically, you need free markets. You might enjoy a recent application of these ideas in Fernandez-Villaverde and Ohanian’s WSJ article European Economic Errors for the U.S. to Avoid: The story of the Continent’s moribund economy began long before the European Central Bank was founded., in which the authors blame high taxes and too much regulation for Europe’s economic problems.

        The new economic growth theory motivated MIT economist Acemoglu and Harvard political scientist Robinson in “Why Nations Fail: The Origins of Power, Prosperity, and Poverty” to devote a book to the institutions and policies that promote sustainable growth. In that book, the authors note that it’s possible to attain some rapid growth ala Solow even under authoritarian economic and political regimes. However, that growth is not sustainable. Interestingly, Acemoglu and Robinson are very skeptical that growth in China is sustainable without fundamental economic and political reform in which China evolves into a more free society. Menzie’s concerns in his post “Politically Directed Higher Education” are certainly on point in this regard.

        Given how important it is for students to understand modern growth theory, Jone’s masterful exposition of Solow and Romer is enough by itself to justify using the book in an intermediate macro course. But I think the book goes beyond that. I like that Jones integrates discussion of the labor market and inflation into the long run section of the book, so that he emphasizes the fundamental economics rather than focusing too much on short run variations, as a lot of text books do.

        Jones does mention inequality, but only in passing. For example, he does have a case study box on Piketty and Saez and inequality in his chapter on the labor market. But when you look at Piketty’s book sales, it’s obvious that there is huge interest in economic inequality and you really could justify devoting a chapter to this topic in an intermediate macro textbook. Jones could adapt his survey article Pareto and Piketty: The Macroeconomics of Top Income and Wealth Inequality which is in the Journal of Economic Perspectives.

        1. baffling

          rick, sorry if this repeats not sure if it submitted the first time
          “Ultimately, Romer’s theory is about the economics of ideas. Ideas are “non-rivalrous” meaning that my consumption of an idea does not impede your consumption of an idea. Non-rivalrly leads to increasing returns to scale, which leads into a world of non-pure competition and endogenous, sustainable growth.”

          how does this model work with copyright and patent rights? these would seem to imply that consumption of ideas has a cost, which could even be variable in time and quantity. would this contradict a “nonrivalrous” idea model? and does this mean that copyright and patent rights may not lead to endogenous, sustainable growth?

          1. Rick Stryker


            Actually, copyright and patents can be important contributors to economic growth in the Romer framework.

            Non-rivalry is an intrinsic property of ideas just as scarcity is an inherent property of physical goods. If I use the pythagorean theorem, you can use it too at the same time. We should distinguish non-rivalry from excludability though. I could potentially exclude you from using the pythagorean theorem if I had enforceable property rights in the formula. I could, for example, have patented the pythagorean theorem and require you to pay me a royalty every time you use it.

            In a perfectly competitive market, the good that’s being sold already exists and in equilibrium price equals marginal cost. But when we consider how the product was developed in the first place, perfect competition no longer holds in Romer’s model. Someone needs to have invested in developing the idea for the product. To recoup that cost, price must be greater than marginal cost for some time. Thus, to incentivize innovation, there must exist mechanisms for price to exceed marginal cost. One way to accomplish that is to give the inventors of new products exclusive property rights in the invention, i.e., patents or copyright.

            So, copyright and patent protection could be argued to be essential for endogenous economic growth, although people debate whether they are the optimal legal institutions. Of course, trade secrets and other market or monopoly power can also be used to incentivize innovation and thus produce economic growth.

          2. baffling

            thanks rick. does this mean in the romer model not all ideas are treated as nonrivalrous? ie if an idea is patented or copyrighted, it is no longer an idea but equivalent to a physical good with scarcity. can this model give us a way to estimate if too much of the “idea” pool is nonrivalrous , or too much is property right controlled? or the more general question, at what point does the use of patent and copy rights impede economic growth, at least below its potential?

  6. AS

    Professor Hamilton,
    What aspects of intermediate macroeconomics do you recommend that retired accountants or business managers should study; assuming they have studied introductory macroeconomics, further assuming goals may include becoming a better voter or a better investor? Is there a self-study text that you recommend, perhaps the text you describe or another?

  7. Manfred

    Jones’ textbook sounds interesting. Will definitely take a look.
    I do have a question: how does Jones’ textbook compare to Stephen Williamson’s “Macroeconomics”?
    Williamson also dispenses completely with the IS-LM model, and builds his textbook around the modern tools of current macro research.
    I am not advertising this book – I am just curious is UCSD took a look and if yes, how the two textbooks compared.

    1. James_Hamilton Post author

      Manfred: I suspect that if you like Williamson, you might not like Jones. Jones’s text is less ideological and much more of a demand-centered view of economic fluctuations.

  8. Emery

    If there is no theory to apply, how is a microeconomist different from a statistician, an engineer or a computer scientist who can find an eigenvector or run a T-test?

  9. Ricardo

    pe seems to think that criticism of modern academic economics is, as he put it, “asinine know-nothing.”

    I encourage you to read this article by Willem Buiter Chief Economist of Citigroup from 2009. The only things that changed much after 2009 is they got worse. Today we are close to the proper policy mix of low taxation and stable money than we have been in since the 1990s (the Republican congress and the Greenspan fed stabilization of the price of gold). Just imagine returning to the Reagan 1983-84 policy mix that brought growth of 7%.

  10. Jon

    Thanks for the review James! I’ve been looking for an alternative to Williamson, and it sounds like Jones could be a nice option.

    By the way, do you have any experience with Blanchard and Johnson’s textbook? I would be curious to hear a comparison between them.

  11. RyanM

    James: I have looke at this book for potential use as a reference for MA level macroeconomics. I was wondering about your view on teaching the DSGE chapter, which for me is what set this book apart from others. I’m not sure if I should include it in the curriculum or not.

    Thank you for the excellent perspective on the book.

  12. Ricardo

    Rick Stryker,

    I really appreciate your taking the time to explain you comments. That was excellent.

    I only scanned the book and I have to admit I totally skipped over the Paul Romer piece assuming it was David Romer. I should have been more careful. I am a Paul Romer fan (and David and Christina Romer on some issues.)

    On the issue of inequality Piketty’s book is actually pretty weak academically and driven by bias. I do agree the topic is of interest but if one does not discuss totalitarian states and the impact government decisions have on inequality such discussion is a waste of time.

    But thanks again for your comments and setting me straight on Romer.

    1. Rick Stryker



      I wonder if I can also get you to reconsider the Buiter article The unfortunate uselessness of most ’state of the art’ academic monetary economics. There are a number of red flags in this article.

      First, the article bashes people like Robert Lucas, Ed Prescott, and Robert Barro, who are all well known for pointing out the many limitations of interventionist policies. And the article praises “advocates of reason” such as Stiglitz. But second, and much more damning, is that Krugman just a few months later wrote an article entitled How Did Economists Get It So Wrong? in which he made essentially the same points as Buiter while bashing people like Lucas, Cochrane, Fama, and Prescott. Is this just a coincidence?

      No, it’s no coincidence. These guys and other fellow-travellers such as Quiggin were trying to build a case for interventionist policies. Krugman in particular was trying to get a giant stimulus plan through. To do that, they wanted to portray free- market oriented economists as failed keystone cops who, trapped in their idealized intellectual castles, not only didn’t see the crisis coming, but didn’t even think a crisis was possible.

      That’s an absurd charge of course. Lucas, Prescott, etc. understood very well the assumptions they were making and their applicability. None of these guys would say a crisis is impossible. But they were not working on financial crises.

      Buiter, Krugman, and others would have us believe Lucas, Prescott, and others were the only economists who should have been working on these issues but that they didn’t see the crisis coming and didn’t think it was even possible. And so no one worked on them. Buiter, for example, makes a big deal out of the assumption of complete markets in macroeconomic models, as if no one ever thought to question that. But he (and Krugman) are just illustrating their ignorance of the broader economic literature.

      I would invite you to take a look at Franklin Allen’s and Douglas Gales’ book Understanding Financial Crises, which was published in 2007, before the crisis. Allen and Gale review the very substantial empirical and theoretical literature on financial crises. They also build a series of microeconomic models of banks and study how crises can develop. Importantly, they incorporate both complete and incomplete markets assumptions, emphasizing the regulatory policty differences that are implied by both.

      The bad effect of these articles by Buiter, Krugman, and others was that the substantial understanding of banking crises that had already been attained was essentially forgotten during and after the crisis, as people became convinced that economists were caught flat-footed with nothing to add. But Buiter also concludes with a disturbing message, that macroeconomics is now “an intellectual potpourri of factoids, partial theories, empirical regularities without firm theoretical foundations, hunches, intuitions and half-developed insights.”

      That’s what we learned from the crisis–that macroeconomics should be renamed macrosociology?

  13. Rick Stryker


    Non-rivalry is an inherent property of certain goods, such as ideas. Ideas don’t lose the non-rivalry property in Romer. But ideas are also excludable to varying degrees. Goods that are both non-rivalrous and non-excludable are public goods, defense being the typical example.

    Yes, one of the advantages of endogenous growth models is that it’s possible to analyze the optimal amount of research and development, the price of patents, etc. I think the general conclusion is that there is market failure in these models such that the economy produces too little research and development. So an important policy question is how to raise the level of R&D. Legal innovations in intellectual property is one way. Government support for basic research is another.

    There are a lot of tough empirical questions as to when protection of ideas starts to impede growth. You raise the good question as to when are patents counterproductive. There’s a lot of debate about that. Alex Tabarok has some interesting discussion about how patents can be harmful in Launching The Innovation Renaissance: A New Path to Bring Smart Ideas to Market Fast But no easy answers emerge from endogenous growth models.

  14. westslope

    “In the LM curve, the Fed chooses the supply of money and the interest rate simultaneously. This is more-or-less what happens in practice.”

    No, it is not more-or-less what happens in practice. Thanks for the chuckle though.

    Aside from that: Thanks for the excellent review Jim.

  15. 2slugbaits

    Regarding the IS-LM vs IS-MP approach. Just to be clear, Krugman’s position is not that IS-LM is useful and IS-MP is not useful. Krugman’s position is that when you are at the ZLB the IS-LM framework provides a simpler and better grasp of the intuitions of what it means to be at the ZLB. It’s just a matter of selecting the approach that works best for the conditions at the time. Back when Romer developed IS-MP no one (except Krugman and “Jap Trap”) thought about being at the ZLB for 6 years and counting. Also, while it’s true that the academy does not work within the IS-LM framework, there are other important economic agents who do. So if you want a career in academia, then learn the IS-MP approach in Romer, et al. If you want to work in government then I would suggest learning IS-LM as well.

    Regarding the Jones textbook, a major problem that I see is the price tag of $175. Students could probably pick up a good, serviceable 10 year old textbook for $25. Is the difference between the shiny new Jones textbook and the 10 year old textbook worth the $150 premium? At the graduate level I’m sure you could make a compelling case for using the latest and greatest. At the intermediate undergraduate level…I’m skeptical. If the shelf-life of what econ students learn at the undergraduate level is so short that the subject matter will be obsolete before the student enters middle-age, then maybe undergrad macro isn’t something that’s worth teaching. If there is that much intellectual turbulence in the field of macro then students should really think twice before deciding on a non-academic career in macro. They might as well take a class in COBOL or Basic.

    I’m not familiar with the Jones textbook and I’ll gladly take JDH’s and Rick Stryker’s testimonials that it’s a great book. But great books shouldn’t become obsolete before a student graduates, so in the interests of holding down college costs (see Menzie’s most recent post on UW-Madison) I hope the university book store buys back the books at the end of the year at a fair price, and recycles those books for next year’s students at something well south of $175. And maybe skip the requirement to use the latest edition of the textbook.

    Rick Stryker I realize that most upper level macro textbooks cover the Solow growth model, overlapping generations, Ramsey models, endogenous growth models, blah-blah-blah, but I’ve never thought this approach was particularly useful at the intermediate macro level. Intermediate macro is mainly about managing aggregate demand and output gaps, not growth theory. It also sends conflicting signals to the student because growth theory tends to be all about the long run steady state solution whereas aggregate demand management is all about responding to shocks that deviate away from the long run steady state. You mentioned Daron Acemoglu. Indeed, he is a big rock star on growth theory, but keep in mind that he teaches it as a separate course at MIT (14:462), and not so much as part of intermediate macro. I’m not arguing that growth theory isn’t worth learning, only that it makes more sense to teach it as a separate course. Also, if you want to cover the Solow growth model, the Ramsey model, the Diamond model, etc., in a serious way, then the student really has to have some familiarity with differential equations. That’s a reasonable pre-requisite for a graduate level class, but not a sophomore/junior level intermediate macro course.

    1. Rick Stryker


      I’d agree that it’s hard to cover the long run and the short run in a single semester course. It sounds like the solution at UC San Diego is to devote a quarter to the long run and a quarter to the short run. But I do think growth is a very important part of macro and should be covered even in an intermediate course.

      If you want to cover growth in a single course at the undergrad level, I don’t think you need to require much mathematical sophistication. As I mentioned, Jones also has out a very good book on growth Introduction to Economic Growth (Third Edition) with Dietrich Vollrath. The mathematical requirement is only one semester of calculus. And as textbooks go, it’s not very expensive.

  16. Ricardo

    A few year ago Menzie posted what would be taught in introductory Micrs at the U of Wisconsin. At that time I gave him a reading list for him to provide to his brightest students so that they could be exposed to alternative ideas. I posted it on this blog. I doubt he gave his students the alternative. I believe you are more interested in academic freedom of thought so I encourage you to develop a list of alternative books and articles for your students to read to broaden their economic exposure. I appreciate your logical approach to economics even thought we disagree on fundamentals.

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