>A book rep came to my office today telling me how good brad de long's text
>book would be. Will it be polluted with AS/AD?
Minor pollution with AS/AD only--I want to focus on the Phillips
curve instead of AS/AD, especially because you have to basically lie
to your students to get the AD curve sloping the "right" way (a price
level decline doesn't raise aggregate demand by raising the real
money stock, it reduces aggregate demand because it raises real
interest rates and causes chains of bankruptcies).
It's a heavily American-Keynesian book (for these times, at least).
It's a heavily neoclassical book. I think it's a very good book:
perhaps one intermediate macro book (Mankiw) is clearer (although I
think I'm more interesting), and one intermediate macro book
(Blanchard) is clearly superior as an intellectual effort (although
Blanchard is really, really hard for undergraduates.
A *draft* of the preface is below. Current ms. versions of chapters 1
through 3 can be (or soon will be) found at:
http://www.j-bradford-delong.net/MHText/Chapter_1.PDF
http://www.j-bradford-delong.net/MHText/Chapter_2.PDF
http://www.j-bradford-delong.net/MHText/Chapter_3.PDF
Why Write This Book?
------------------------
I wrote this book out of a sense that it was time for intermediate
macroeconomics to have many of the barnacles scraped off of its hull.
It is more than three-quarters of a century since John Maynard Keynes
wrote his _Tract on Monetary Reform_, which first linked inflation,
production, employment, exchange rates, and government policy
together in the pattern that we now call macroeconomics. It is
two-thirds of a century since John Hicks and Alvin Hansen drew their
IS and LM curves. It is more than one-third of a century since Milton
Friedman and Ned Phelps demolished the static Phillips curve, and
Robert Lucas, Thomas Sargent, and Robert Barro taught us what
rational expectations could mean. And all the while intermediate
macroeconomics has been becoming more complicated, as new material is
added while old material remains.
Thus we now have excellent macroeconomics textbooks--my three
favorite are Andrew Abel and Ben Bernanke, Olivier Blanchard, and
Gregory Mankiw. But they seem, to me at least, to have too much
material that is in there primarily because of the way that
macroeconomics has developed, and not primarily to aid students in
understanding the material. It seemed to me that all three of
these--excellent--textbooks went slower in the water than they might
because of insufficient streamlining. It seemed to me that if I could
successfully streamline the presentation then I would have a more
understandable and comprehensible book.
I believe that I have succeeded. I believe that this book does move
more smoothly through the water than its competitors, and will prove
to be a better textbook for third-millennium macroeconomics courses.
I think that this is the case because I have made five changes in the
standard presentation of modern macroeconomics. Note that these five
changes are not radical: they are shifts of emphasis and changes of
focus. They do not require recasting of courses. But they are very
important in bringing the organization of the book in line with what
students learning macroeconomics need to know.
The first two changes have to do with economic growth. They continue
the line of development begun by Gregory Mankiw, who first began to
recapture the study of long-run economic growth as a major topic in
intermediate macroeconomics. But the presentations of long-run
growth--both the facts of growth and the theory of growth--in modern
macroeconomics textbooks need to be beefed up, and I have done so. I
believe that the subject of economic growth is worth much more than
one or even two short chapters. One of this book's longest chapters
is on the theory of economic growth. A second one of its longest
chapters covers the facts of economic growth. Students need to see
and understand the broad cross-country and cross-time patterns: the
industrial revolution, the spread of industrialization, the East
Asian miracle, and the American century. Students have no business
leaving macroeconomics courses without understanding the nature and
causes of the wealth of nations. The treatment of growth in this
textbook will keep them from doing so.
More important than the thicker and deeper treatment of the facts of
economic growth, perhaps, is a better treatment of the theory of
economic growth. Too often undergraduates find the standard
presentation of growth theory--with concepts like "output per
effective worker"--to be confusing. The more understandable and
robust presentation of growth theory in this book focuses on the
economy's steady-state capital-output ratio, which is itself a very
simple function of the proximate determinants of accumulation:
savings rates, depreciation rates, population growth, and
labor-augmenting technical change. To make the links between the
fundamental determinants of growth and the workings of the economy
simpler and more transparent is more than half the battle. And I
believe that the presentation of growth theory in this textbook will
help us win intellectual victories with our students.
The third change is to my mind long overdue. It is time to simply
forget about the "closed-economy case." Students need to be analyzing
an open economy from the very beginning of the book. Even in the
United States, every single economic policy issue and news event
already has an important international dimension. Presenting the
closed-economy case first gives students a lot of wrong
impressions--about the size of the Keynesian multiplier, about the
freedom countries have to conduct independent monetary and fiscal
policies, about the relationship between savings and investment--that
then have to be unlearned later in the "open economy macro" chapters.
Moreover, moving the international material into the main narrative
thread removes many barnacles and enhances streamlining. All of the
"in the closed-economy chapters we said this... but really that..."
passages in the textbook are no longer needed. Throughout the book,
save in Chapter 15, the default assumption is that the exchange rate
is freely floating. This was not true in the past, this may not be
true in the distant future, but it is true now and for the
foreseeable future, and is thus a reasonable working assumption.
In addition, integrating international macroeconomics into the main
narrative thread from the start makes it possible to keep the book
much more closely engaged with economic policy. There is not a policy
issue today that does not have an important international dimension.
If a book chapter deals with the closed-economy case only, its
ability to seriously engage issues of economic policy is crippled.
The fourth change is also, to my mind, overdue. It is two-thirds of a
century since John Hicks and Alvin Hansen drew the LM curve. In
today's world in which central banks set interest rates and not money
stocks, the LM curve's underlying assumption that the money stock is
fixed is artificial. A major reason for giving the LM curve a central
place is historical: it allows you to present the
Keynesian-monetarist debate of the 1970s as a debate about the
relative slopes of IS and LM curves. Steep LM curve or shallow IS
curve, and the monetarists are right--the money stock is the
principal determinant of output, unemployment, and inflation. Shallow
LM or steep IS curve, and the Keynesians are right. (Never mind that
Milton Friedman always thought that this was an unwise and unfair way
of presenting the debate.)
But this is a debate that has been dead for a generation. And
conducting much of the discussion of the determination of real GDP in
a framework in which the money stock is fixed gives students the
wrong intuitions. It is much better to downplay the LM curve, and
focus on the key factors of the position of the IS curve and the real
interest rate determined by the term structure and central bank
policy. This brings the presentation in the textbook much closer to
what the students will find when they open up their Wall Street
Journals. This makes all of our tasks as professors much easier,
because there is no longer an artificial gap between the models
taught and the actions seen in the world.
The space saved by downplaying the LM curve can be used for a serious
discussion of the term structure of interest rates. The Federal
Reserve controls short-term, nominal, safe interest rates. The
principal determinants of aggregate demand are long-term, real, risky
interest rates. The slippage between these two is a limitation on the
government's ability to stabilize the economy. Treating this topic
seriously allows us to begin to teach the importance of expectations
and the limits of policy relatively early in the book, rather than
having to leave these topics for the policy chapters at the book's
end.
Fifth is another streamlining operation. The variable on the vertical
axis of the Aggregate Supply-Aggregate Demand graph--the price
level--is not the best price variable to use in analyzing economic
policy. The best price variable is the one on the vertical axis of
the Phillips curve, the inflation rate. A very close integration of
the AS-AD framework with the Phillips curve helps students follow the
thread of the argument better, and saves enormous amounts of
repetition. After all, the Phillips curve *is* the AS curve with a
couple of changes of variables. What point would be served by
considering them separately, in different chapters?
Other Features
--------------
This book has other excellent features not related to the primary
task of streamlining. I am proud of Chapter 3, _Thinking Like an
Economist_, which brings out into the light of day and examines many
things about how economists argue and reason that are usually left
unexamined. I am proud of Chapter 12, _The Phillips Curve and
Expectations_, for its explanations that rational, adaptive, and
static expectations are not incompatible alternatives among which one
must choose but instead reflect different strategies by economic
actors of dealing with the problems of inflation--strategies each of
which can be useful in the right economic environment. This book has
space for more thorough discussions of the term structure of interest
rates and of the workings of international financial markets made
possible because of the streamlining exercises undertaken.
I am also proud of the pedagogical work that has gone into the book:
the attempts to smooth over what often turn out to be rough spots for
students. Thus this book contains a greater-than-usual number of
worked examples. One important way that people learn economics is by
watching other people solve problems, and then repeating the process
themselves. A large number of worked examples helps those students
who are hesitate before making conceptual leaps, but who are best
taught by example. The end-of-chapter exercises are divided into two
groups, one set that is not closely tied to recent events, and a
second set that is. It is important to have policy-relevant exercises
at the end of chapters, but few things turn students off as much as
"policy-relevant" exercises that are obsolete because the economic
situation has changed.
The glossary provides fuller and deeper explanations of economic
concepts than is typically found. Once again, there are some students
for whom such extended definitions are truly useful. And even the
extended glossary takes up little space.
Boxes throughout the book try to reinforce the main narrative without
disrupting it. They are an attempt to solve the perennial problem of
how to provide more depth and background to those who need (or want)
it without boring or distracting those who wish to move on. The book
contains four kinds of boxes:
--"tools" boxes to remind students of some of the algebraic
and conceptual
tools economists use.
--"details" boxes for those who want to dig deeper into a
particular subject.
--"policy" boxes for those who want to know how the current
thread of the
book affects the making of economic policy.
--"examples" boxes to show how the concepts, ideas, and
models of the current
main thread of the book can be applied.
Students come to intermediate macroeconomics with astonishingly
different preparations for the course, and with surprisingly
different levels of curiosity and interest. It is not possible to
tune the book for every category of student. The hope is that the
judicious use of pedagogical tools like boxes and the extended
glossary will provide a rough equivalent.
Structure
---------
However, not all of the book is innovative. For example, the
structure of the book is not itself especially innovative. It follows
a standard pattern that has served macroeconomists well.
The introductory Section I contains three chapters: Introduction,
Measuring the Macroeconomy, and How Economists Think. Chapter 1
begins with an overview of what macroeconomics is, and then quickly
focuses in on six key variables that together allow one to gain a
firm hold on the state of the macroeconomy. These six key variables
are (1) real GDP, (2) the unemployment rate, (3) the inflation rate,
(4) the interest rate, (5) the level of the stock market, and (6) the
inflation rate. The chapter closes with a quick tour of recent
macroeconomic events and macroeconomic policy dilemmas in the world,
included both to pique students' interest and to give them a sense of
the kinds of questions and issues that macroeconomics is supposed to
help resolve. Chapter 2 provides the standard review of national
income accounting and other measurement issues. It is, however,
organized around the six key economic variables of Chapter 1. The
focus is on the quality of our measurements of these six key
variables, and what the measurements mean.
The only thing at all innovative in the structure of Section I is
Chapter 3: Thinking Like an Economist. Chapter 3 focuses on how
economists view the world. It covers the question of just what kind
of "science" economics is, on the dominance of the circular flow of
economic activity in how macroeconomists view the world, and on how
economists go about building the models that they then use to try to
analyze the macroeconomy.
Section I is followed by Section II, focusing on long-run growth,
with Chapters 4 and 5: The Theory of Economic Growth and The Reality
of Economic Growth: History and Prospect. Chapter 4 covers the theory
of economic growth. It focuses on the simple-to-understand
capital-output ratio (rather than the more complicated concept of
capital-per-effective-worker), how the economy converges to its
steady-state equilibrium capital-output ratio, and the effect of
technological progress on productivity. While most treatments of
growth theory begin with a very artificial economy--no population
growth, no technological progress--and do not achieve relative
realism until near the end of the discussion, Chapter 4 puts all the
balls in play early in the chapter. Thus students are unlikely to
acquire faulty intuitions about the relationships of economic
variables that will return to plague them later.
Chapter 5 begins with a survey of very long-run economic growth
before the Industrial Revolution, moves on to the Industrial
Revolution itself, and then covers the astonishing pace of economic
growth in the United States over the past century and a half that has
made America today an astonishingly rich and productive society from
the standpoint of any previous century. It then shifts focus to
patterns of growth and development the world over--the East Asian
miracle, stagnation in Africa, the convergence of the OECD nations to
common levels of productivity and industrial structure, and so
forth--before concluding with a discussion of economic policies and
how they affect long-run growth. In a sense, Chapter 5 should be part
of *everyone's* general education. It is, in summary and compressed
form, an inquiry into the nature and causes of the wealth of nations.
In my view, at least, intermediate macroeconomics is the most natural
place to provide this overview of long-run economic growth.
Section III presents flexible-price business-cycle macroeconomics
with two real-side chapters--Building Blocks of the Flexible-Price
Model and Equilibrium in the Flexible-Price Model--and one money and
inflation chapter--Money, Prices, and Inflation. Since many of the
functions are the same in the flexible-price full-employment model of
Section III and the sticky-price model of Section IV, the real-side
chapters are written with an eye toward making it clear what changes
and what doesn't when we move from flexible to sticky-price models.
Chapter 6, Building Blocks..., covers first the determination of
potential output when wages and prices are flexible, second the
domestic components of aggregate demand--consumption, investment
spending, and government purchases--and third and last the
determinants of the final component of aggregate demand, net exports.
Chapter 7, Equilibrium..., focuses first on how in the flexible-price
framework the demand and supply for loanable funds in the
flow-of-funds through financial markets pushes the interest rate to
the level at which investment demand equals savings supply, the
economy is at full employment, and real GDP equals potential output.
It then shows how to use the method of comparative statics to analyze
the effects of changes in economic policy and the economic
environment on the macroeconomy. It concludes with a section on
supply shocks and on "real" business cycles understood as
fluctuations in current and expected future productivity and thus in
the value of investment spending today.
Chapter 8 moves from the real to the monetary side in the
flexible-price framework. It focuses first on the utility of money
and on the simple interest-inelastic quantity theory. It then moves
on to consider the determinants of the price level and inflation when
money demand is sensitive to the nominal interest rate.
Section IV's presentation of sticky-price macroeconomics is divided
into four chapters running from 9 to 12: The Income-Expenditure
Framework; Investment, Net Exports, and Interest Rates; Extending the
Sticky-Price Model; and the final chapter of Section IV, The Phillips
Curve and Expectations, that not only rounds out the stick-price
business-cycle framework but also reaches back to Section III to
explain under what circumstances flexible price and under what
circumstances sticky-price modelling is likely to be appropriate.
Chapter 9 provides the standard treatment of the sticky-price
income-expenditure inventory-adjustment model. Its only innovative
feature is that, because the model begins with the open economy case,
the calculated value of the multiplier is realistic--as opposed to
the grossly inflated multiplier values calculated in closed-economy
models with lump-sum taxes which students then have to unlearn.
Chapter 10 then builds on Chapter 9 to construct the IS curve. An
immediate payoff follows: the last sections of Chapter 10 use the IS
curve along with changes in the Federal Reserve's interest rate
targets to understand macroeconomic fluctuations in the U.S. in the
post-World War II period. It thus demonstrates that the models are
actually useful: that they help us gain a measure of understanding of
why the state of the business cycle went as it did in the post-World
War II U.S.
Chapter 11 performs three tasks. First, it asks what determines the
interest rate when the Federal Reserve is not following a policy of
interest-rate targeting. The answer is that the interest rate and
aggregate demand are jointly determined by money demand and the money
stock--together summarized in the LM curve--and by the IS curve. It
goes on to analyze the impact of changes in the economic environment
and economic policy on the exchange rate and the trade balance. And
the chapter concludes by introducing the concepts of aggregate demand
and aggregate supply.
Chapter 12 puts in place the keystone for Sections III and IV. It
analyzes not just the determination of real GDP in the sticky-price
framework, but also how prices change--how inflation is generated--by
the state of aggregate demand relative to potential output. It
presents the Phillips curve and the key determinants of the location
of the Phillips curve: the natural rate of unemployment on the one
hand, and the expected rate of inflation on the other. It then
presents the three kinds of inflation expectations we expect to
see--static, adaptive, and rational expectations of inflation--and
the circumstances under which we expect to see each one. And the
chapter concludes by outlining the transition from the sticky-price
"short run" to the flexible-price "long run": it helps students think
about under what circumstances the better answers are generated by
using the flexible-price model of Section III, and under what
circumstances the better answers are generated by the sticky-price
model of Section IV.
The main payoff to all of this model-building work comes in Section
V, which deals with economic policy. Chapters 13 on Stabilization
Policy; 14 on The Budget Deficit, the National Debt, and Investment;
and 15 on International Economic Policy allow students to think
through the issues and understand the debates about proper
macroeconomic management, both for stabilization and for enhancing
economic growth. The institutions of macroeconomic policy, the power
and limits of stabilization policy, monetary vs. fiscal policy, rules
vs. authorities, and extreme situations like financial crises are all
covered in chapter 13. Chapter 14 covers the government's budget and
the government debt, outlining both short-run stabilization and
long-run growth implications of the government's budget. And Chapter
15 takes a look at how fixed exchange rate systems function, how
exchange rate regimes have been chosen, and at currency crises.
These chapters are then followed by three more discussions which
emphasize the extent to which macroeconomics is an unfinished
science. First of all, there is the fact that the macroeconomy
changes over time, and thus that macroeconomics aims at a moving
target. This is covered in Chapter 16, Changes in the Macroeconomy
and Changes in Macroeconomic Policy. Chapter 17 on The Future of
Macroeconomics focuses on where macroeconomists disagree, and how the
science is evolving even in the absence of structural change in the
macroeconomy. And an Epilogue sums up the lessons of the book, and
reminds readers of what we do not know.
Thus the core of the book has a very standard organization: it is an
organization that, I think, has served teachers of intermediate
macroeconomics very well.
Flexibility
---------
At this point in a preface, it is conventional for the author to try
to boost his audience by explaining how chapters can be mixed and
matched to create smaller or larger courses. Certainly the
introductory material in Section I can be compressed to the degree
that it truly is review material. However, with the exception of
omitting the economic growth Chapters 4 and 5 (which would be a
shame), this book does not lend itself to that treatment especially
well. The introductory chapters are there for good reason, and the
chain of logic and presentation from the start of the flexible-price
model in Chapter 6 through the international economic policy
discussion in Chapter 15 is a cumulative one.
I have while teaching this course in some years shortchanged the
chapters after 15. Once again, however, this is a shame. While in
government I had many conversations with smart people who could not
see why the macroeconomics they had learned 35 years ago did not
immediately apply. It proved remarkably hard to teach them that the
world had changed, and that the way macroeconomists thought about the
world had changed. The historical and history-of-thought perspectives
provided in Chapters 16, 17, and the Epilogue are (to my way of
thinking, at least) valuable.
--
-----------------------------------
Professor J. Bradford DeLong
Department of Economics, U.C. Berkeley
Berkeley, CA 94720-3880
[EMAIL PROTECTED]
http://www.j-bradford-delong.net/
-----------------------------------
"In one way only can we influence these hidden currents-by setting in
motion those forces of instruction and imagination which change
opinion. The assertion of truth, the unveiling of illusion, the
dissipation of hate, the enlargement and instruction of men's hearts
and minds, must be our means..."
--John Maynard Keynes
