Monthly Archives: June 2014

Singing for Hitler – Choirs, Clubs and the Third Reich

Bowling for Fascism: Social Capital and the rise of the Nazi Party in Weimar Germany, 1919-33

Shanker Satyanath (NYU), Nico Voigtlander (UCLA) and Hans-Joachim Voth (Zurich)

URL: econpapers.repec.org/paper/zureconwp/147.htm

Abstract:

Social capital typically leads to positive political and economic outcomes. A growing literature also emphasizes the potentially “dark side” of social capital. This paper examines the role of social capital in the downfall of democracy in interwar Germany. We analyse Nazi Party entry in a cross-section of cities. Dense networks of civic associations such as bowling clubs, choirs, and animal breeders facilitated the Nazi Party’s rise. Towns with one standard deviation higher association density saw at least one-third faster entry. All types of associations – veteran associations and non-military clubs, “bridging” and “bonding” associations – positively predict NS Party entry. These results suggest that social capital aided the rise of the Nazi movement that ultimately destroyed Germany’s first democracy. We also show that the effects of social capital depended on the institutional context – in Prussia, where democratic institutions were stronger, the link between party entry and association density was markedly weaker.

Reviewed by Ronan McGarry (final-year BSc Economics student, Queen’s University Belfast)

This NBER working paper was distributed by NEP-HIS-2013-07-15. The authors seek to clarify and quantify the role that social capital played in the rise of the Nazi Party and the ensuing downfall of the democratic Weimar Republic. In order to do so, econometric analysis of the link between local clubs/societies and Nazi party membership is conducted. The authors also seek to add to the current literature on the ‘dark side’ of social capital (Putnam 1995).

The literature on positive and negative outcomes as a result of high levels of social capital is conflicting. In his 1995 essay ‘Bowling Alone’, Robert Putnam wrote that communities with high levels of social capital ‘promote participatory democracy’. However, Riley (2005) would refute this and point to society-rich Northern Italy – which turned fascist in the 1930s. Furthermore, Chambers & Kopstein (2001) point out that after the collapse of the USSR, Serbs began ethnically cleansing their Balkan neighbours, even though Serbia had fairly intense levels of social capital. This paper turns its attention to Weimar Germany in an effort to shed more light on the topic.

It must be noted that the authors were not the first to tackle Weimar Germany’s fall in terms of social capital. However, they are the first to have done so econometrically. Berman (1997) showed that ‘a robust civil society helped scuttle the twentieth century’s most critical democratic experiment, Weimar Germany’ explaining that the ‘high levels of association served to fragment rather than unite German society.’ This paper builds on Berman’s conclusion by comparing numerically the rates of civic association intensity in German towns and cities against the rate of Nazi Party membership uptake; whilst controlling for various other political and socio-economic variables.

The authors collected data on 111 German towns and cities in modern-day Germany. One problem here is that Weimar Germany’s eastern border was much further to the east than modern-day Germany’s. This means that missing from this dataset are cities like Breslau (now Wroclaw, Poland) and Konigsberg (now Kaliningrad, Russia). Both of these cities were very Nazi-friendly – the Nazis received 44% of Breslau’s vote in 1932 (Davies & Moorhouse, 2011) and 54% of Konigsberg’s in 1933 (Jasinski, 1994) and so their exclusion from the dataset is disappointing in terms of accuracy.

Missing from the authors' dataset are cities like Breslau, Koningberg and Danzig.

Missing from the authors’ dataset are cities like Breslau, Koningberg and Danzig.

Following this, the authors begin the presentation of their findings with an interesting comparison of two similar towns – Kleve and Coburg. Both were similar in size, but with large differences in the presence of associations. Coburg was far denser in terms of civic society – with a rate of 2.99 associations per 1000 inhabitants, compared to Kleve’s 0.89 per 1000. Then, as their hypothesis predicts, Coburg saw an ‘80% greater uptake’ (p. 15) in Nazi Party membership than Kleve between 1919 and 1933.

However, whilst this serves to broadly illustrate the authors’ point, I find this comparison disingenuous in that in picking Coburg, they happen to select one of the most Nazi-friendly cities in Germany to make their point. Indeed, Coburg’s city hall was the first in Germany to fly the Nazi flag. My point is that by picking a town in Bavaria (the home province of the Nazis) and comparing it to a town in the far north, they are ignoring potential geographical concerns. Indeed, if the authors had of compared Kleve with Hamburg (another Northern city with a similar Association Density to Coburg’s), then they would have found their results running the wrong way, as Hamburg has a higher Association Density but a lower Nazi Party entry rate!

Nazi Party Entry Rate against Association Density of towns, with Hamburg, Kleve and Coburg highlighted.

Nazi Party Entry Rate against Association Density of towns, with Hamburg, Kleve and Coburg highlighted.

The authors then present their numerical findings. They announce that ‘association density strongly and significantly predicts higher entry rates into the NSDAP’, with ‘the per capita entry rate increasing by 0.4 standard deviations for every standard deviation increase in association density’ (p.16), results which support Chambers & Kopstein (2001) and Riley’s (2005).

Following this, the authors make an effort to quantify the differences between Putnam’s (1995) ‘bonding’ (exclusive groups such as Gentleman’s Clubs) and ‘bridging’ (inclusive groups such as choirs or bowling clubs) social capital in terms of their effects on Nazi membership uptake. Putnam believed bonding social capital to have adverse effects, with bridging social capital fulfilling the opposite role. However, the authors find bridging capital to have ‘positive, significant and quantitatively meaningful coefficients, which are similar in magnitude to those for bonding capital’ (p.21) – suggesting that both types of associations were ‘important pathways’ in terms of Nazi party membership.

German youth choir, and example of bridging capital. The sign translates to 'We sing for Adolf Hitler'.

German youth choir, and example of bridging capital. The sign translates to ‘We sing for Adolf Hitler’.

One final important contribution this paper makes is in terms of investigating the evidence that social capital can develop a ‘dark side’ (Putnam, 1995) and actually undermine a functioning democracy – which the authors claim is ‘missing’ from current literature. To do so, they examine the state of Prussia, which was more ‘pro-democracy’ and was ‘governed more competently’ (p.22). What they find is that before the gradual weakening of Prussian democracy in 1930, the relationship between party entry and association entry in Prussia was ‘systematically weaker’ (p.23) than the rest of Germany. What this shows is that a ‘functional, strong, democratic government’ (p.24) can help prevent social capital showing its ‘dark side.’

To conclude, this paper offers an interesting insight into an area of social capital literature which had not been studied econometrically before. Whilst it is indeed disappointing that the authors could not include important eastern European cities that are no longer a part of Germany, they do make a fair point that massive war damage in these cities led to the loss of many public records and as such, makes it impossible to gather data. On a positive note, the presentation of Prussia as a case in which social capital can suddenly change from a democracy-supporting vehicle to one which undermines democracy completely is welcomed, and suggests that the manner in which social capital operates is heavily dependent on the ‘wider institutional context’. In terms of future study into the ‘dark side’ of social capital, it might be interesting to apply these econometric methods to the rise of other fascist parties, such as the Golden Dawn in Greece, or further study on fascist – building on Riley’s 2005 work.

Bibliography

Berman, S. (1997). Civil society and the collapse of the Weimar Republic.World politics49, 401-429.

Chambers, S., & Kopstein, J. (2001). Bad civil society. Political Theory, 837-865.

Davies, N., & Moorhouse, R. (2011). Microcosm: a portrait of a central European city. Random House.

Jasiński, J. (1994). A history of Konigsberg: sketches of the thirteenth to twentieth centuries. (Historia Królewca: szkice z XIII-XX stulecia) Książnica, Poland.

Putnam, R. D. (1995). Bowling alone: America’s declining social capital. Journal of democracy6(1), 65-78.

Riley, D. (2005). Civic associations and authoritarian regimes in interwar Europe: Italy and Spain in comparative perspective. American Sociological Review70(2), 288-310.

Satyanath, S., Voigtländer, N., & Voth, H. J. (2013). Bowling for fascism: Social capital and the rise of the Nazi Party in Weimar Germany, 1919-33 (No. w19201). National Bureau of Economic Research.

 

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(Spoiler Alert) Game of Science: Higher life expectancy does not cause Economic Growth

Disease and Development: A Reply to Bloom, Canning, and Fink

By Daron Acemoglu and Simon Johnson (both MIT)

URL: http://d.repec.org/n?u=RePEc:nbr:nberwo:20064&r=his

Abstract

Bloom, Canning, and Fink (2014) argue that the results in Acemoglu and Johnson (2006, 2007) are not robust because initial level of life expectancy (in 1940) should be included in our regressions of changes in GDP per capita on changes in life expectancy. We assess their claims controlling for potential lagged effects of initial life expectancy using data from 1900, employing a nonlinear estimator suggested by their framework, and using information from microeconomic estimates on the effects of improving health. There is no evidence for a positive effect of life expectancy on GDP per capita in this important historical episode.

Reviewed by Sebastian Fleitas

 “The game of science is, in principle, without end.   He who decides one day that scientific statements do not call for any further test, and that they can be regarded as finally verified, retires from the game.” 

The Logic of Scientific Discovery, Karl Popper, 1934.

Bill Gates' Infographics

Bill Gates’s Infographic.

Not a long time ago, on April 25, Bill Gates posted an infographic on his blog revealing which is the world’s deadliest animal. Sharks, bugs, snakes and many very scary animals are not even close. The mosquito has the first place by far. They carry terrible diseases, including malaria, which kills more than 600,000 people every year. This infographic is just a reminder of how important it is to improve health around the world. Better health conditions could make millions of people live longer and better lives. But will these better health conditions (and a longer life expectancy) actually cause economic growth? Cross-country regression studies show a strong correlation between measures of health and both the level of economic development and recent economic growth. But, as we know, correlation does not imply causation.

What Acemoglu and Johnson (AJ hereafter) do in their 2014 paper (NEP-HIS 2014-05-17) is just to play the Game of Science. AJ (2007) argue that life expectancy does not cause economic growth and that previous studies had not established a causal effect of health and disease environments on economic growth. Since countries suffering from short life expectancy are also disadvantaged in other ways that are correlated with their poor health outcomes, previous macro studies may be capturing the negative effects of these other unobservable disadvantages. To address this identification problem, AJ (2007) used an instrument for the life expectancy: medical advances that occur at the health frontier, interacted with variation in the prevalence of diseases across the world, used together to construct a predicted mortality variable. The adoption of new medical practices is clearly endogenous, but the authors argue that the technology at the frontier is potentially exogenous. Since there was variation across countries in the prevalence of different diseases, the timing of new medicine advances has a different effect on the predicted mortality for different countries. In other words, the predicted mortality variable satisfies the requirements of a good instrument: it is correlated with the life expectancy in the country, but it is arguably not correlated with other unobservables that determine growth that may be changing at the same time in a country.

Dr. Jonas Salk and Dr. Albert Sabin developed two different polio vaccines that have pretty much  almost eradicated polio from the world.

Dr. Jonas Salk and Dr. Albert Sabin developed two different polio vaccines that have pretty much almost eradicated polio from the world.

Bloom et al. (2013, hereafter BCF) disagree with AJ’s strategy and conclusions. In their paper, which earlier appeared as an NBER working paper, they argue that the problem with AJ’s instrument is that it assumes the predicted mortality to be exogenous and not affected by contemporaneous income shocks. In other words, it implies that the initial mortality rate in 1940 should be unaffected by income levels in 1940, which is difficult to believe. As BCF explain very clearly, the “natural experiment” constructed by AJ is flawed. The “treatment group” that received large health gains from technological innovations is fundamentally different from the “control group” that received low health gains, since the “treatment group” had lower life expectancy initially. Therefore, if initial conditions are important for subsequent economic growth, the results will be biased if these initial conditions in 1940 are not considered. BCF included the level of life expectancy in their econometric specifications (a “partial adjustment model”) and they concluded that exogenous improvements in health due to technical advances associated with the epidemiological transition appear to have increased income levels.

In their reply to the reply, Acemoglu and Johnson (2014) address by different means the concern raised by BCF about their original work. First, in order to capture the long-run effects of the initial life expectancy, they include the level of life expectancy in 1900 interacted with time dummies in their decadal panel data set (which runs from 1940). Second, they estimate the “partial adjustment model” of BCF via non linear GMM, since the linear estimation of BCF’s specification will lead to a great deal of multicollinearity and the standard errors become very large. Finally, they use microeconomic estimates from another paper to calculate potential macroeconomic effects of current life expectancy on future growth and examine the implications of their baseline results. AJ conclude that all these approaches confirm that their main results are robust. There is no evidence that increases in life expectancy after 1940 had a positive effect on GDP per capita growth.

There are three issues in this Game of Science that I would like to comment on. First, the intent to quantify the contribution of health to economic growth is extremely relevant for both scientific and policy-related motivations. The general conclusion of the debate, at this stage of the game, is that health conditions were not a factor that shaped the differences in GDP per capita during the second half of the 20th century. Even more generally, the evidence casts doubts on the views that health has a first-order impact on economic growth. With this in mind, it is important to recognize the limitations in the study, especially to extract conclusions for today’s effect of health on economic growth. This is recognized by AJ, who warn that international epidemiological transition was a one-time event and that the diseases that take many lives in the poorer parts of the world today are not the same as those 60 years ago. Despite these considerations, it is important to notice that no author in this debate has questioned the crucial role of improving health conditions to save and improve the lives of millions of people.

Correlation and Causation

Correlation versus Causation

Second, it is important to highlight that the main contribution of AJ is that they provide a sound way to address the problem of endogeneity in order to answer this important question. It is not the first time that Acemoglu and Johnson find a way to design a natural experiment to address some fundamental development questions by using exogenous variation in a country-level panel data setting. In another famous paper, Acemoglu, Johnson and Robinson (2001, AJR hereafter) address the problem of endogeneity that raises in the study of the linkages between income and institutions with the famous instrument of mortality rates of European settlers in different colonies. In both occasions Acemoglu and co-author(s) show us in practice the nuts and bolts of economists’ empirical work, that is, to address the endogeneity concerns by doing good research designs and by finding exogenous sources of variation.

Finally, I see this debate as a privileged example of Popper´s quote. In this short reply to BCF, AJ (2014) present further tests for their results in AJ (2007), overcoming the important point that BCF raise. This is a fair game; both articles are forthcoming in the Journal of Political Economy and the database and programs for AJ papers can be downloaded from Daron Acemoglu’s webpage at MIT. Even more, this is not the first time these authors play the game in the same way. A similar, and also very illustrative debate about AJR (2001) and David Albouy’s critiques can be found in the American Economic Review, or in the NBER working paper. In both debates, Acemoglu and co-author(s) present more evidence on their results that are robust to additional tests, but in both episodes we gain from the debate. We just need to recall that our knowledge is always limited by the evidence we have at the moment, and that this evidence will change over time. After all, in the Game of Science, just like in another famous game, you do not know how it is going to end, even if you read all the books that have been published on the topic.

The institutional co-evolution of proto-multinationals

The Formative Years of the Modern Corporation: The Dutch East India Company VOC, 1602-1623

By Oscar Gelderblom (University of Utrecht), Abe de Jong (Erasmus University Rotterdam) & Joost Jonker (Universities of Amsterdam and Utrecht)

URL: http://ideas.repec.org/p/ems/eureri/32952.html

Abstract

With their legal personhood, permanent capital with transferable shares, separation of ownership and management, and limited liability for both shareholders and managers, the Dutch East India Company (VOC) and subsequently the English East India Company (EIC) are generally considered a major institutional breakthrough. Our analysis of the business operations and notably the financial policy of the VOC during the company’s first two decades in existence shows that its corporate form owed less to foresight than to constant piecemeal engineering to remedy original design flaws brought to light by prolonged exposure to the strains of the Asian trade. Moreover, the crucial feature of limited liability for managers was not, as previously thought, part and parcel of that design, but emerged only after a long period of experimenting with various, sometimes very ingenious, solutions to the company’s financial bottlenecks.

Reviewed by Stephanie Decker

The Dutch East India company may be among the best researched businesses of all time, but it is testament to its importance as a proto-multinational and the quality of its archive that research on this firm continues to inform contemporary research debates. The working paper by Gelderblom, De Jong & Jonker (NEP-HIS 2014-01-17), which has since been published in the Journal of Economic History, is interesting as it deals with the early years of the VOC (Vereenigde Oostindische Compagnie), and presents both a historical narrative as well as some distinctive challenges to previous assumptions. Their paper has to be seen as both an interesting contribution to other researches on the VOC, as well as some more general debates.

The continued interest in this very old company is due to a variety of reasons. Even a short sweep of recent work that relates to the VOC shows a remarkable breadth of themes. Wim van Lent has compared management policies of the VOC with its competitor, the English East India company, to understand some problems of its organizational evolution (Sgourev & Van Lent, 2011). This comparison is so intriguing not just because of the Dutch-English colonial competition during this time period, but also because the two East India companies were organized very differently, and almost provide a naturally occurring counterfactual for each other in a laboratory that tests organizational effectiveness at long distance.

As both firms date back to the seventeenth century, and were among the first well-documented examples of how organizations dealt with the challenges of managing across vast distances, their corporate histories are of great importance in and of themselves. Both provide organizational solutions to some of the perennial problems of multinationals, which struggled with poor communication and oversight of operations, especially the difficulties of enforcing control and monitoring the trustworthiness of its agents.

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Gelderblom et al. discuss the attitudes and conflicts within the Dutch Republic over the control of the VOC, the world’s first modern corporation

But despite all of these similarities to the multinationals of later stages, the East India companies were also fundamental different, and creations of their own time. The companies, especially the VOC, often took on roles that made them quasi-governmental bodies. As a result, they were involved in some of the day-to-day issues of governance of empire, which made these archives particularly rich. Thus they have been researched beyond the narrow confines of business history, and the particular insights that can be gained from those files have been discussed in great detail by Ann Laura Stoler (2009), a well-known postcolonial historian of gender and empire. The conduct of business often involved the company in political and personal issues well beyond what one would usually expect to see in a business archive, which offers rich contextual insights into the time period and its attitudes.

It is in this regard that the paper by Gelderblom et al. is interesting, as it discusses the attitudes and conflicts within the Netherlands over the control and financing of the VOC, and the exact rights and obligations of its directors. The paper takes core historical values such as contextualization and contingency (O’Sullivan & Graham, 2010) seriously, and paints a rich picture of the time period and some of the characters that influenced the decision-making within and beyond the VOC. The importance of these issues lies in more conceptual debates about the evolution of limited liability in the West (as opposed to other commercially vibrant areas such as the Middle East). Gelderblom et al.’s analytically structured narrative (Rowlinson, Hassard & Decker, 2014) highlights that although the VOC possessed some important legal features that we commonly associate with modern corporations, others developed only during its first years of operations in response to external pressures.
Consequently, having acquired two key features of the modern corporation (the split between ownership and management and transferable shares) from the outset, the VOC obtained three more (a permanent capital, limited liability for directors and by extension legal personhood) step-by-step over a period of some twenty years. Thus the five features did not come as a package, as a coherent logical set.

Their narrative shows how most of these pressures reflected financial constraints, as the large-scale trading activities in conjunction with military expeditions were a far larger undertaking than anything that had hitherto been financed on the Amsterdam money markets. This is an important contribution, and their short discussion in the conclusion quite sensitively highlights that some assumptions about the superiority of the Western institutional frameworks, such as argued for by Kuran (2010), are perhaps too ethnocentric to fully understand not just the different evolution of institutions in other cultures, but can also blind researchers to the historically contingent development of the legal frameworks that we now take for granted.

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Gelderblom et al. hide much of their contribution in their paper’s appendix

In light of the above, it is noticeable that the actual narrative takes up the largest part of the paper, and that it is only at particularly important junctures that the historiographical literature is challenged, while the framing in the introduction and conclusion is more heavily conceptual. These insights that can only be developed from a careful, in-depth historical investigation perhaps deserve better highlighting. This extends to the title, which does not quite do justice to the large themes that inform the historical narrative. Finally, it is only in the appendix that it becomes clear for readers not familiar with the nature of the VOC archive that this early period that the paper deals with is indeed not as well-researched as the later period, especially in terms of its financial performance. All of this adds up to another interesting angle of research on the VOC, which as a company and an organizational archive is clearly a case of great importance for the history of business and its institutional developments.

References:

  • Kuran, T. 2010. The Long Divergence: How Islamic Law Held Back the Middle East. Princeton: Princeton University Press.
  • O’Sullivan, M., & Graham, M. B. W. 2010. Guest Editors’ introduction: Moving Forward by Looking Backward: Business History and Management Studies. Journal of Management Studies, forthcoming.
  • Rowlinson, M., Hassard, J., & Decker, S. 2014. Research Strategies for Organizational History: A Dialogue between Historical Theory and Organization Theory. Academy of Management Review, 39(3).
  • Sgourev, S. V., & van Lent, W. 2011. The Right Amount of Wrong? Private Trade and Public Interest at the VOC European Group of Organization Studies. Gothenburg, Sweden.
  • Stoler, A. L. 2009. Along the Archival Grain: Epistemic Anxieties and Colonial Common Sense. Princeton: Princeton University Press.

On Macroeconomics After the Financial Crisis

Short-Run Macro After the Crisis: The End of the “New” Neoclassical Synthesis?

By Oliver Landmann (Albert-Ludwigs-University Freiburg)

Abstract: The Financial Crisis of 2008, and the Great Recession in its wake, have shaken up macroeconomics. The paradigm of the “New” Neoclassical Synthesis, which seemed to provide a robust framework of analysis for short‐run macro not long ago, fails to capture key elements of the recent crisis. This paper reviews the current reappraisal of the paradigm in the light of the history of macroeconomic thought. Twice in the past 80 years, a major macroeconomic crisis led to the breakthrough of a new paradigm that was to capture the imagination of an entire generation of macroeconomists. This time is different. Whereas the pre‐crisis consensus in the profession is broken, a sweeping transition to a single new paradigm is not in sight. Instead, macroeconomics is in the process of loosening the methodological straightjacket of the “New” Neoclassical Synthesis, thereby opening a door for a return to its original purpose: the study of information and coordination in a market economy.

Persistent Link: http://EconPapers.repec.org/RePEc:fre:wpaper:27?

Reviewed by Catherine Dorman (final-year BSc Business Economics student, Bangor University, Wales)

Summary

This paper was distributed by NEP-HIS on 2014-02-08, and it addresses the impact that the recent financial crisis has had upon macroeconomic thought. Specifically in terms of how the New Neoclassical Synthesis has held up to scrutiny following the most recent economic debacle. Landmann offers an overview of the history and progression of macroeconomic thought from the “Keynesian revolution” (p.4) to New Neoclassical Synthesis economics, right up to modern day contemporary economics, and its response to current macroeconomic issues.

The purpose of Landmann’s paper is to explain how economics has evolved since the Keynesian school of thought emerged in the aftermath of the 1930s depression, and to show how the macroeconomic community has been left splintered as a result of the recent financial crisis, without a consensus in sight. It asks the questions: Why has this occurred? How did the New Neoclassical Synthesis fail to foresee or explain the worst economic downturn since the 1930s? Finally, it asks the all-important question: Is it necessarily a bad situation to be in? Or has having smashed the previous concept to pieces resulted in an environment in which macroeconomics can really explore and develop itself without the shackles of archaic and contextually inapplicable economic theory?

Prof. Dr. Oliver Landmann -Bild Schneider

Landmann introduces his paper by assessing the state of macroeconomic affairs, operating within a New Neoclassical Synthesis environment, in the run up to the financial crisis of 2008. The ‘Great Moderation’, described a period of economic constancy spanning from the 1980s to 2008, which was characterized by a continually stable business cycle (Davies and Kahn, 2008). Famously, Ben Bernanke, who coined the phrase ‘Great Moderation’, is quoted as having attributed this period of economic success to structural change, improved macroeconomic policies, and good luck (Bernanke, 2004). Ultimately, Landmann describes a period in which the great moderation had lulled the economic community into a false sense of stability, much like that described by Hymen Minsky (Minsky, 1992).

The next section of the paper is dedicated to creating a contextual understanding, and this is achieved through showing the evolution of economics thought from Keynes to the New Neoclassical Synthesis.

Consider Fig 1 for a brief overview of the changes of economic thought from the 1930s to 2008:

Fig. 1
Figure1

As is evident across each of these theories, their explanatory power tends to be relatively finite. In the case of Adam Smith and John Keynes’ theories, they were deconstructed and meshed in order to explain the economy’s operations at a specific point in time, and this came to be known as the Neoclassical Synthesis. This was largely credited to the work of Paul Samuelson during the 1950s (Samuelson, 1955). It took the underlying idea of Keynesian theory of underemployment, with the notion that monetary and fiscal policy can be employed to reduce this. It could therefore use classical equilibrium analysis to explain resource allocation and relative prices (p4). The economic policy was successfully adopted in developed countries as an effective treatment for the economy after the Second World War.

It was from the stability and growth that was created through the adoption of this macroeconomic approach, which helped to develop confidence in the prescriptive capabilities of economic theory. However, as history has taught us, ceteris paribus does not hold in reality. The theory was largely nullified in the 60’s and 70’s, because it had been unable to predict stagflation, and the Philips Curve was completely undermined (Motyovszki, 2013).
Consider Fig 2 for a concise history of the economic theory covered in this paper.

Fig. 2
Figure 2
(Source: Short-Run Macro After the Crisis: The End of the “New” Neoclassical Synthesis? By Oliver Landmann.)

The result of this was a new hybrid economic theory: New Classical economics. From this theory came the Real Business Cycle model, which argued that cycles result from the reactions of optimizing agents to real disturbances, for example, changes in technology.
In the 1970s, the New Neoclassical Synthesis emerged, with a combination of New Keynesianism and New Classical theories, and the basis of economic practice during the Great Moderation. It was felt amongst policy makers that the short term interest rate was enough of an instrument in economic management, and that the business cycle was believed to have been overcome (Aubrey, 2013).

Landmann’s paper addresses how the economic crash of 2008 threw macroeconomics into turmoil. The New Neoclassical Synthesis had not fully appreciated the effects of the financial market within its model, and the result was that it was inadequate as a means of remedying problems in the economy (Pike, 2012). Landmann makes a good point of acknowledging that although financial economics took great consideration of the behavioural antics of the banking sector, within the actual practiced model of the New Neoclassical Synthesis, these were fundamentally disconnected.

In light of this, the once unquestioned macroeconomic doctrine was suddenly under scrutiny. One of the greatest criticisms of the New Neoclassical Synthesis is its reliance upon “elegant” (p12) mathematical equations, which are often predictively insufficient due to the sheer number of assumptions that have to be made in order to create a working model. It doesn’t fully estimate factors such as irrationality and uncertainty (BBC NEWS, 2014) and the result of this is that the results can be wildly inaccurate (Caballero, 2010). This can also create coordination problems from assumptive behavioural models, such as the Robinson Crusoe model, which become overly stylized to the detriment of economic viability (Colander, 2009).

Consequentially, macroeconomics has begun to pay more focus to realistic behaviour, given that information is rarely perfect in actuality (Caballero, 2010; Sen, 1977).

Landmann concludes that out of the financial crisis, there has been a flood of new macroeconomic theories develop, and that the New Neoclassical Synthesis still has pedagogic merit. He does, however, primarily blame the era of Great Moderation for a period of complacency amongst economic academics. The simple acceptance of one concept of economics based purely on its merit during a stable business cycle, without inquisitive forethought into how it would respond when faced with an exogenous or endogenous shock, is Landmann’s greatest criticism.

Critique

This paper is incredibly relevant, and its themes and messages are certainly ones that economists need to be considering in the aftermath of such a fresh and colossal economic recession. There is perhaps an over simplification of some of the timeline of economics: broadly defining all economists during the Great Moderation as being one school of thought is unfair and inaccurate, but for the purpose of the paper, it is perhaps forgivable.

Landmann makes little mention of the pattern by which economic thought often evolves. Gul, Chaudhry and Faridi describe economic thought as developing from “quick fixes” (Gul et al. 2014: 11), and this would help to explain why, during the Great Moderation, very little new economic thought was developed: the need wasn’t there. Through their histories of economic development, Gul et al. (2014) and Landmann,suggest that macroeconomics is reactionary as opposed to precautionary, despite its attempts to be prophetic.

This echoes the “Lucas Critique”, the understanding that economic equations developed and implemented during one policy system, are unlikely to remain relevant or explanatorily applicable during another (Lucas, 1976).

Finally, it does little to explore the external factors that led to the period of Great Moderation. Globalisation had really taken a hold during this time, with containerization in full flow (at 90% of all non-bulk cargo worldwide being moved by containers on transport ships (C. E. Ebeling, 2009)), and advances in computation and communication technology (Bernanke, 2004) which helped to stabilize inventory stocks – something that is acknowledged as a contributory factor in cyclical fluctuations (McConnel and Quiros, 2000).

Ultimately, the paper makes the same conclusions that most macroeconomic papers do. There is no definitive explanation for everything that occurs within the economy, and certainly no blanket approach that will procure the most lucrative outcomes on every occasion. This paper goes a step further to explain why it can be damaging to rigidly subscribe to one theory of macroeconomics: it discourages continual change and forethought, which in turn can stunt the evolution of explanatory macroeconomic thought.

References

Aubrey, T., 2013. Profiting from Monetary Policy: Investing Through the Business Cycle. 1 ed. New York: Palgrave MacMillan.

BBC NEWS, 2014. Did Hyman Minsky find the secret behind financial crashes?. Available at: http://www.bbc.co.uk/news/magazine-26680993 [Accessed 07 April 2014].

Bernanke, B. S., 2004. Remarks by Governor Ben S. Bernanke At the Meeting of the Eastern Economics Association Available at: http://www.federalreserve.gov/Boarddocs/Speeches/2004/20040220/ [Accessed 07 April 2014]

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