From Naked Keynesianism:
Just finished my summer macro class (last Friday actually; grades were due
Monday). One of the things that always becomes important in the course is how to
define the break between Keynes, or at least Keynes and the Old Neoclassical
Synthesis, on the one hand, and Friedman and Lucas, in the case of the latter
both the New Classical models (monetary misperception) and Real Business Cycle
(RBC) models, on the other. Many authors suggest that Lucas should be
considered, after Keynes himself, the great scientific revolutionary, and that
Friedman's break is incomplete. It is the implicit view in Alessandro Vercelli's
book Methodological Foundations of Macroeconomics: Keynes After
Lucas or explicitly in the more recent book by Michel De Vroey's Keynes, Lucas, d'une macroéconomie à
The reasons adduced are associated to Friedman's model, which remains in many respects similar to the Neoclassical Synthesis one, that is, an ISLM with a Phillips Curve (PC) with gradual adjustment to the equilibrium position. In one sense it is true that in Lucas' equilibrium model endogenous variables are determined on the basis of real phenomenon, technology, preferences, and factor endowments. The model, which was further developed by RBC authors, emphasizes the intertemporal choices of between leisure and consumption, and the fact that production takes time, and requires inputs over several periods, and has led many to label it Walrasian, in contrast to the supposedly Marshallian model used by Friedman and the Neoclassical Synthesis Keynesians. The other significant difference is that stochastic processes, rather than deterministic ones, become relevant, and Dynamic Stochastic General Equilibrium (DSGE) became dominant [more on that in another post; issues have been dealt to some extent here].
Traditionally a Walrasian model is a General Equilibrium (GE) one, while a Marshallian model represents partial equilibrium. In that sense, the label is a bit of a misnomer, since the ISLM cum Phillips Curve model behind the Friedman’s aggregate demand and aggregate supply model is also a GE model. The Neoclassical Synthesis model solves for the simultaneous equilibrium of the goods, labor, money and bond markets. What Friedman added explicitly is the natural rate. The supply constraint.
Lucas asks: “where is the productivity shock that cuts output in half in that period? Is it a flood or a hurricane? If it really happened, shouldn’t we be able to see it in the data?”* Lucas, even though he has accepted that most cycles are explained by productivity shocks remains convinced that the Great Depression resulted from a monetary contraction by the Fed, as in the Monetarist views of Friedman. And one wonders why that monetary contraction was unanticipated.