Money, Banks and Finance in Economic Thought

The History of Recent Macroeconomics Through the Lens of the Marshall-Walras Divide

de Vroey Michel, université catholique de Louvain

According to Leijonhufvud, the development of economic theory can be compared to a decision tree, the branches of which originate in choices made about basic methodological nodes. My paper is an attempt at putting this insight into practice by reconstructing the recent history of macroeconomics on its basis. The paper is divided in two main parts. In the first, I expose the commonalities and differences between the Economics of Walras and the Economics of Marshall. In the second, I engage in two tasks. I begin with examining whether Leijonhufvud’s decision-tree framework can explain three crucial turns in the history of the field: (a) the transition from Keynesian to new classical macroeconomics triggered by Lucas; (b) the transition from the Lucas model to Kydland and Prescott’s ‘real business cycle’ modeling strategy; and (c) the transition from RBC modeling to DSGE modeling. In a second step I study how these transformations can be gauged against the Marshall-Walras divide.

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Keywords: Keynes, Lucas, Keynesian macroeconomics, RBC macroeconomics, DSGE macroeconomics

Paper file