Macroeconomics and History
Britton, Andrew, National Institute Economic Review
Andrew Britton (*)
The Review is pleased to give hospitality to CLARE Group articles, but is not necessarily in agreement with the views expressed. Members of the CLARE Group are M.J. Artis, T. Besley, A.J.C. Britton, W.A. Brown, W.J. Carlin,J.S. Flemming, C.A.E. Goodhart, J.A. Kay, R.C.O. Matthews, D.K. Miles, C.P. Mayer, M.H. Miller, P.M. Oppenheimer, M.V. Posner, W.B. Reddaway,J.R. Sargent, P. Seabright. Z.A. Silberston. S. Wadhwani and M. Weale. Drafts of this article have been discussed among members of the Group, but responsibility for the views expressed rests with the author alone.
Macroeconomic behaviour varies according to the character of the policy regime. There is therefore no truly 'general' theory which will apply at all times and in all places. Over the past hundred years, one model may be appropriate to the period of the gold standard, another to the interwar years, another to the so-called 'Golden Age' after the Second World War, and so on. Expectations, which depend on confidence in the regime, determine the stability of both prices and output. Institutions also adapt in ways that may support, or ultimately undermine, the foundations of the policy regime.
The relation between economics and history was keenly debated a hundred years ago (Keynes, 1891). According to the historical school at that time the laws of economics are different in different countries and in different historical periods. The analytical school, however, sought to build economic theory on axioms of individual rationality which might be of very general application. So far as microeconomics is concerned, or Walrasian general equilibrium theory, it was the neoclassical axiomatic approach which prevailed, and it has constituted the mainstream of economics to this day. Yet the history of the twentieth century demonstrates again and again that economic behaviour can vary fundamentally from one time to another.
The contention of this paper, and of the book on which it is based (Britton, 2001), is that macroeconomics must relate to a particular time and place if it is to be of practical value. There are no answers to the most important questions posed in this branch of economics that are generally correct. The macroeconomics of America or of Europe is not the same as that of Japan, Russia or China. The macroeconomics of the 1930s, or even of the 1970s, is not the same as the macroeconomics of today.
It will, no doubt, be readily agreed that the behaviour of economies will depend on institutional differences: on the openness to trade, the size of the public sector, the influence of trades unions and so on. The particular point to be made here is that economic behaviour reflects the character of the policy regime. It will be argued that the stability of the economy depends crucially on perceptions of the regime in place. Institutions adapt to the regime in ways which may either support or weaken it. This will be illustrated with examples from the history of the past hundred years.
For much of that century, battle was joined between the Keynesians and the monetarists. They held very different views both about the behaviour of the macro-economy and about the appropriate policy regime. It looked as if the debate might in principle be settled if research could uncover a better understanding as to how the economy in fact always behaves. One side would be proved right, and the other proved wrong. If, however, the behaviour of the economy itself adapts to the regime in place, then it is quite possible to say of the Keynesian and the monetarist school that each is right in its own context -- and that in the other context each is wrong.
This methodological issue is very important when assessing the possible implications of a change in policy regime, asking whether the existing or the alternative regime is more appropriate to a particular economy. If the new regime would be very different in character from the old one, then one must look beyond the consequences which could be foreseen if the behaviour of the economy remained the same. …