Robert Solow, “Towards a Macroeconomics of the Medium Run.” Journal of Economic Perspectives, Vol. 11, No. 1, Winter 2000.
Solow begins by talking about the progress of macroeconomics even though it is still a rough science that cannot be exact. He claims that maybe a certain level of inexactness is unavoidable even though macroeconomics is in fact the most important part of the field of economics. He says that macro is necessary to understand current events and policy implications even if the policy that is required is neglect. He wants to use this study to talk about some of the leftover questions left in macro but not to go on about them. He discusses how recently, the general equilibrium model has been the main vehicle for macro theory and he does not believe anything will replace it soon. He talks about the choices that have to be made within the models and there are obvious flaws that still need to be resolved. He also discusses the fixed-price models that he supported which did not get a fair trial by American macroeconomists in his eyes. He talks about how compromising between believable assumptions and assumptions that are able to be modeled is still a very real question in macro theory. One of the main ones is the distinction between individuals optimizing their benefits in every situation or acting by a rule of thumb. He also talks about the importance of expectations in macro. These are the questions still up in the air about the foundations of macro theory which Solow thinks need to be answered in order for macro to progress.
He next discusses growth (fitting considering he came up with the Solow growth model) and how a wider variety of models are available for testing. He talks about how some growth models such as open economy models are shot down without given much of a chance. Another factor in growth which Solow discusses is the role of human capital. He says that it is very important to figure out how developing nations could most effectively work to develop its people’s human capital. He goes on to talk about how the main focus of most debate today is the fluctuations in the business cycle. He says the extremists on both sides of the debate have begun to converge a little bit and that the disagreements might be resolved if there were a common framework from which to work from. His second point is that some of the answers to the questions might change over time as attitudes, theories, and experiences change. He also points out the importance of not only correcting past errors but also keeping up with the changing reality experienced in the practice of new economic theory. He also forecasts the open economy models will gain greater importance in the future.
His next point of discussion is wage and price behavior in the short-medium run. He uses this as an example of how theory and fact can connect and how the expectations augmented Philips curve was used well in the 70s and 80s because it gave good fits. Finally Solow begins to discuss “The Medium Run.” He assumes that in the short run prices are predetermined, not necessarily constant, and that some ad hoc dynamics are also included. In the long run, he assumes that prices are dealt with in a growth theory manner. He then postulates that there must be a medium run in which prices play a role but income driven processes may dominate events. He shows how Keynesians never stop because they are moving from quarter to quarter and Neoclassicals never fix prices because markets do not clear. He talks about how when he sails he does it as if the world was flat and yet he makes it to his destinations just fine. He is arguing here for a hybrid model to understand what is occurring in the macroeconomy since a purely Keynesian or neoclassical model does not adequately explain what is going on.
I thought this was a good article by Solow especially after having read that Hoover catastrophe. Nobody does macro better than Solow and this was much simpler to understand than Hoover’s. I also think that he makes some very good points about how to look at the macroeconomy with it being completely irrelevant or overwhelming. It seems like he is preaching a discretionary policy towards which theory to apply. If you are looking short term, use Keynesian. If you are looking at the long term, try Neoclassical. He has a much more uplifting view than Hoover because Solow actually believes that macro exists and is at the heart of what should be studied in economics.