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Abstract
Karl Brunner and Axel Leijonhufvud constantly pointed out the prominence of imperfect information in macroeconomic analysis. This paper argues that, despite strong oppositions related to their rival schools of thought, this emphasis on informational problems led them to adopt similar views on many theoretical and methodological issues. These issues encompass the perception of the economic agent in society, the theory of price inflexibility and unemployment, the role of relative prices, the importance of signal-extraction problems and the position within the Marshall-Walras divide.
Acknowledgements
I would like to thank Muriel Dal-Pont Legrand, Michel De Vroey, Rodolphe Dos Santos Ferreira, David Laidler, Michael Parkin, Moïse Sidiropoulos, and two anonymous referees for helpful comments, suggestions, and references.
Disclosure statement
No potential conflict of interest was reported by the authors.
Notes
1 When asked to put his assertions in a broader theoretical perspective, Friedman simply chose the IS-LM apparatus and claimed that “the basic differences among economists are empirical, not theoretical'' (1970, 234).
2 The following quotations from Howitt (Citation1984) illustrate this state of confusion: “Leijonhufvud is able to develop Keynesian ideas using the ‘island' approach” (432); “Leijonhufvud's approach shares a great deal with modern rational-expectations theory in its focus upon signal-extraction problems” (442).
3 This theory was first developed by Costas Azariadis (Citation1975), Martin Baily (Citation1974) and Donald Gordon (Citation1974).
4 These communication failures were labeled as effective demand failures by Leijonhufvud (Citation1973).
5 As an organisational device, for each issue covered in the present paper, I will systematically begin by exposing the arguments of Brunner, then turn to that of Leijonhufvud, and conclude by confronting them in a final paragraph (Sections 5.1.1 and 5.2 being the only exceptions).
6 In an interview with Arjo Klamer (Citation1984), Brunner told that his encounter with colleagues at UCLA, and most particularly with Alchian, had been even more important than his encounter with Milton Friedman.
7 Brunner was at the UCLA from 1951 until 1966, Leijonhufvud from 1964 until the mid-1990s. However, they did not seem to have directly met and discussed there (e.g., in faculty seminars) between 1964 and 1966. Indeed, neither Brunner (e.g., in Klamer (Citation1984)) nor Leijonhufvud (e.g., in Snowdon (Citation2004) or Jayadev and Mason (Citation2016)) mentioned in interviews any interaction between them. David Laidler, who had close contact with both of them, recalls that during their overlap time at UCLA Leijonhufvud was very much Robert Clower's protégé (email to author) and that Clower and Brunner did not get along very well. Moreover, Brunner established his famous Konstanz seminars in 1970. Leijonhufvud attended one of them, in the early 1980s. He also got a visiting appointment there. In both cases, Brunner seemed to have no involvement.
8 As we shall see below, Leijonhufvud considered Alchian's theory as a necessary condition to involuntary unemployment.
9 This expression is borrowed from Kevin Hoover (1984).
10 A referee of this paper raised that it would have been worthwhile to compare the positions of Brunner and Leijonhufvud about monetary rules and regimes. Indeed, Leijonhufvud published extensively about monetary regimes, analysing both processes of (high) inflation and constitutional designs of monetary regimes in depth. Brunner, however, did not seem to share the same interest about these questions. I was not able to find dedicated work on these issues in his writings. David Laidler suggested that the important literature on central bank laws and inflation that Robin Bade and Michael Parkin had started in the late 1970s (notably in Bade and Parkin (Citation1978)) could have some connections with Brunner (email to author). Nevertheless, Parkin only recalls that Brunner had, at best, “a limited interest in this topic'' (email to author).
11 This led Laidler (Citation1991) to raise that “Karl's REMM is a much more interesting and subtle creature than the mechanically maximizing homunculus oeconomicus of the intermediate microeconomics textbook, who is currently coming to dominate macroeconomics, too'' (p. 636, italics in original).
12 “Such phenomena remained essentially unintelligible, unless one contrived to introduce arbitrary constraints justified by theoretically extraneous ‘social conventions''' (Brunner (Citation1971, 31)).
13 Notably in Brunner (Citation1970, 4–5 and Citation1971, 32–33) and Brunner and Meltzer (Citation1972a, 954–955).
14 See notably Brunner (Citation1970, Citation1971) and Brunner and Meltzer (Citation1997).
15 “Friedman avoids developing an alternative to the Keynesian analysis of the ‘transmission mechanism' with its emphasis on borrowing costs. Equally important and related… Friedman avoids any explicit role for relative price changes and the application of price theory to aggregative analysis'' (p. 843).
16 Notably in Friedman and Schwartz (Citation1963b).
17 The arguments developed in this section are close to those exposed in Section 2.2. I have, however, chosen to treat them separately. Indeed, the object of Section 2.2 has been the direct application (and the promotion) of Alchian's theory of price inflexibility and unemployment by Brunner and Leijonhufvud. This theory involves a particular type of signal-extraction problems (between aggregate and idiosyncratic shocks), essentially in the labour market. Instead, the present section deals with alternative types of inference problems (notably between permanent and transitory shocks) which do not necessarily occur in the labour market. We may infer that these differences could explain why Brunner and Leijonhufvud did not mention Alchian's theory in this part of their work.
18 This “stylised” fact would have been well documented by Friedman and Schwartz (Citation1963a).
19 The argumentation developed there was first described in Brunner, Cukierman, and Meltzer (Citation1983).
20 Brunner and Meltzer spoke about a “recognition lag” (p. 144). As we shall see later, the assumption that agents fail to distinguish between permanent and transitory shocks was introduced by Brunner, Cukierman, and Meltzer (Citation1980).
21 In this case, indeed, the expected gains of adjusting wages are lower than the costs incurred to renegotiate them. Wages are kept unchanged and so are prices, which are set by firms that apply a constant markup over marginal costs.
22 These shocks, and the related theory, would “explain the persistently disappointing performance by the American economy in this period (1965–1980)'' (p. 26, brackets added)).
23 As a result, there are “inconsistent beliefs of firms and security market investors about the realizable rate of real profit in the economy'' (p. 9).
24 “This story does not give both sides of the labor market the same information sets'' (Leijonhufvud (Citation1983, p. 28)).
25 Moreover, if consumption is driven by wealth (like for permanent-income or life-cycle theories), small shocks will not impair this latter and consumption will not be altered at all if cash balances are enough.
26 “Second thoughts on effective demand theory suggest that the capabilities self-regulating behavior of actual market systems are likely to be a good more ‘robust' '' (p. 34).
27 As we shall see in Section 5.2, the Modern tradition is the Walrasian one.
28 In the words of Leijonhufvud (Citation2006, 59): “‘Equilibrium' was understood as a state in which the pertinent ‘law of motion' had ceased to operate''.
29 It is interesting to note that Alchian (Citation1977, 133) located the origins of Brunner's monetary thought in their “long association'' and in “some ancient joint discussions''.
30 Essentially firms in Marshall's theory.
31 Models based on the intertemporal equilibrium concept comprise intertemporal substitution on top of intra-period substitution, while reasoning in terms of the state-of-rest equilibrium exclusively involves intra-period substitution.
32 There is “Motion of the equilibrium point around the normal output line'' (p. 131).
33 “Why should not (the market rate) simply come down to (the new normal rate) as speculators learn that no better placements are opening up? It will'' (Leijonhufvud (Citation1981a, 199), brackets added).
34 Contrary to Brunner, Friedman is a professed Marshallian. He claimed his adhesion to the Marshallian tradition on many occasions (e.g. in Friedman (Citation1972)).
35 As mentioned above, this will also be the position of De Vroey (Citation2004).
36 More precisely: “For Friedman, Cournot's problem is, given economic interdependence, how to cope with economic analysis using practical methods… Marshall's method is a response to Cournot's problem. It attempts to keep an investigation manageable by examining one problem at a time… For the point of the Cournot problem and Marshall's (and Friedman's) solution to it is that, whatever the economic problem, any practically significant analysis of it requires that reality be partitioned. The most important bits with respect to the problem at hand are analyzed in detail; the rest are summarized in less detail (but not forgotten, of course)'' (Hoover (Citation1984, 65–66, brackets and italics in original)).
37 An example can illustrate this divergence between Brunner and Friedman. Friedman (Citation1971) assumed a constant real interest rate in his preferred way of closing his “Theoretical Framework”. Brunner criticised this choice as follows: “By keeping real rates constant… Friedman's ‘common model' neglects the variables that, we believe, explain many of the short-run changes in expenditure'' (Brunner and Meltzer (Citation1972b, p.847)). Friedman justified this assumption by invoking a “Marshallian approach'' of economic theory: “From a Marshallian approach… there is nothing inconsistent or wrong about using a theory that treats the real interest rate as constant in analyzing fluctuations in nominal income but using a theory that treats the real interest rate as variable in analyzing fluctuations in real income; the one theory may be more useful for the one purpose, the other theory for the other. We lose generality by this procedure but gain simplicity and precision'' (1972, 920, italics added).
38 That Leijonhufvud had tried to develop such an approach was already noted by De Vroey (2004, p.78 and 2016, p.116).
39 This aspect may render our “friends or foes” subtitle somewhat less accurate. Rather than rivalry (“foes”) on the same plane of argumentation, there may thus be an issue of incongruence in discourse.