Opposition to Romer's developments, and defense of the Solow model came from the New Keynesians. New Keynesian thought stood opposite the New Classical faction, and was founded on a focus on the imperfections of the invisible hand. Primarily a "liberal doctrine," many prominent economists adhere to the New Keynesian club. However, there were also Saltwater economists who, though drawn to Keynes, leaned more to the conservative side, economists like Martin Feldstein and Greg Mankiw.
Believing that there was "plenty of room in Keynesian tradition" for more conservative views, Mankiw (with David Romer and David Weil) replied to Romer's growth model with what became known as the Augmented Solow Model. Defending the Solow model as "consistent with the evidence," the new model added human capital in order to explain all observed differences between nation's growth rates. Key to this conclusion was the idea that one pool of knowledge exists for all, countries only differ in the mix of physical and human capital used to capitalize on this knowledge. Response from Romer and others was that the model was "indefensible" and "unsatisfying," because of all that it failed to account for and explain.
A for Jim.
ReplyDeleteThat's quite the list of New Keynesians on pg. 271: Bernanke (our current Fed chairman) and Yellen who is on the Fed board, Summers (Obama's chief economics insider), Blinder (who had an op-ed piece in The Wall Street Journal just last week, Stiglitz (who won a Nobel Prize), and Fischer, Blanchard, Blinder, Woodford and Mankiw all have best-selling textbooks in macroeconomics.
This discussion ties into the discussion towards the end of the semester. But, we now know that the Lucas conjecture of the mid-80s, and the Mankiw-Romer-Weil model of the early 90s don't fit all that well: human capital is another one of the little factors that explain growth, but not a big one.