This paper is based on a long-term research program with Rachel Kranton on the implications of identity

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This paper is based on a long-term research program with Rachel Kranton on the implications of identity

for economic behavior and also a manuscript we are currently writing on the missing motivation in economics.  Our

previous joint papers (Akerlof and Kranton (2000), (2002) and (2005)) have explored implications outside of

macroeconomics of utility functions dependent on people’s notions of what ought to be.   Conversations with

Kranton have also been the basis for the section on economic methodology.   I have also benefitted from

conversations with Robert Shiller, with whom I am co-authoring work on behavioral macroeconomics.  In addition, I

wish to thank Robert Akerlof and Janet Yellen for invaluable advice.  E-mail address: [e-mail].

The Missing Motivation in Macroeconomics

George A. Akerlof

 

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October 2, 2005

Preliminary Draft: Presidential Address

American Economic Association, Chicago, IL, January 7, 2007

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1

See for example Samuelson (1964), Dernburg and McDougall (1967), and Ackley (1961).  The

econometric model of Klein and Goldberger (1955) provides a useful synopsis of the variables that the early

Keynesians thought most important for a macroeconomic model, and how they would be included.

2

Time Magazine, December 31, 1965.  His appearance on the cover was especially remarkable because

Time covers are rarely posthumous.  Keynes had died in 1946.

3

See http://www.libertyhaven.com/thinkers/miltonfriedman/miltonexkeynesian.html, which quotes

Friedman, Dollars and Sense, p, 15.  

1

I. Introduction

Macroeconomics changed between the early 1960's and the late 1970's.  The

macroeconomics of the early 1960's was avowedly Keynesian.  This was manifested in the

textbooks of the time, which showed a remarkable unity from the introductory through the

graduate levels.

1

  It was even manifested in the appearance of John Maynard Keynes on the

cover of Time Magazine.

2

  Milton Friedman was famously quoted, “We are all Keynesians now,”

although in a later disclaimer, he said, almost surely correctly, that he had been quoted out of

context.

3

  But this love-fest was not long-lasting.  A little more than a decade later Robert Lucas

and Thomas Sargent (1979) wrote “After Keynesian Macroeconomics.”

The decline of the old-style Keynesian economics was due in part to the simultaneous

occurrence of increased inflation and increased unemployment, an event that seemed impossible

with the simple non-accelerationist Phillips Curves of the early 1960's.  But it declined also

because of a change in the world of ideas.  The early Keynesians derived the major components

of their model, such as the consumption function, the investment function, and price and wage

equations from intuition.  For example, they let the consumption function depend upon

disposable income and investment depend upon current profits and current cash flow.  Regarding

wage setting, a key relation was the Phillips Curve, where nominal wage inflation depended

upon the unemployment rate (as an indication of the looseness of the labor market).  In part the

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4

A good example of this methodology can be seen in Phillips’ (1958) mixture of light theory and statistical

analysis in his estimation of the relation between wage inflation and unemployment.

2

Keynesians took these functions from their observations as to how the various actors in the

economy would behave; they also tempered their judgments by looking at statistical relations.

4

But another school of thought objected to the casual ways involved in this methodology. 

They said that the relations of macroeconomics should instead be derived from sound economic

principles.  They should be derived from the behavior of profit maximizing firms and utility-

maximizing consumers with objective arguments in their utility functions. 

This new methodology had a profound effect on macroeconomics, because it failed to re-

produce the components of the standard macroeconomic models.  It revealed at least five

neutrality results:  independence of consumption and current income (given wealth), the

Modigliani-Miller theorem, natural rate theory, inability to stabilize output in the presence of

rational expectations, and Ricardian equivalence.  The excitement these results generated among

macroeconomists—among both those who tried to dismiss them and those who accepted

them—makes it clear that these neutralities had been unexpected.  They were seen as tell-tales

that the macro-economists of the previous generation had been thinking in the wrong way.  In

the new view, scientific reasoning was producing a newer, leaner, more precise economics. 

The neutralities are important because they are all believed to hold with some generality. 

For that reason they are useful benchmarks for macroeconomics.  The neutralities commonly

describe equilibria of competitive economies with complete information.  This means that they

are not completely general, but they still have enough  generality to be useful as benchmarks. 

They will hold in a competitive model with perfect information and the usual definition of

general equilibrium irrespective of people’s preferences, as long as those preferences

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