Coordination and Growth Essays in Honour of Simon K. Kuipers Coordination and Growth Essays in Honour of Simon K. Kuipers Edited by Gerard H. Kuper Elmer Sterken Els Wester Department of Economics University of Groningen^ The Netherlands Springer Science+Business Media, LLC Library of Congress Cataloging-in-Publication Data Coordination and growth: essays in honour of Simon K. Kuipers / edited by Gerard H. Kuper, Elmer Sterken, Els Wester, p.cm. Includes bibliographical references. ISBN 978-1-4613-5609-7 ISBN 978-1-4615-1549-4 (eBook) DOI 10.1007/978-1-4615-1549-4 1. Kuipers, S.K. (Simon Klaas) 2. Economists-Netherlands. 3. Macroeconomics. I. Kuipers, S.K. (Simon Klaas) II. Kuper, G.H. (Gerard H.) III. Sterken, E. (Elmer) IV. Wester, E. HB111.K85 C66 2001 338.9--dc21 2001038473 Copyright ® 2001 Springer Science+Business Media New York Originally published by Kluwer Academic Publishers in 2001 Softcover reprint of the hardcover 1st edition 2001 All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means, mechanical, photo-copying, recording, or otherwise, without the prior written permission of the publisher, Springer Science+Business Media, LLC Printed on acid-free paper. Preface: Personal Recollections by Jan Pen I The editors excused me from the obligation to write a scientific article; instead I'm allowed to write a personal note. Indeed, I know Simon for a very long time. Longer than the other authors do. Our first encounter took place when he was a student, which must have been in the beginning of the 1960s. On behalf of the students he was member of a committee in charge of organising an excursion abroad. On the very last moment the number of participants turned out to be too large: an extra professor had applied. The question was whether one of the students should be excluded. No, Simon said, and he got his way. He persisted in a very polite way, and that was a characteristic that I would again witness many times later. In the forty years that I know him I saw him develop from student to assistant professor (with Frits J. de Jong), PhD candidate (with De Jong as promotor (supervisor) and Pen as co-referent (consulting supervisor)), colleague in the same faculty (he for general economics, I for public finance), dean of the university and chairman of the board of the university. So, every now and then he was my boss. Together we were members of the editorial board of De Economist, founded in 1852, of which Simon is now Honorary Editor. In that capacity we had a meeting every three months at the house of one of the editors, followed by a dinner together with our wives. One can write a book about that circle of friends. I have very good memories of the recent period, during which Simon was my host on the fifth floor of the WSN-building where the Faculty of Economics is housed. That was from 1986 through 1992. After my retirement from the Faculty of Law, Simon invited me to move into a room I Translated by Els Wester and Richard Gigengack. vi Preface: Personal Recollections by Jan Pen on the same floor as he. It was a room with a nice view, surrounded with nice people. I could sit there at times that suited me, mostly in the morning. There I read, wrote, looked out of the window and held conversations with who ever felt the desire to walk in. For me, after having spent years with jurists, a new fertile period set in. I was impressed by the skill of the new generation and spoke more with Simon than ever before. He reported about these meetings himself - I can restrict myself to my side ofthe story. My account starts in the 1960s. Simon was not one of my students, but attended classes in public finance every now and then. That was not unusual - Duisenberg, who graduated in 1961, also dropped in sometimes. The fact is that there was a rumour about me telling another story about macroeconomics than the man who was paid for that, viz. Frits de Jong. That rumour was correct. Of course it was all about Keynes. De Jong's lectures were strongly oriented towards monetary phenomena. He was interested in the creation and contraction of money, in hoarding and dishoarding and in the velocity of money. Moreover, he interpreted the difference between S and J as a matter of time, in the spirit of the Swedish school. In fact it was a variant of Dennis Robertson's ideas, whose elegant book Money I had read for my Master's exam in 1946. If you believed this story there was nothing new in Keynes. In my lectures Keynes was pictured as the man of autonomous investment that influences national income through its impact. Money follows expenditures, banks accommodate. The two approaches can be concisely summarised as MV versus C+J (the title of an article that I wrote at that time in the journal of the central bank of Belgium.) Students like that: a dispute between two people they can see and hear. With hindsight there is a case for both points of view and in any case Frits de Jong was right in his contention that formally the two theories can be converted into each other. But at the time I opposed that although Keynesian and monetary models may be formally equivalent, the stories differ. One narrator places different accents than the other; the language differs. Frits de Jong did not embrace the proposition that stories are part of our profession. In that respect Simon Kuipers resembles his master: in his opinion storytelling easily degenerates into journalism. Upon that we disagree - in my opinion economic research, no matter how theoretical or empirical, should be crowned with a story, preferably excitingly told. The listener or reader should think: "And that's the way it is!" I had a rather intensive contact with Simon when he was working on his PhD thesis: The Significance of Demand and Supply Factors in One-Sector Models of Economic Growth (1970). It dealt with growth, more specifically 2 Brakman, S., H. Garretsen and S.K. Kuipers (eds.) (1993), Met Jan Pen in debat, Amsterdam: Amsterdam University Press. vii with disequilibrium growth. Frits de Jong, supervisor, stayed for a year in the United States and I was consulting supervisor, a not very clearly defined role. The drafts that were submitted to me were in a pretty advanced stage. It seemed very original to me but not always easy to understand. I learned a lot about disequilibria, whether or not simultaneously occurring, - excess demand, excess supply, capital shortage, labour abundance etc. etc. - classified in full-page charts. It was pure macroeconomics, a field in which I had occasionally been active myself, but I couldn't always find the relations between the new and the existing literature. The prose, staccato with lots of enumerations, didn't sound like music to me. It was more like a lecture note than a thesis. However, the prevailing impression was: here is a creative expert speaking. Nowadays we would call it pioneering. Several rumours circulate about the conversations between the PhD candidate and me, but for sure Simon never changed anything to please me. Again I learned to appreciate his determination. On a few points I maintained my criticism - I don't believe for instance that a negative marginal product of capital is a real phenomenon; the thesis asserts the contrary. The doctorate was bestowed cum laude, which I totally agreed with. The thesis itself is only as a mimeograph available. It belongs in the category scarce tracts in economics, copies of which are worth much money. The way in which Simon developed as a monetarist, a Keynesian or whatever, in the course of time, can easily be discovered by consulting his publications. That's not a job, however, to tackle at any odd moment. He is extremely diligent and his work continuously evolves. The dissertation alone demands a few days of study. Before 1970 he rewrote, in collaboration with others, the standard textbook of Korteweg and Keesing Het moderne geldwezen. This book originates in the 1930s, but the first edition, delayed by World War II, was published in 1946. Even at that time it wasn't really modem. Various teams set about to modernise it. In the end only the team from Groningen remained. The result was a miraculous multiplication. More and more volumes and parts came along and they became more and more voluminous. I have in my library the 14th edition (1986) of Part III. The subject is monetary theory. It's loaded with models. One of the chapters analyses the influence of money creation on the price level with eighty-eight equations. And that is only one part of the book that consists of 407 pages. Anyone who is aware of the relatively limited mathematical knowledge of the original authors acknowledges the enormous advance in professional and technical skill. On the other hand, it also becomes clear how these models can obscure the mind. After working through Part III you are not only longing for a holiday, but also get the impression that in the world of models everything is possible. Depending on the assumptions the model produces results. The more modem the theory the richer the possibilities. viii Preface: Personal Recollections by Jan Pen One of the great multipliers was the theory of expectations - if those are a rational la Lucas every policy is suppressed. In my opinion it is a foolish story, but you will never hear that qualification from Simon. At least not explicitly and not in writing. In private conversations he has firm opinions but in the scientific business he is tolerant. Anyone who wants to get an impression of Simon's tolerance in science should compare the pure theoretical dissertations that are completed under his supervision. There is a world of difference between the works. They are predominantly Keynesian, in the sense that they describe disequilibrium situations, but the nature of disequilibrium diverges. Jan Snippe constructed a world described by a quarterly model with one macro-firm in which national income stops now and again. Nothing happens then. The sole firm then gets going again, don't ask how. Halfway through his (funda)mental research the PhD student realised that this wasn't the way things work. His mind also threatened to stop, but Simon appreciated the effort - Snippe obtained his doctorate with everyone's approval and later became a respected banker. Lex Hoogduin was a Keynesian of the fundamental-uncertainty type: the essentials of money were supposed to be located in that uncertainty. I thought this rather strange and I got the impression that Simon also struggled with the idea, but that doesn't matter - it was a solid thesis and the new-born PhD nowadays manages the econometric research department of De Nederlandsche Bank (the Dutch central bank). Hans van Ees en Harry Garretsen recreated Keynes, following the Walrasian idea that there exists a fundamental equilibrium that would emerge were it not that prices show rigidities. I thought that this was too much of a concession to the neoclassicals, but Simon went along with it. Subsequently, Fieke van der Lecq started to explain those nominal rigidities - a splendid thesis, but about a problem that is hardly a problem. Those rigid prices in fact are not rigid at all and if they adjust slowly there are obvious reasons for it. The shopkeeper has to change his price tags and that is an annoying job even with a computer. This thesis was much more theoretical and profound than the others were. The nice thing about Simon is that he gives everyone the opportunity to tell his or her own story. If it is told in a reasoned way, he will always help and support. With such an approach, however, his own story remains hidden. This becomes clear when we examine the best book that emerged from the Groningen School in recent years: Evenwicht, conjunctuur en groei (1994) (Equilibrium, the Trade Cycle and Growth), by S.K. Kuipers, H. van Ees, H. Garretsen, G.H. Kuper, E. Sterken and E. Wester. It is a textbook and the product of many authors. Its is based on lectures given in the 1980s and the beginning of the 1990s. It gives a complete picture of macroeconomics and ix the book is modem in the sense that the latest developments are covered. It is crystal clear and shows that it is possible to have two theories at the same moment that have completely different conclusions. Neoclassical theory, the Keynesian theory for the short run, the Keynesian monetary theory, the New Keynesian theory, Keynesian and neoclassical growth theory, etc. It is a well-stocked shop window and the economist may choose his wares. Such an abundant supply of choices of course has a drawback. If we accept the authors, no theory is better than another. Almost no recommendations are given, not even on empirical grounds. Nor is anything discouraged. Some readers will appreciate this tolerance; others will see it as a drawback. I personally would have been rather more "directive" - that is to say I would have told a story that I found to be more convincing at the time I wrote it. If only in a concluding chapter. Moreover, my favourite story is not found in the book. It is a Post Keynesian story and at its centre lies the vertical demand curve. A few elements: if expenditure is high enough production depends on the production function and the available labour, capital and nature. In that case neoclassical growth theory applies, in which technical progress explains about eighty percent (the labour share) of growth. However if expenditure is deficient, a Keynesian model determines production. We have a different regime then. Prices don't matter (with the interest rate as an exception), because we are talking about the general price level and this doesn't influence aggregate demand. Nor, for that matter, does the nominal wage rate influence the demand for labour (this is Chapter XIX of the General Theory). Aggregate demand is vertical because every price rise of domestic origin also creates income. Not the money supply but last year's price level and inflation determine the price level today. Inflation depends predominantly on the increase of the nominal wage rate minus the increase of the productivity of labour (if desired one can incorporate the influence of government, for instance through taxes). The increase in nominal wages arises from the negotiations between employers and workers. The money supply accommodates, that is what banks are for. The central bank has hardly any control of the money supply. The crucial element in this story is the increase of the nominal wage rate, which should be explained by economists - that part of the theory is missing in Evenwicht, conjunctuur en groei. It's about power, bargaining theory, the "polder model". Neither can one find the vertical demand curve in the book. Unfortunately, I think, because the idea can be the basis of macroeconomic thinking in terms of growth rates. It is not the ultimate truth, but a starting point. My comments above on the development of ideas in Groningen show that I had frequent conversations with Simon, but that I didn't do the best I x Preface: Personal Recollections by Jan Pen could to convince him of the Post Keynesian story. Admittedly it is an apocryphal story. An inelastic aggregate demand curve conflicts with the traditional economic way of thinking. Economists usually attach a decisive role to prices - and they are right, in microeconomics. But the macroeconomic world is constructed differently. There, incomes dominate the picture, prices have only indirect and - in my view - weak effects. The fundamental difference between micro- and macroeconomics is at the root of all economic wisdom. In my days this was standard material for introductory courses, at least for law students. They were warned of the fallacy of composition. These warnings I miss in modem teaching. It may be that, 25 meters above the ground, a work of art portrays the "micro-macro-Ieap" on the front of the WSN-building, but on the lower floors it doesn't show very much. About such things Simon and I used to converse when I walked into his room in Paddepoel, about ten years ago. There is an ongoing trend in our meetings, which started during my lectures at the Boteringestraat in the 1960s and that now ends with the presentation of this volume. The contact which Simon and I had all the time is difficult to characterise. Even in the beginning it was not the standard relationship between a teacher and a student. From the very start I saw him as a person in his own right, a man who could perhaps be convinced, but only with very good arguments. In that it helped that we didn't belong to different schools; we are both eclectic and aimed at a kind of synthesis between neoclassical and Keynesian ideas. It is not very helpful for our communication that we are both rather busy. I prefer writing and Simon nowadays leans more towards managing. Moreover, I am impatient and not inclined to listen very long. Simon is better at that than I am. For me he is the personification of Groningen. He was born in Sauwerd, ten kilometres from the city. He went to university at 44 Boteringestraat, the same building where he now holds office as the highest-level boss of the university. He lives within walking distance of the WSN-building. As ever, he goes to work by bike. During the last half century I met many Groningers and tried to understand the workings of their mind. I came to the well considered conclusion that they all differ. It is therefore convenient that there is one man I know whom I can consider to be symbolic for all of them - something like Marshall's Representative Firm: Simon is the Representative Agent from Groningen. Haren, February 2001 Jan Pen Contributors Bas Bakker, International Monetary Fund, Washington DC Steven Brakman, Department of Economics, University of Groningen Nanne Brunia, Department of Economics, University of Groningen Sijbren Cnossen, Erasmus University Rotterdam and Maastricht University Jouke van Dijk, Department of Spatial Sciences, University of Groningen Ruud Dorenbos, NEI, Rotterdam, Division of Labour and Education, and World Bank Institute, Human Development Division Hans van Ees, Department of Economics, University of Groningen Casper van Ewijk, CPB Netherlands Bureau for Economic Policy Analysis, Tinbergen Institute and University of Amsterdam Martin Fase, Econometric Research and Special Studies Department, De Nederlandsche Bank N.V. and University of Amsterdam Harry Garretsen, Department of Applied Economics, University of Nijmegen Reyer Gerlagh, IVM, Institute for Environmental Studies, Vrije Universiteit, Amsterdam