Business Cycles in a Robinson Crusoe Economy
The empirical observation that macro activity was linked to broad, but less so to narrow money, finally prompted NCM to depart from its monetarist tradition. Monetary policy and banking behaviour now were considered as responses to market dynamics, which according to the new view of the Real Business Cycle (RBC) theory is driven by real shocks (Barro 1989).
They emanate mainly from the sphere of technology as productivity shocks, but this approach can be generalised to comprise also shifts of the marginal efficiency of investment resulting from demand shocks (Stadler 1994). Thus, after a long detour in the history of macroeconomic thought, the neoclassicals seemed to have found their way back to Keynes’s world (see cell R/R in Table 1).However, this would be a misleading conclusion. Keynesian economics are criticised for lacking a proper choice-theoretic framework and their assertion of market failures, which may be compared to unexplained and unexploited gains from trade. On the contrary, the core of the RBC approach consists of the optimisation calculus of a representative agent who decides on his path of work, leisure, consumption, saving and investment over time, thus responding to random choices of his opponent player: Mother Nature. These exogenous impulses drive a productivity growth process; shocks and (in the case of specific utility functions) responses may show a pattern of serial correlation so that the stylised image of a macroeconomic cycle can be formally reproduced. It is supposed to be an equilibrium business cycle that does not call for economic policy interventions.
“Microfoundation of macroeconomics”, NCM’s methodological principle, aims to derive the path of all macro variables directly from the optimisation calculus of a single agent. This ideal of collapsing macroeconomics into a series of microeconomic choices comes into its own in the world of Robinson Crusoe.
It is, by definition, a full-employment scenario where coordination failures between saving and investment, liquidity shortages and distributional conflicts have no role to play.Some proponents of RBC frankly admit that “this model is clearly simple and unrealistic” (Plosser 1989: 54). They claim, but do not prove that results from studying Robinson Crusoe economics continue to hold in a competitive setting with many agents and incomplete markets. Nevertheless, Lucas (1987: 67-9) does not hesitate to conclude that all unemployment in the real word must be of the voluntary type, and - if people spend too much time on being unemployed - that welfare can be improved by imposing a tax on this “activity”. The representative agent who dominates the RBC model exhibits conspicuously close ties to a social planner, but is hardly able to aggregate individual preferences of heterogeneous agents in a free market society (Kirman 1992).
On a more technical level, it proved to be difficult to explain slumps and crises by simultaneous negative productivity shocks in most of a country’s industries. Moreover, RBC was not able to account for the power of monetary policy in a world of partly rigid wages and prices. This paved the way for the next step in macro theory: new Keynesian macroeconomics, which however is a misnomer as seen from the development of the history of economic thought (Spahn 2009).