# King and Plosser - Real Business Cycles — reading pack Page: https://gautsch.org/research/king-and-plosser-real-business-cycles/ ## How to use this pack Help the reader explore this rabbit hole. Start by asking what caught their attention, then discuss one question at a time. Explore the strongest counterargument and what remains uncertain. Distinguish the original speakers' claims, Adam's question, the site's research commentary, and your own interpretation. Do not treat the commentary as a transcript or assume Adam endorses every claim. Preserve corrections and uncertainty; do not invent sources or pretend to have opened links. This pack contains the page's current research text, references and figure text. Related rabbit holes are linked, not included. It is a reading companion, not an independently verified source. ## The short version Adam asked "Who?" and, separately, what Tyler is getting at. **Who:** Robert King and Charles Plosser, two of the founders of real business cycle theory; John Long and Plosser wrote its 1983 founding paper. **What Tyler is getting at:** he is accusing Acemoglu — a left-leaning economist who has spent his career on market failures — of having quietly adopted the macro of the freshwater right. And the accusation lands, which is why the exchange is fun. ## Relevant transcript excerpt Source: https://conversationswithtyler.com/episodes/daron-acemoglu-2/ Annotated transcript: https://gautsch.org/research/#a19 COWEN: Does that mean you’re not really such a Keynesian? Because the fertility crisis, aggregate demand, aggregate supply, they’re shrinking forever. A Keynesian or a supply-sider could get quite worried. Paul Romer, the market size is shrinking, he should get quite worried. In a funny way, you end up at a real business cycle point of view where as long as the induced innovation is positive, the macro will go fine. You’re like Long and Plosser, King and Plosser in your macro. Is that wrong? ## Research commentary **Adam asked:** *"I'd love a little rabbit hole expanding on this paragraph. Explain what Tyler is getting at."* and *"Who?"* --- ## Who they are | Name | Role | |---|---| | **Charles Plosser** | Co-author of the founding RBC paper (Long & Plosser, "Real Business Cycles," *JPE* 1983); later President of the Federal Reserve Bank of Philadelphia | | **Robert King** | Boston University; with Plosser wrote the canonical RBC papers of the mid-1980s, including "Money, Credit and Prices in a Real Business Cycle" (*AER* 1984) | | **John Long** | The other half of Long & Plosser | Cowen says "Long and Plosser, King and Plosser" — he is naming the pair of collaborations, not confusing himself. ## What real business cycle theory claims The provocative core: **recessions are not failures.** They are the efficient response of a well-functioning economy to real shocks — mostly shocks to productivity. - The driver is **technology**, not money or demand. Money is roughly neutral. - Employment falls in a downturn because workers *choose* less work when the real wage is temporarily low (intertemporal substitution of labor). - The outcome is Pareto-efficient. **Stabilization policy has nothing to fix**, and attempts to fix it make things worse. - The residual — the unexplained part of growth, "total factor productivity" — is treated as the fundamental driving force. It was, and is, deeply contested. The standard objection is that it requires believing the Great Depression was a large voluntary vacation. But its *method* won even where its conclusions didn't: RBC established the calibrated microfounded model as the standard tool, which is why every modern DSGE model is a descendant. ## What Cowen is actually saying Follow the logic of his question: > *"Does that mean you're not really such a Keynesian? Because the fertility crisis, aggregate demand, aggregate supply, they're shrinking forever. A Keynesian or a supply-sider could get quite worried. Paul Romer, the market size is shrinking, he should get quite worried. In a funny way, you end up at a real business cycle point of view where as long as the induced innovation is positive, the macro will go fine. You're like Long and Plosser, King and Plosser in your macro."* The argument step by step: 1. Falling birth rates shrink both demand and supply, permanently. 2. **A Keynesian** should fear the demand side — fewer people, less spending, chronic shortfall. 3. **A Romer-style growth theorist** should fear the supply side — ideas depend on the number of people looking for them, and a smaller market means weaker incentives to innovate. (Romer's own model makes population a driver of growth.) 4. Acemoglu fears neither, because his paper says technology responds: scarce labor induces labor-saving innovation, and growth per working-age adult *rises*. 5. **That is an RBC-shaped answer.** The real side — technology, the residual — determines outcomes; demand doesn't matter much; the economy self-corrects through the productivity channel without policy. Cowen's next line makes the target explicit: *"It's about the residual, and if the residual is—"* The residual is TFP, the thing RBC theorists put at the center. So the jab is: **the market-failure economist has ended up at a self-correcting-economy conclusion.** ## Acemoglu's answer Three moves, and they're worth separating: 1. **He doesn't recognize the framing.** *"I never thought of King and Plosser about induced innovation."* Honest — he came to this through the growth-theory literature, not the macro one. 2. **He supplies his own ancestor instead:** *"Habakkuk was the first one who was about this."* See [Induced Innovation and the Habakkuk Thesis](https://gautsch.org/research/induced-innovation-and-the-habakkuk-thesis/). This is him saying: my lineage is 19th-century economic history, not 1980s Minnesota macro. 3. **He half-accepts the charge:** *"I never saw myself as a traditional Keynesian… and I never understood the new Keynesian models very well."* But he keeps a demand channel — *"there are episodes in which aggregate demand shortages create problems"* — and argues the fertility decline is too slow-acting to produce one. **The honest bit:** *"I'm also finding these results surprising. We've checked them so many times, and that's why we've done them so many different ways, but it seems to be there in the data."* He is reporting a result he didn't want. ## Reading - Long & Plosser, "Real Business Cycles," *JPE* 1983 — the founding paper - King & Plosser, "Money, Credit and Prices in a Real Business Cycle," *AER* 1984 - Summers, "Some Skeptical Observations on Real Business Cycle Theory" (1986) — the classic demolition, four pages, entertaining - Romer, "Endogenous Technological Change" (1990) — the position Cowen says should worry --- ## Working notes Cowen's "you're like Long and Plosser" is a compliment and a needle at the same time, which is characteristic. The substantive question underneath — **is induced innovation a self-correcting mechanism strong enough to make demographic decline harmless?** — is genuinely open, and [The Lucas Critique](https://gautsch.org/research/the-lucas-critique/) is the strongest reason to doubt it. **Checked against the book: not there.** No real-business-cycle literature, no Long and Plosser, and no treatment of demographic decline as a growth question. The *Baby Busts* result Cowen presses him on is a working paper, not book material. What the book does supply, in Chapter 6, is the empirical half of the induced-innovation argument underneath this exchange — German firms adopting robots faster than American ones and reallocating rather than shedding workers, which is automation responding to institutions rather than to scarcity. See [Acemoglu and Restrepo - The Task Framework](https://gautsch.org/research/acemoglu-and-restrepo-the-task-framework/). The open question below — whether induced innovation is self-correcting enough to make demographic decline harmless — gets no help from the book either way. Checked against the audiobook edition (Penguin Random House Audio, narrated by John Lee), machine-transcribed; references are by chapter. **Related:** [Induced Innovation and the Habakkuk Thesis](https://gautsch.org/research/induced-innovation-and-the-habakkuk-thesis/) · [The Lucas Critique](https://gautsch.org/research/the-lucas-critique/) · [Acemoglu and Restrepo - The Task Framework](https://gautsch.org/research/acemoglu-and-restrepo-the-task-framework/) --- Research page built in conversation with Claude.