Overlapping Generations: Methods, Models and Morphology

The 800-pound gorilla in macroeconomics is the question of why the overlapping generations model didn't become the central workhorse model, despite its greater realism and implausibility of the assumptions underlying the neoclassical growth model. This paper explores the co-evolution of the two models to shed light on why the growth model became dominant.

Format: Hardback
Length: 332 pages
Publication date: 22 August 2023
Publisher: Emerald Publishing Limited

The 800-pound gorilla in the room of macroeconomics is the intriguing question of why the overlapping generations model, introduced by Paul Samuelson in 1958, did not become the dominant workhorse model for macroeconomics. This model presents a unique perspective by positing an infinite number of finite-lived families, in stark contrast to the more prevalent neoclassical growth model, which assumes the existence of a finite number of dynastic families within real economies. Despite the greater realism offered by the overlapping generations model and the inherent implausibility of the assumptions underlying the growth model, the latter has emerged as the dominant paradigm in macroeconomic analysis. In this essay, the authors delve into the intricate co-evolution of these two models, spanning the entire post-World War II era, in an effort to unravel the reasons behind this shift.

The overlapping generations model, introduced by Paul Samuelson in 1958, offered a more realistic portrayal of the economic dynamics of a society by considering the intergenerational relationships and transfers of wealth. It recognized that individuals are not isolated entities but rather part of a larger family network that extends across multiple generations. This model accounted for factors such as retirement, savings, and inheritance, which are crucial in understanding the long-term economic behavior of individuals and societies.

On the other hand, the neoclassical growth model, which gained prominence in the 1960s and 70s, posited that economic growth is primarily driven by technological advancements and the accumulation of capital. It assumed that the population is relatively static and that the rate of economic growth is determined by the availability of human capital and the efficiency of capital utilization. This model disregarded the role of family dynamics and intergenerational transfers in shaping economic outcomes.

Despite the advantages of the overlapping generations model, it faced several challenges that hindered its widespread adoption. One of the main criticisms was its complexity, which made it difficult for students and researchers to understand and apply. Additionally, the model's assumptions about the behavior of individuals and families were often criticized as being unrealistic and inconsistent with empirical evidence.

In response to these criticisms, the neoclassical growth model underwent several modifications and adaptations to address its shortcomings. One of the most significant changes was the introduction of human capital theory, which recognized the importance of education and training in driving economic growth. The model also incorporated the concept of technological progress, which allowed for a more nuanced understanding of the factors that contribute to economic growth.

Over time, the neoclassical growth model became more empirically grounded and widely accepted as the dominant paradigm in macroeconomic analysis. This was largely due to its ability to generate testable predictions and its compatibility with mathematical modeling techniques. The model's assumptions about the importance of capital accumulation and technological progress were widely accepted by economists and policymakers, leading to the development of policies aimed at promoting economic growth and stability.

However, the dominance of the neoclassical growth model has also been criticized for its narrow focus on economic growth and its disregard for other important aspects of economic life. Some critics argue that the model fails to account for environmental sustainability, social inequality, and other social and economic challenges that are increasingly important in today's world.

In conclusion, the co-evolution of the overlapping generations model and the neoclassical growth model has played a significant role in shaping macroeconomic analysis over the past several decades. While the neoclassical growth model has become dominant due to its ability to generate testable predictions and its compatibility with mathematical modeling techniques, the overlapping generations model offers a more realistic portrayal of the economic dynamics of a society and provides insights into factors such as retirement, savings, and inheritance. As economic conditions and societal needs continue to evolve, it will be important for economists and policymakers to consider the strengths and weaknesses of both models and to develop policies that promote economic growth, social well-being, and environmental sustainability.

Dimension: 229 x 152 (mm)
ISBN-13: 9781837530533