The GEM Project’s weekly blog, measured in issues, is now as old as I am, measured in years. That is my excuse for being a bit reflective. The website’s co-founder as well as other friends, using homilies like vinegar versus honey, have suggested that I chill. Apparently, my criticism of mainstream macro theorists can be intemperate.
I remind those friends that today’s consensus thinking was originally organized around the frequently brutal rejection of the Early Keynesianism that dominated postwar macro analysis for a generation. In the early skirmishes that began the 30-year macro-methodology war, the eventually victorious New Classical/RBC theorists were sufficiently frustrated in their attempt to be heard that many became uncivil in their language and reckless in their claims. And, most interesting to me, their intemperate, take-no-prisoners strategy was successful. Early Keynesianism has been effectively banished from the best graduate schools and cutting-edge debate.
I admit to admiring the memorable abuse crafted by Robert Lucas. In 1980, he famously wrote: “One cannot find good, under-forty economists who identify themselves or their work as Keynesian…. At research seminars, people don’t take Keynesian theorizing seriously anymore; the audience starts to whisper and giggle to one another.” (Cassidy, p.97) I like the image of giggling younger economists a lot. Also indelible is the wildly exaggerated early “wreckage” assessment of Lucas & Sargent (1978): “That the predictions [of Keynesian economics] were wildly incorrect, and that the doctrine on which they were based was fundamentally flawed, are now simple matters of fact, involving no subtleties in economic theory. The task which faces contemporary students of the business cycle is that of sorting through the wreckage, determining what features of that remarkable intellectual event called the Keynesian Revolution can be salvaged and put to good use, and which others must be discarded.”
The strategy of trading off civility for attention has been frequently used by frustrated theorists, dating back at least to the founding of macroeconomics as a separate branch of economic theory. Famously illustrating the visceral urge to impose indignity on the other side of a methodological divide is Keynes’s (1936) unrelenting attack on his classical straw-men, in which he particularly included the estimable Pigou and Robertson.
I am interested in whether the intemperance strategy (absent the exaggerated claims, which are happily not needed in the promulgation of the GEM Project’s powerful generalized-exchange theory) still works. The Great Recession demonstrated, not for the first time, that central predictions of micro-coherent market-centric mainstream macroeconomics are “wildly incorrect”. One of the worst forward-looking assessments, that must have been rooted in a fundamentally poor understanding of extreme instability, came from Lucas (2003, p.1) on the big stage provided by his 2002 AEA Presidential address: “[The] central problem of depression prevention has been solved, for all practical purposes, and has in fact been solved for many decades…. Taking U.S. performance over the past 50 years as a benchmark, the potential for welfare gains from better long-run, supply-side policies exceeds by far the potential from further improvements in short-run demand management.”
I admire Lucas. Who doesn’t? It is however a disservice to the development of stabilization-relevant macro theory, especially the need to steer it away from its now dominating Ptolemaic tendencies, to ignore how spectacularly awful that confident prediction was. It is on-going malpractice never to explicitly investigate what fundamental flaw in modern consensus macro modeling produced it.
All Hat, No Cattle
Next week begins a series of posts that look closely at that flaw. Several specific examples in the recent literature are used to provide some sense of the widespread failure of policy-usefulness in contemporary consensus thinking. The tough message is that mainstream stabilization theorists are all hat, no cattle. Their widespread disregard for crucial, well-known evidence, centrally including the causal link from nominal demand disturbances to involuntary job loss, especially upsets me; it should upset everybody. I reserve the right to forcefully express that unhappiness.
Blog Type: Policy/Topical Saint Joseph, Michigan