The Economist has a feature this week on “the state of economics” in the wake of the crisis. It’s worth a read as an overview of the PR battle between schools of thought within the mainstream.
The likes of Krugman and deLong are undoubtedly in the ascendancy. As I suggested a few months ago, I think we should see this as the victory of a rational technocratic economics over an ideological conservative economics. While these guys are more pleasant and more fun to read than the so-called ‘freshwater’ economists, it is not an especially ‘progressive’ or ‘left’ economics.
The line of both Krugman and William Buiter that the last 30 years of economics have been a dead end dates the wrong turn to the 1970s. Their cut-off point would, I think, come between Friedman and Lucas. The mistake was ‘rational expectations’ and ‘new classical economics’, which basically completely reject Keynes – uncertainty, historical time instead of general equilibrium, and the non-neutrality of money – and return to pre-Keynesian orthodoxy on a more mathematically sophisticated basis.
Friedman’s version of the quantity theory was also a mistake, though that is hardly news. His politics may be gauche. But the Friedman of the ‘natural rate of unemployment’ and the ‘expectations-adjusted Phillips curve’ was not at all a mistake for the technocrats. In fact he represents the apogee of the technocratic neoclassical-Keynesian synthesis rather than a rejection of it. DeLong in particular has been quite explicit about this, arguing that “Friedman completed Keynes” . (For more detail see his “The Triumph of Monetarism?” in the Journal of Economic Perspectives, Winter, 2000.)
The shifting of mainstream economics and policy back towards neoclassical-Keynesianism well predates the crisis. In fact, as I’ve argued before, it never really stopped dominating macropolicy-oriented economics, as opposed to academic economics or microeconomic policy. You can see the basic argument that macroeconomics had it basically right around 1971 or so, for example, in this 1999 paper from the Reserve Bank of Australia:
By the 1990s, however, the intellectual framework for analysing inflation had come full circle. The framework of the 1990s had much in common with the one enunciated in the 1971 ‘Inflation’ paper. The intervening years had led to some refinement of the analysis, but the expectations-augmented Phillips curve had returned and once again was at centre-stage. [p. 40]
What we’re seeing now is an opportunistic reconsolidation of its academic and public reputation against ‘new classical’ holdouts.
The rediscovery of the specifically financial side of Keynes may be genuinely new. That The Economist quotes Paul Davidson and calls Minsky a “neglected prophet”, is an interesting sign. Both are post-Keynesians, well out of the mainstream. Post-Keynesian economics, incidentally, has very little to be embarrassed about by the crisis, since it has analysed finance in a realistic way all along.
(The term ‘post-Keynesian’, confusingly, refers to Keynes purists who set themselves against the ‘bastard Keynesianism’ of the post-war period, also incorporating a great deal of Marxian influence, thanks to Robinson, Kalecki and Sraffa. Davidson’s relatively conservative as these guys go, while Minsky comes out of the Marx-inflected side, and I hear they didn’t get on well after Minsky gave Davidson’s magnum opus a critical review.)