Dark Ages of Academic Economics - Part 3

When asked if what Buiter says is true, Brad DeLong says:

Yes, it is true. That is all.

Well, actually, that is not all. Buiter is a little bit too mean to us "new Keynesians", who were trying to solve the problem of why it is that markets seem to work very well as social planning, incentivizing, and coordination mechanisms across a range of activities and yet appear to do relatively badly in the things we put under the label of "business cycle."

I, at least, always regarded Shiller, Akerlof, and Stiglitz as being fellow "New Keynesians." As Larry Summers put it to a bunch of us graduate students l around the end of 1983, Milton Friedman's prediction in 1966 that the post-WWII economic policy order would break down in inflation had come true and that that had given the Chicago School an enormous boost,

Preposterous. Friedman predicted an inflation based on monetary stresses. We got an inflation based on oil prices. Somehow this validated the conceptually vapid Monetarist booshwah.

DeLong continues

but that now they had gone too far and were vulnerable, and that our collective intellectual task if we wanted to add to knowledge, do good for the world, and have productive and prominent academic careers was to "math up the General Theory": to take the conclusions reached by John Maynard Keynes in his General Theory of Employment, Interest and Money, and explain how or demonstrate to what degree they survived the genuine insights into expectations formation and asset pricing that the Chicago School had produced.

In fact, Buiter's column I read as a commentary on General Theory chapter 12: "The State of Long-Term Expectation." Collectively, I think we made a compelling intellectual case--but we were completely ignored and dismissed by Chicago.

But, yes, on the big things Buiter is right.

Brad DeLong

return to Thoma quoting an email [from Paul Krugman],

economists who

"have spent their entire careers on equilibrium business cycle theory are now discovering that, in effect, they invested their savings with Bernie Madoff."

I think that's right, and as they come to this realization, we can expect these economists to flail about defending the indefensible, they will be quite vicious at times, and in their panic to defend the work they have spent their lives on, they may not be very careful about the arguments they make. I don't know if the defenders of the classical faith have come to this realization yet, at least beyond the subconscious level, and the profession will most likely move in the same old direction for awhile due to research inertia if nothing else. But I think what has happened will have a much bigger impact on the profession and the models it uses to describe the world than most economists currently realize:

The end of it all is that economics is a pathetic failure in the current situation. The most prominent economists did not predict the current market failure. It has left the market fundamentalists and monetarists with only one defense. "The government did it." These academically prominent but conceptually irrelevant academics did it by ascribing to the market an efficiency and sophistication it simply does not have.

The policy think tanks such as the American Enterprise Institute, the Heritage Foundation and the Cato Institute are left floating in a Bermuda Triangle of their own making. Their compasses and maps are useless, and unfortunately they are still trying to tell the rest of us where to go.

Demand Side