In an earlier post, I complained about the following:
"I also dislike the fact that while Krugman can be biased and does occassionally say so, the strength of his convictions can drown out opposing points of view in his 'digested views of academic literature' ."
The claim calls for an example and this is one (and perhaps not a good one since I am in agreement with him):
1. Lucas and his disciples agree that the economy looks Keynesian — that is, it surely looks as if monetary and fiscal policy have real effects — but argue that an equilibrium approach with imperfect information can explain why, while rejecting Keynesian policy implications. And they ridicule Keynesian economics.
2. By 1980 — three decades ago! — it is already clear that the Lucas project has failed. Equilibrium models with imperfect information cannot, in fact, explain key facts about business cycles, especially the way recessions persist even though everyone knows that they’re in a recession.
3. Rather than admitting that they went down the wrong track, however, the advocates of freshwater macro double down; they decide to forget about what they used to know about the apparent effects of demand shocks, and explain the business cycle in terms of real shocks.
4. This approach also falls short; in an attempt to rescue the models, ever more epicycles are added, and whatever clarity may once have existed gets lost.
5. Freshwater economists declare that the business cycle is deeply puzzling, and that we need much more research before we can make policy recommendations.
In short, what we’re looking at is learned helplessness. Economists who didn’t go down this path, who didn’t flush everything the profession had learned between 1936 and 1973 down the memory hole, aren’t especially baffled by the situation we’re in now; on the contrary, it looks like an extreme version of a fairly familiar event, and policy recommendations aren’t hard to make.
It’s only if you’re committed to a failed research project — a project that failed a generation ago, but refused to admit it — that you’re baffled.
I would characterize this as a very strong (and negative) summary of the state of "fresh-water economics" and indirectly, of neo-classical economics and DSGE. While not completely inaccurate, the strength of his arguments are in the rhetoric, e.g.
- By 1980 — three decades ago! — it is already clear that the Lucas project has failed.
By using a date of 1980 and emphasizing that economists wasted 30 years he is emphasizing the fact that these economists were beating a dead horse. To me it isn't clear that the "Lucas project" failed by 1980. Reasonable arguments could be used to date this at 1990 or even as late 2000.
- Rather than admitting that they went down the wrong track, however, the advocates of freshwater macro double down...
The use of the phrase "double down" here implies desparation on the part of these economists. Again, I would disagree (mildly I suppose since I think that real shocks aren't very compelling) but one can also argue that these economists essentially contributed to the field by taking real shocks as far as they could go before "turning back" and deciding that "fresher avenues" can be found in price stickiness. Isn't the nature of science (something economics tries to lay unsuccessful claim to) and scientific discovery be to explore all avenues regardless of where they lead?
- Economists who didn’t go down this path, who didn’t flush everything the profession had learned between 1936 and 1973 down the memory hole, aren’t especially baffled by the situation we’re in now; on the contrary, it looks like an extreme version of a fairly familiar event, and policy recommendations aren’t hard to make.
Again, the phrase "flush everything" seems to indicate that these economists stubbornly clung on to the real shocks hypothesis (to the extent that Ed Prescott declared business cycles were explained). True, some might have but it is misleading to claim that the entire fresh-water school rejected price stickiness or fiscal stimulus effects (or whatever we were supposed to have learned between 1936 and 1973).
In some ways, this last fragment is also an example of what I had claimed in the post:
"We are not always arguing from evidence but from the strength of our convictions - or for lack of a better word, our faith." More on this later.