After the Global Financial Crisis, it became clear that the concessions made by the New Keynesians were ill-advised in both theoretical and political terms. In theoretical terms, the DSGE models developed during the spurious “Great Moderation” were entirely inconsistent with the experience of the New Depression. The problem was not just a failure of prediction: the models simply did not allow for depressions that permanently shift the economy from its previous long term growth path. In political terms, it turned out that the seeming convergence with the New Classical school was an illusion. Faced with the need to respond to the New Depression, most of the New Classical school retreated to pre-Keynesian positions based on versions of Say’s Law (supply creates its own demand) that Say himself would have rejected, and advocated austerity policies in the face of overwhelming evidence that they were not working

New Old

The failure of DSGE macroeconomics in the crisis gave rise to New Old Keynesianism, represented most notably by Paul Krugman, and rather less notably by me. I won’t presume to state Krugman’s position for him, but will give my own.

• In theoretical terms, New Old Keynesianism recognises that the Old Old Keynesians oversold the capacity of aggregate demand management to ‘fine-tune’ the economy, and select from a menu of macroeconomic outcomes represented by the Phillips curve[2], and that the Old New Keynesians provided valuable understanding of the way in which relatively minor deviations from standard microeconomic models could have significant macroeconomic consequences. Nevertheless, in conditions like those of the New Depression it is the ideas and policy prescriptions of Old Keynesianism that are needed. To the extent that microeconomic foundations are needed at all, they are likely to end up being radically different from those of current micro textbooks, incorporating bounded rationality and large-scale co-ordination failures

• In political terms, projects of convergence have been shown to be futile. As on all scientific issues, those on the political right are ideologues whose views are immune to empirical evidence. There is no value in intellectual debate with Classical macroeconomists, any more than with climate denialists (the overlap between the groups being large and growing)

• Relative to DSGE, the key point is that there is no unique long-run equilibrium growth path, determined by technology and preferences, to which the economy is bound to return. In particular, the loss of productive capacity, skills and so on in the current depression is, for all practical purposes, permanent. But if there is no exogenously determined (though maybe still stochastic) growth path for the economy, economic agents (workers and firms) can’t make the kind of long-term plans required of them in standard life-cycle models. They have to rely on heuristics and rules of thumb. (Update in response to comments) This is, in my view, the most important point made by post-Keynesians and ignored by Old Old Keynesians).

New New

The prominence of New Old Keynesians like Krugman in the public debate contrasts with the situation in academic macroeconomics, which has gone on almost unchanged since the crisis (and in a state of massive intellectual retrogression relative to Old Old Keynesianism). It’s still the norm to assume that recessions can at most be transitory, and quite common to see New Classical/Real Business Cycle models that assume full employment at all times. Within this framework, the New Keynesian program (at least as I see it), is to incorporate a volatile financial sector into DSGE-style models, and aim to reproduce the observed outcome that financial crises are commonly followed by long and deep recessions. From the outside, I don’t see much progress being made here. But the sense of crisis that briefly gripped the profession in 2008 and 2009 is long gone.

There hasn’t been much overt conflict between New New and New Old Keynesians. That’s because nearly all Keynesians are in agreement on the need for more fiscal stimulus in the major economies, and because New Old Keynesians have, in general, confined themselves to policy debate while New New Keynesians have mostly steered clear of those debates. But the need to refound Keynesian macroeconomics on firmer foundations is every bit as clear as in the 1970s.

I haven’t said much about the other side of the debate: the New Classical/Chicago/austerity camp. That’s because, on this as on most issues (climate science, energy, environmental hazards etc), the political right has immunised itself against evidence that conflicts with its desired views. The difference between economics and the natural sciences is that natural scientists have almost uniformly rejected the Republican/right position (around 6 per cent of scientists identify as Republicans). By contrast, in economics, there are plenty of Nobel prizewinners (yes, yes I know) on both sides.

In še nekoliko deprimiran sklep Paula Krugmana o tem, zakaj do nove revolucije v uradni makroekonomiji še ne bo prišlo tako kmalu. Delno zaradi inercije (preden se zamenjajo uredniki najboljših akademskih revij, preden univerze zamenjajo kurikulume) in delno zaradi ideologije (večina neoklasikov simpatizira s konzervativnimi strankami):

But will this sweep the academic world? No. Partly because of politics: as Quiggin says, new classical economics is effectively part of the broader right-wing apparatus of denial, into which awkward facts rarely penetrate.But there’s also a professional dynamic going on.

You see, both the Keynesian revolution and the classical counterrevolution had one great virtue for ambitious academics: they involved both new ideas and more elaborate math than their predecessors. (It’s often forgotten, but Keynesian economics and the Samuelsonian modeling revolution went hand in hand.) New Old Keynesian economics, on the other hand, involves turning away from hard math back toward rough-and-ready assumptions based on empirical observation. Aspiring up-and-coming economists may be able to publish empirical papers in this vein, but theoretical analyses are likely to be met with giggles and whispers. Just because the stuff works doesn’t mean that it will be publishable.

So I think we’re in for a long siege in which the economics that works remains virtually absent from economic journals (except policy journals like Brookings Papers) and largely untaught in graduate programs.