What is Mainstream Economics?
Paul Krugman and Simon Wren-Lewis have been widely criticized (for example here) as defending “mainstream” economics that spectacularly failed during the crisis (and before).
My (very short) take on this: I do believe that Krugman has a point, a very good one, when claiming that standard textbook analysis is (almost) all you need to understand the current crisis, and to implement the correct policy solutions.
The point is what we define as “textbook analysis”. Krugman refers to IS-LM models. But these, that starting in the 1980s virtually disappeared from graduate curricula because supposedly too simplistic, not grounded on optimization, not intertemporal, and so on and so forth.
I personally was exposed to these ideas in my undergraduate studies in Italy, and I still teach them (besides using them to discuss the crisis with my students). But they were nowhere to be found during my graduate studies at Columbia (certainly not a freshwater school). None of the macro I studied in graduate school (Real Business Cycle models, or their fixed-price variant proposed by New Keynesians) as interesting as it was intellectually, could give me insight on the crisis. I simply do not need to use it.
The IS-LM model with minor amendments (most notably properly accounting for expectations to deal among other things with liquidity traps) remains a powerful tool to understand current phenomena. The problem is that it is not mainstream at all. What bothers me in Krugman’s post is the word “standard”, not “textbook analysis”.
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Dear Francesco
I’m interested in why you think the New Keynesian stuff you learned at grad school is so different from IS-LM, particularly after you have added expectations into the latter. Paul Krugman would say that he uses IS-LM, but uses more modern macro as a cross-check. In fact I think he uses New Keynesian analysis more than he admits – see his discussions on the liquidity trap. I don’t think he sees them as very different, and neither do I.
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Dear Simon,
thanks for taking the time to comment. it is maybe my personal bias. I went to grad school in the late 1990s. At the time, IS-LM (even in the amended version) was de facto rejected. My macro training was based on Stokey-Lucas and Sargent. New Keynesian at the time meant RBC with aggregate price rigidities (a number of papers by Jordi Gali, for example). The basic driver of economic fluctuations remained technology and aggregate supply shocks. Woodford’s book had very limited circulation (in a pdf format that I should still have somewhere). The IS-MP model was never discussed in my classes. You are right that what we call New Keynesian theory today is less obsessed with price rigidities and supply side shocks than what we called New Keynesian theory only 15 years ago.
Besides labels, it remains the open question of how much of today’s training in macro is centered on these models, and how much on more neoclassical models with short run fluctuations driven by price rigidities
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“But they were nowhere to be found during my graduate studies at Columbia (certainly not a freshwater school).”
Query, Dr. Saraceno: Do you mean these analyses were not found even at Columbia, and certainly would not have been found at a freshwater school? Or do you mean that Columbia is certainly not a freshwater school?
I only ask because in my (quite limited) experience with Columbia econ Ph.D.’s, their attitudes have seemed quite aligned with others I’d consider more unambiguously freshwater. But it’s only a handful of individuals I know, too small a sample to make a larger point, so your comment piqued my interest.
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Columbia is certainly a diverse intellectual environment, which cannot easily be tagged as belonging to a particular school
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and what do you think of the complexity theory’s criticism of equilibrium seeking models? the divide today is between academics and real market economics, kind of Fama vs Shiller type of divide.
Krugman’s simplistic arrogance is destroying his reputation. Economists die with their ideology, they often try to make a name for themselves historically by constant provocation. A known historical fact for example that Keynes demolished Pigou’s reputation because Pigou denied him a good position post graduation because of a bad grade. Mainstream economics is for me not a set of theories and experimentations, but a way of talking economics krugman style that is as close to real world economics as I am to the planet mars.
Complexity theory is the way forward.
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I’ve reported your answer in our students’ blog.
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Please help what is different between mainstream economy and heteredox
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