Much of the recent discussion in the “state of macroeconomics” has concerned the question
* Is macroeconomics making progress?
* If not, when did it stop?
I’m not going to survey the whole debate, but I will point to a good contribution from Robert Gordon (linked by JW Mason in comments to a previous post). Gordon argues that 1978-era New Keynesian macro is better than the DSGE approach dominant today. That implies 30 years of retrogression.
My own view is even more pessimistic. On balance, I think macroeconomics has gone backwards since the discovery of the Phillips curve in 1958 [1][2]. The subsequent 50+ years has been a history of mistakes, overcorrection and partial countercorrections. To be sure, quite a lot has been learned, but as far as policy is concerned, even more has been forgotten. The result is that lots of economists are now making claims that would have been considered absurd, even by pre-Keynesian economists like Irving Fisher.
Phillips showed that there was a negative correlation between unemployment and inflation, a finding replicated for the US by Samuelson and Solow. The result was consistent with the then-dominant (Old) Keynesian models which taught that inflation (or deflation) arose in situations of excess (inadequate) aggregate demand and therefore low (or high) unemployment.
The first mistakes in interpreting the result were made by Keynesians, notably including Samuelson and Solow. Although their journal articles included lots of qualifications about expectations effects, these qualifications were downplayed in policy discussions, leading to the idea that policymakers had a menu of choices. In particular, appropriate use of fiscal and monetary policy could permanently reduce unemployment at the cost of somewhat higher inflation. This claim went along with the widespread belief that macroeconomics was now, for policy purposes, an exact science, which would allow “fine tuning” of the economy, in the unfortunate phrasing of Walter Heller, Kennedy’s head of the Council of Economic Advisers.
Taken together, the “menu” interpretation of the Phillips curve and the belief in fine tuning imparted an inflationary basis to policy, which was already evident by the time Milton Friedman gave his 1968 Presidential Address to the American Economic Association. Friedman argued that the trade-off in the Phillips curve was only temporary. Once firms and workers got used to higher inflation, they would build it into their expectations, and the initial reductions in unemployment would be lost. Friedman also argued against fine-tuning, pointing out the “long and variable lags” that made short-term fine-tuning impossible.
Friedman’s criticisms were broadly correct, and were validated by the inflationary explosion that began around the time of his address, but he pushed the point too far in several respects. First, at inflation rates near zero, there really is a trade-off, arising from the fact that interest rates can’t be negative. This point was implicit in Keynes’ discussion of the liquidity trap, but was reinforced by Krugman’s analysis of the Japanese experience in the 1990s, and is highly relevant today. Second, he took his critique of the Phillips curve to mean that there was a “natural rate” of unemployment, determined by labour market conditions (this is now usually called the NAIRU or non-accelerating inflation rate of unemployment). It’s turned out that long-periods of high unemployment have their own self-sustaining effects – Olivier Blanchard and Larry Summers christened this “hysteresis”. So, estimates of the natural rate tend to rise when unemployment is high, making the concept virtually useless as a guide to policy.
Third, Friedman used his critique of fine-tuning that macro policy should be confined to a rules-based monetary policy, with no role for fiscal policy. Although Friedman’s own prescription (a rule controlling the rate of growth of the money supply) was unsuccessful and quickly abandoned, these ideas were the basis of the policy regime, based on the use of interest rates as an instrument to meet inflation targets, that prevailed from the 1980s to the financial crisis, and to which central banks plan to return as soon as the crisis is over.
The real decline was in the 1970s and 1980s, as Friedman’s already overstated critique of Keynesianism was pushed to the limits of credibility and beyond. The big ideas of the period: Ricardian equivalence, Rational Expectations, Policy Ineffectiveness, Microfoundations, Real Business Cycle theory and the (strong-form) Efficient Markets Hypothesis were based on plausible (to economists, anyway) arguments. They didn’t have much empirical support but, given that Keynesian models weren’t working well either, this wasn’t enough to stop them taking over the debate.
The main response was New Keynesianism which showed that with plausible tweaks to the standard micro assumptions, some Keynesian results were still valid, at least in the short run. New Keynesianism gave a rationale for the countercyclical monetary policies pursued by central banks in the inflation targeting era, whereas the classical view implied that a purely passive policy, such as Friedman’s money supply growth rule, was superior. Broadly speaking the pre-crisis consensus consisted of New Keynesians accepting the classical position in the long run, and most of Friedman’s views on short-term macro issues, and abandoning advocacy of fiscal policy, while the New Classicals acquiesced in moderately active short-term monetary policy
How you evaluate this consensus depends on your view of the period from 1990 to the crisis. Noah Smith, quoting Simon Wren-Lewis says
macro did produce a policy consensus (basically interest rate targeting by the Fed, with a Taylor Rule type objective function balancing growth stability and price stability), and yes, that policy consensus did help the world, by giving us the Great Moderation, which wasn’t perfect but was better than what came before
Implicit in this view is the idea that the Great Moderation was a policy success and that the subsequent Great Recession was the result of unrelated failures in financial market regulation. My view is that the two can’t be separated. In the absence of tight financial repression, asset price bubbles are regularly and predictably[3] associated with low and stable inflation. Central banks considered and rejected the idea of using interest-rate policies to burst bubbles, and the policy framework of the Great Moderation was inconsistent with financial repression, so the same policies that gave us the moderation caused the recession.
To sum up, work done in macroeconomics since the discovery of the Phillips curve has offered an improved understanding of a wide range of issues. On the other hand, it has produced and sustained the dominance, in central banks and in much of the economics profession, of an empirically unsupportable position that is resolutely opposed to fiscal stimulus, or to any large-scale countercyclical policy. It has also diverted most of the intellectual energy of academic macroeconomists into a largely fruitless search for microfoundations, at the expense of an improved understanding of the various co-ordination failures that are at the heart of the macroeconomic problem.
I don’t suggest throwing out everything that’s been done since 1958 and starting all over from there. But, in many ways, that would be a better choice than continuing on the current path.
fn1. Phillips himself might agree. He is supposed to have remarked “If I’d known what they were going with the curve, I never would have drawn it”.
fn2. Macro covers a range of topics. In some other areas often classed as part of macro, such as growth theory and national accounting, progress has continued. And macro in 1958 was focused on the case of fixed exchange rates and limited capital flows. Mundell and Fleming in 1963 did the basic work on open-economy macro with floating rates and free capital movements.
fn3 No one predicted the timing of the crisis, or the details of the meltdown, with any great accuracy. But at least on this point, my 2006 paper with Stephen Bell, Asset price instability and policy responses: The legacy of liberalization got the analysis basically right, I think.
John Quiggin 
Actually I thought Joan Robinson said it all in 1972, after noting the Phillips curve was “late-lamented” went on to conclude …
40 years later it is clear this ‘revolution’ never happened, capitalists (who Keynes abhorred but saw no alternative) captured the various pivots of power, and drove almost the entire global economy to the precipice.
Only slow learners would try to patch things up again. The only solution is an alternative to capitalism.
(This is somewhat OT—feel free to delete. Your series inspired it, and I hope you like it.)
I suspect the long-term outcome is foregone; countries that do not adopt Keynesian policies will be out-competed in world markets.
One could imagine a country clinging to pre-Keynesian policies. It would be subject to boom and bust economics. Poorer than its neighbors, it would have to erect trade barriers to keep out the consumer goods of its healthier neighbors. Now—this reminded me of the Soviet Union. During the period 1950-1980, when Western Keynesianism was at its peak, the Soviet Union did erect trade barriers, and its citizens did envy the West.
Could it be that Keynesian economics won the Cold War? That would be quite a feather to put in our cap, could we claim it!
All of this could well be true, but there’s no satisfaction in it.
The citizens of Greece may well envy those in other countries, but in this case Greece isn’t really choosing not to adopt Keynesian policies. It’s being imposed externally.
Or take the UK, which is doing it voluntarily. The average citizen isn’t choosing the harsh treatment they’re receiving, a bunch of ratbags who are temporarily in charge is doing the choosing.
The people in charge don’t suffer any long term consequences of their decisions.
The global arena, where countries can be outcompeted, does not operate on Keynesian principles.
Keynes specifically said (in effect) that interest rates in one country must not be set in competition to those in other parts of the world.
In other words, unfair trade completely destroys Keynesianism.
The Cold War was determined by deliberate, coordinated, non-Keynesian, economic warfare.
Belief in fine tuning can probably be attributed originally to the theory of economic policy developed by Tinbergen with its distinction between instruments and targets. This made the economy look like an automatic control system, a theme developed later by the Phillips work on the different types of stabilisation policies (proportional, derivative, integral) and ultimately by the control theory fad of the 1970s with beloved Riccarti equations.
@Chris Warren
I think Chris Warren has landed close to a valid and clinching point. I would like Prof. J.Q. to answer it. If we just broaden the focus a little we can point out essentially that;
1. In each nation there is no such thing as economics just political economy.
2. In the world, there is no such thing as global economics only political economy, grand strategy [1] and geostrategy [2].
It’s naive to think that individuals, classes and nations “fight fair” or “fight predictable” and follow the rules (or lack of rules) of a global free market or a global regulated market or any other national or international system. As soon as ideology changes or institutional frameworks change or force is used anywhere from protection rackets to police action to conscription to wars then the economic “equation” is changed. Mathematical economics must be akin to attempting to solve a problem where there are no constants, the value of all known variables is unknown and the total set of variables is unknown. (Sorry almost started channelling Rumsfeld there.)
The pursuit of pure economics or pure macroeconomics is thus doomed to failure. Class, political and geostrategic struggle will keep changing and even subverting the institutional economic structure domestically and internationally sometimes by force (war, revolution, insurrection) and sometimes by stealth, trickery, gaming the system and all sorts of undeclared “wars” from go-slow work behaviour and sabotage by disgruntled workers to things like tarriff wars, subsidy wars, currency wars, cyber attacks, industrial espionage, theft of intellectual property etc. etc. etc.
Given the above, economics should perhaps simply be split into the mundane (practical business economics) and the profound (political economy). I am not sure where pure theoretical mathematical economics would fit, if anywhere. It’s pure research I guess and no more inapplicable and no further from real results than say string theory.
————–
Note 1. According to Military historian B. H. Liddell Hart:
“[T]he role of grand strategy – higher strategy – is to co-ordinate and direct all the resources of a nation, or band of nations, towards the attainment of the political object of the war – the goal defined by fundamental policy.
Grand strategy should both calculate and develop the economic resources and man-power of nations in order to sustain the fighting services. Also the moral resources – for to foster the people’s willing spirit is often as important as to possess the more concrete forms of power. Grand strategy, too, should regulate the distribution of power between the several services, and between the services and industry. Moreover, fighting power is but one of the instruments of grand strategy – which should take account of and apply the power of financial pressure, and, not least of ethical pressure, to weaken the opponent’s will. …
Furthermore, while the horizons of strategy is bounded by the war, grand strategy looks beyond the war to the subsequent peace. It should not only combine the various instruments, but so regulate their use as to avoid damage to the future state of peace – for its security and prosperity.”
Note 2. I would use a broad definition of geostrategy which includes geopolitics, geographic factors, global territory and resource politics and all forms of economics, diplomacy and war to attain goals of nations and coalitions of nations.
To sum up the other side of my argument I would simply say this.
1. Forget economics. If something needs doing in the nation, then do it by direct government action.
If a government (in a well ordered and functional nation) wants something done it mandates it and makes the fiat currency available to purchase all necessary labour, materials and contractors. In extremis (say the existential crisis of war) it even conscripts, requisitions, rations and commands. Liberal democracies do this as much as do command economies when pushed to it by an existential crisis. This proves that in practice state command trumps economics and for achieving desperately needed outcomes it is a better resort than f**ting around with a lot of indirect economic levers.
Use state command (dirigisme) and the big direct lever of public spending. It really is that simple. Macroeconomics can be reduced to one sentence.
Yet the economies of the most dirigiste western economies suffered the most during the 1970s and 1980s from stagflation and capital flight.
Does this propensity inhere in dirigisme or was it a consequence of incompetent dirigiste policies?
The danger of the leviathan state in pursuit of autarchy is the opposite danger to liberal globalism.
@Katz
“Yet the economies of the most dirigiste western economies suffered the most during the 1970s and 1980s from stagflation and capital flight.”
Evidence please. Don’t confuse dirigiste with having a pegged exchange rate under the old system.
Also, there is a strong argument IMO that capital flight is meaningless. If it is domestic private capital then the government can invoke capital controls if needed. If it is foreign owned capital the situation may be more compicated but ultimately the flight of foreign capital need not depress the domestic economy in any way. The government can issue adequate capital (fiat money) to keep domestic activity and domestic investment rolling. It has to watch out for excessive inflation and/or an excessive drop in the exchange rate that is all.
There is nothing wrong with a degree of autarky if it keeps you self-sufficient in foods and essential manufactures. Any world crisis of trade, shortages or wars could throw a nation back on its own resources.
Here is an interesting analysis of the “misery index”, which is a reasonable proxy for stagflation. Note that this analysis encompasses the period after the collapse of the Bretton Woods system.
Click to access An_international_analysis_of_the_misery_index%5B1%5D.pdf
The paper concludes that historically leftist policies are correlated with stagflation. Note that this is not a statement of causation, but rather may be associated with capital strike and capital flight.
The issue of price controls is interesting in this context (macroeconomics). The price of labour is heavily controlled in Australia. It has a floor which is reasonable and indeed necessary. A wage must be a “living wage” or the workers’ position and society’s position is totally untenable. Labour has a reproductive cost. Workers must be able to survive, reproduce and then bring up and educate the next generation of workers.
More important to note is the fact that wages are not allowed to move freely like all other prices on the upside. It is very difficult to impossible now for base grade and middle level workers to get wage “rises” which even match inflation. This is due to institutional arrangements which heavily favour capital, disadvantage organised labour and have caused the profit share of the economy to rise markedly and the wage share fall. Yet prices (other than the price of labour of course) have very few controls other than (imperfect) competition with private monopolies, duopolies and oligopolies ruling the economy.
It’s typical bourgeois capitalist hypocrisy and exploitation of workers. Most of our problems are caused ultimately by the inequity of the late stage capitalist system. What liveability workers have left is due to social democratic controls, worker solidarity and social wages.
These are the plain facts which bourgeois economics tries to obscure with all manner of lies.
@Katz
It is clear that the capitalist oligarchs (and their suborned government apparatus in Washington and London) manipulate the international system to routinely punish any (relatively small) nation which shows any sign of leftist policies.
Of course, they can’t do it to China. China is the new nascent superpower and its economy has already overtaken that of the US on some measures. China is pragmatic. It will use any system or hybrid system to make things happen for itself economically. It is not hidebound and rusted on to one failed ideology.
@Ikonoclast
That statement confirms my original comment:
Bill Mitchell’s view of the stagflation era is;
“The problem was … that the coincidence of unemployment and rising inflation in the 1970s was not a problem of excess demand. The fact is that the instability came from the supply side as the OPEC sheiks drove up oil prices.
The policy response to cut aggregate demand and thus increase unemployment was exactly the wrong response. The Monetarists exploited that policy error and claimed that it demonstrated a categorical failure of the Keynesian approach.”
But as the source I cited shows, during the 1979s and 1980s western polities that adopted monetarist policies in the face of stagflation scored lower on the Misery Index.
If Bill Mitchell were correct, adopting monetarist policies at that time should have has no effect in lowering the Misery Index.
The fact that monetarist policies did lower the Misery Index contradicts Mitchell’s assertion.
Australian Misery index
http://asxiq.com/blog/australia-misery-index/
@Chris Warren
I don’t think I agree, and I offer this hand-waving argument in defense of my hypothesis. If the Western Bloc and Eastern Bloc nations used similar economic policies, they would have, economically, been much more similar than different. The West would not have outstripped the East. Instead, we had the Eastern Bloc pursuing a command economy managed with neo-liberal models, while the West pursued a mixed economy managed with Keynesian models. Equitable treatment of labor was far better achieved by the Keynesian model. From this flowed Western consumerism, and by 1960, even, it was clear to most everyone with their eyes open that the Western economies had achieved more for labor than the Eastern offered. This, in turn, discredited the whole state-socialist enterprise. If, with a far less onerous state structure, the mixed economy could achieve such success, then what were all the austerities of the Soviet system for?
I am not sure I believe that story. If it is true, though, there is another irony buried in it: the West won by methods which its own elites did not understand or believe in. With the Cold War over, the West returned to the oppression of pre-Keynesian capitalist economics and is now experiencing a crisis similar to that of the Soviet Union: the failures of the system of unregulated capital stand in contrast to the successes of our own system of a generation past.
And all the while the CO2 rises.
What, I wonder, does an ecologically sustainable economic system look like?
@Ikonoclast
The first bout of stagflation happened in the Bretton Woods countries in 1970, three years before the OPEC oil shock.
@Katz
Ok, I am going to read the paper properly now. My “spidey” senses are tingling and warning me that I about to read a piece of right wing propaganda. My spidey senses are not perfect so I will attempt to read it with an open mind.
Side Note 1: I would like Prof. J.Q. , Ernestine and any other accredited economists who write on this site to come on into this Stagflation debate. I’m not calling for the cavalary as such because I suspect Prof. J.Q. for one might argue that the stagflation phenomenon does present a problem for standard Keynesianism.
Side Note 2: Don’t you hate it when paper writers use the word “methodology” when they mean the word “method”. “Method” is how you do something. “Methodology” is the critical and comparative study of methods in any field.
There is an alternative pair of definitions I found with which I am not in complete agreement.
“… methods are the techniques or processes we use to conduct our research. The methodology is the discipline, or body of knowledge, that utilizes these methods.” – “Paradigms, Methodology & Methods” Dr. Shelley Kinash, Bond University.
In the above example, I would stick with the word “discipline” for the meaning Dr. Kinash intends and reserve the word “methodology” for the more precise use I indicated.
Opinions on Note 2 anyone?
@The Raven
I suppose you can argue anything by sprinkling “if”s throughout.
Anyone aware of the state of the Third World workers (based on massive exploitation by OECD capitalists) will know that statements as:
are false.
In other words you cannot look at capitalism by looking at the so-called “West”. Your so-called open eyes are blinded by the glittering wealth at one pole of global capitalism.
In addition to the main post, with regards to the financial collapse. Joseph Stiglitz’s “Freefall: America, Free Markets, and the Sinking of the World Economy” have written a very good documentation of what was going on in the financial market and the policy failures of the aftermath of the GFC for anyone who is interested in the GFC.
@Ikonoclast
I think that the effect that the paper is detecting is the influence of monetarist policies on private sector financial decision-makers, specifically the rapidly-growing merchant banking sector.
Governments that offered a congenial investment environment were rewarded. Those that did not were punished. As the paper shows, leftist governments proved to be no less adept at maintaining a lower Misery Index score than rightist governments. The superiority of the rightist governments is to be found in encouraging more rapid recovery. This recovery was the product of investment decisions spurred by congeniality.
Thus, the paper makes no claims about the superiority of one set of policies over the other. It merely measures the effects of different policies on decisions to invest — Keynes’ famous and notoriously erratic “animal spirits”.
@hc the rules versus discretion debate is 250 years old.
Thomas Humphrey in a 250 year long literature survey published the 1998 Richmond Fed Quarterly found that:
• Keynesian ideas about a lack of labour demand and their many antecedents gain currency when unemployment was the main concern.
• Monetarist ideas tended to reign when price stability was the main problem.
The policy debate keeps recycling because
1. people forget the lessons of the past and
2. For better or worse, politicians and the public have tended to believe that central banks, the focus of his studies, have the power to boost output, employment, and growth permanently.
Humphrey showed that stable policy rules are popular in good times to contain inflation; when unemployment was rising, discretionary monetary policies returned to policy vogue.
@Chris Warren
That’s a good objection. On the other hand, Russian had its own version of colonialism. Tsarist Russian and the Russian Empire conquered its eastern and southern territories, which it ruled with an iron hand. These became the brutally-ruled backwaters of the brutally-ruled Soviet Union.
I don’t know how the comparison plays out; it would take a lot more research before I would claim evidence for my hypothesis. I think I have a lot of reading ahead of me. I keep hoping that someone has asked this question before, but so far I have not found their writings.
@The Raven
You just have to choose your own comparisons. Tsarist Russia vs British and American capitalism whipping surplus value out of slaves in the southern states and Caribbean?
Practically every nation on earth has been invaded by Europeans at one time or another and most were brutally-ruled. But then the Japanese were particularly brutal in their time as well.
I would have thought Noam Chomsky covered these issues well enough.
Bill Mitchell’s latest post on his blog starts out like this;
“Two papers have come out in the first week of January that provide further evidential support for the argument that the majority of macroeconomics that is taught in standard university programs is worthless. The first (published January 3, 2013) – Growth Forecast Errors and Fiscal Multipliers – from the IMF attempts to explain why the planned fiscal austerity measures in advanced economies have been more damaging than mainstream economists predicted. It is an excruciating attempt at regaining credibility for the seriously wayward IMF. The problem is that its credibility is so far in deficit that it has a lot of consolidation to do before anyone should believe them again. The second paper (published January 2013) – A Boost in the Paycheck: Survey Evidence on Workers’ Response to the 2011 Payroll Tax Cuts – from researchers at the Federal Reserve Bank of New York “presents new survey evidences on workers’ response to the 2011 payroll tax cuts”. The results of the survey? Much higher estimates of the consumption propensities than were predicated from mainstream economic theory. Implication? The standard theory taught to students is wrong and should be disregarded.”
To which I say,”Hear! Hear! Absolutely correct!”
Mainstream economics (which is now neoclassical neocon) is 100% wrong on all the important points and demonstrably so from mountains of empirical evidence. There are none so blind as those who will not see.
I might add that the whole Bill Mitchell article titled “The culpability lies elsewhere” is well worth reading. It addresses the failure of IMF predictions, the differences between forecasts being wrong for stochastic (chance) reasons and for systematic modelling error reasons, the failure of pro-cyclical austerity prescriptions from the IMF and elsewhere and the fallacy of composition which is central to so many of the mistakes made by neoclassical macroeconomics… and much, much more. So it’s well worth an attentive reading.
@Ikonoclast
Your making a very nice argument for a benevolent dictatorship
@Ikonoclast
Bill Mitchell sometimes exaggerated undergraduate economic studies a bit too far. I do not dispute it is full of neoclassical theories and models, but to my knowledge, universities in NSW at least, still teaches Neoclassical Synthesis models (Neo-Keynesian).
In these courses, although it teaches IS-LM curve which suggests government expenditure “crowd out” investment, some units of the undergraduate courses also teaches New Keynesian IS-MP curve which suggests that fiscal policy does not inevitably lead to an increase in interest rate (thus “crowding out” does not necessarily apply). Most importantly, none of its units suggests that fiscal multiplier is zero (other than units that are related to New Classical side) or implied a figure that is lower than 1. Academic lecturers, usually uses figures estimated by Treasury or other economic related organisation rather than ricardian equivalence.
Even though I personally have my disagreements with undergraduate economics, what they teach in universities (in NSW) is not as extreme in neoclassical as what Bill Mitchell suggests. The IMF? They have no excuses.
This makes no sense – unless you view parliament and the courts as a form of;
“benevolent dictatorship”
@Tom
Perhaps you are right on the academic side. But the baneful and seemingly all-pervasive influence of neoclassical economics (a badly bowdlerized version of academic economics) on public discourse and offical policy can scarcely be denied. The “zombie ideas” that won’t die as Prof. J.Q. terms them are everywhere and cannot be killed off despite being hit with great bludgeons of empirical data and historical experience. This suggest there is an enormous push coming from somewhere to debase economics to the cartoon fallacy of neoclassicism.
This push has definitely debased economics education in Australia. Steve Keen writes of the great undergraduate fight to keep economics from being debased in Sydney in the 1970s / 80s. I walked through the UQ bookshop recently (admittedly a kind of strawpoll of what’s being studied by textbook display count). Vast shelves (and I mean vast relatively speaking) were devoted to Business, Management and Business Economics (whatever in heck that is). Virtually no or very little shelf space I could find was devoted to History (Economic history or otherwise), nor Philosophy, nor (strangely) Medicine nor Political Economy (nary a book by or about Keynes or Marx that I could see). Literature, science and computer science seemed to get a bit of a look-in. Now maybe I missed some sections but it seemed passing strange to me and a sea-change from say 35 to 40 years ago when I was an undergrad.
Something very odd, very deleterious and deeply concerning has happened to the intellectual life of the West in the last 40 years. No wonder we are in such a mess.
@Ikonoclast
In my opinion, the change in the structure of the undergraduate economic course is due largely to the change in the mangement style of universities. I think Bill Mitchell and a fair number of academics also agree on this point.
As much as I dislike the change in university economics, I don’t think non-ideological graduates in the current undergraduate programs will advocate fiscal austerity in EU or the US thinking the fiscal mutiplier is zero or negative from the models they have been taught. To conclude? If the EU even tries to follow the simple undergraduate textbook rather than the New Classical ideology, it won’t be in the mess its in right now.
If the rot started with the discovery of the Phillips curve in 1958, the rot started much earlier. See THE EARLY HISTORY OF THE PHILLIPS CURVE by Thomas M. Humphrey 1985.
Prototypal Phillips curve analysis is in the writings of David Hume (1752), Henry Thornton (1801), and John Stuart Mill
Irving Fisher’s 1926 statistical analysis was republished as I discovered the Phillips curve in 1973. Jan Tinbergen estimated the wage-change version in 1936
Phillips was seen as the discoverer because, Humphrey concluded, because “by providing a ready-made justification for discretionary intervention and activist fine tuning, this interpretation helped make the Phillips curve immensely popular among Keynesian policy advisors.”
The 100-years stable Phillips curve trade-off disappeared for the reasons provided by Lucas. People anticipated the interventions.
JQ, did you see that Krugman acknowledged your 1958 argument at the AEA meetings a few days ago, at a panel on the macroeconomics of recessions? There’s a transcript in DeLong’s blog.
John, maybe Robert Gordon is right about pre-1978 Keynesian macroeconomics being better. Krugman may be well on the money too about pre-1978.
Nelson and Schwartz specially addressed this point in their response to his carping at the time of Milton Friedman’s death.
• Krugman (2007d) said: “The key thing is that good Keynesianism, as embodied even in undergrad textbooks of the time, was perfectly OK: Dornbusch and Fischer, 1978 edition, offered a description of what disinflation would look like that matches the experience of the ’80s reasonably well, and the textbook does not seem all that dated even now.”
• Nelson and Schwartz going on to say that “a major reason why Dornbusch and Fischer (1978) “does not seem all that dated even now” is because it incorporates many monetarist ideas.” Dornbusch and Fisher (1978, p. 520) observe ‘Much of the analysis of this book would, a few years ago, have been considered monetarist.”
See http://www.nber.org/papers/w13546.pdf pp. 18-19.
Tom Sargent also pointed out that Keynesians such as in the renditions of Berkley story of macroeconomics say that the natural rate hypothesis was well accepted in the very early 1970s.