Afternoon Must-Read: Paul Krugman: The Fall of Macroeconomics

Paul Krugman: Stagflation and the Fall of Macroeconomics: “Anti-Keynesian views…

…indeed real business cycle theory asserting that inadequate demand can never be a problem, retains a firm grip on much of the profession…. More broadly, the fundamental shift in intellectual criteria that Simon [Wren-Lewis] has written about several times–from ‘does the model fit the facts?’ to ‘does it have rigorous foundations in [intertemporal] maximization?’–remains very much in force. You might have expected both the 2008 crisis and the years of poor performance that followed–years in which new classical types made massively wrong predictions, while people who remembered IS-LM did much better–would have changed this a lot. But remember that new classical macro fundamentally elevated microfoundations above empirical success; so orthodoxy largely brushed aside empirical failure…. In the long run, new classical macro may erode in the face of its uselessness. But in the long run — well, you know…