Evening Must-Read: Paul Krugman: Will University Economics Departments Help Us Understand Business Cycles?

Paul Krugman: Everything New Is Old Again:

There have been two big revolutions in macro…. The Keynesian revolution… tied to the Great Depression; then the new classical counterrevolution… loosely tied to stagflation in the 1970s…. Keynes offered a way to understand what was happening, and a solution…. Stagflation was predicted by Friedman and Phelps, using models that attempted to derive wage and price-setting behavior from rational choice… the effect… was to give a big boost to ‘microfoundations’ as a modeling strategy.

There was a limited Keynesian pushback… Old New Keynesian economics… get as much rationality into the models as possible without reaching the conclusion that demand-side recessions can’t happen…. There was never a compelling empirical case for this approach. Yet it became dominant… [because] it aped the style of the new classical types, creating the illusion of intellectual convergence… [and] was mathematically hard enough to give you the feeling that you were doing real theoretical work, not just writing down something ad hoc[,]… enough to convince referees that it was serious stuff…. New Keynesian-type models did and do under certain circumstances force you to think harder….

So now comes the Lesser Depression — and it turns out that the New Keynesian models have been of hardly any use, while old Keynesian approaches (sometimes with a consistency check using NK modeling) have been tremendously useful. The result has been the rise of what Quiggin, borrowing a phrase from Tyler Cowen, calls New Old Keynesian economics. I liked my term Neo-Paleo-Keynesianism, but whatever….

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…. But there’s also a professional dynamic…. Both the Keynesian revolution and the classical counterrevolution… involved both new ideas and more elaborate math than their predecessors…. 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…. 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.

I hope I’m wrong.