The Thin Basis of the Neoclassical Counterrevolution

John Quiggin’s proposed introduction to his book project Dead Ideas from New Economists is very good. One thing it really brings home is the rather thin motivational bases for the neoclassical counterrevolution in macroeconomics.

I think it’s generally understood that developments in macro are impacted by “real world” events and not just by pristine ivory tower considerations of theory. In particular, the trauma of the Great Depression was seen as discrediting classical economics and giving life to Keynesian ideas. And then the success of Keynes-inspired mixed economies in delivering stability and growth in the 1950s and 1960s was seen as legitimating this settlements. Then came the “stagflation” of the 1970s which helped discredit Keynesianism and gave a major boost to the rise of neoclassical and monetarist ideas.

So far so good. But one thing that’s really striking about this is lack of symmetry between the two events. The US economy in the 1970s was not doing well, but things were much worse during the Depression. And though US economic performance since Ronald Reagan’s election has been better than it was during the troubled Ford/Carter years of the late-1970s it’s been considerably worse than it was in the postwar years. So it’s not immediately clear what about the events in the real world should really be seen as overwhelmingly tipping the scales in a neoclassical direction. What’s more, the scope of the theoretical revision seems unnecessarily large relative to the “real world” puzzle. In retrospect one can fairly easily say something like “monetary policy was too loose in the late-1960s and early 1970s” without chucking tons of additional ideas overboard. But that’s what happened.

And it would be one thing if that switch had been delivering awesome results, but compared to what we had in the postwar years it really hasn’t.