Monday, September 21, 2009

Mankiw on Keynes

Every time I hear someone saying that the latest economic crisis has forced us to go back to the economic theories of forty or even eighty years ago, I shake my head in disbelief. The statement is as crazy as to say that the fall of the I-35 bridge in Minneapolis has forced us to go back to the physics theories of ninety years ago.

There's no question that only a madman would believe that Albert Einstein is responsible for every engineering project that went wrong since the development of the relativity theory. Yet, that's exactly what many have been suggesting when it comes to some of the most important developments in macroeconomic theory that took place during the last forty years. Physicists, consider yourselves lucky for not having to deal with the political craziness that we economists are subjected to on a daily basis.

To make matters even worse, many among the "crazies" are economists, or at least have economic degrees (most are too deeply involved into politics to be called scientists).

A good example of my point is given by Mankiw on his WSJ review of a new book on Keynes written by historian Skidelsky. As Mankiw explains:

Most macroeconomists—that is, those who study the ups and downs of the overall economy—fall into one of two broad camps: Keynes admirers or Keynes detractors. When these groups cross paths, the result is the ivory-tower equivalent of a spitball fight. ...

As an ardent fan, Mr. Skidelsky fails to give Keynes's intellectual opponents their due. In academic circles, the most influential macroeconomist of the last quarter of the 20th century was Robert Lucas, of the University of Chicago, who won the Nobel Prize in 1995. His great contribution to the discipline was to analyze how government policies influence the economy in part through their effect on people's expectations—a lesson that Keynes would likely have appreciated but that early followers of Keynes often ignored. ...

Mr. Skidelsky chooses to make Mr. Lucas sound like some kind of idiot savant, more interested in playing with mathematical models than in trying to understand how the world actually works. ...

Which brings us to a third group of macroeconomists: those who fall into neither the pro- nor the anti-Keynes camp. I count myself among the ambivalent. We credit both sides with making legitimate points, yet we watch with incredulity as the combatants take their enthusiasm or detestation too far. Keynes was a creative thinker and keen observer of economic events, but he left us with more hard questions than compelling answers.

1 comment:

ENNYMAN said...

Powerfully good thinking.