The State of Macro Theory

The first half of David Friedman’s post (Ideas: The Living Dead: Thoughts on Macro and Depressions) contains a good explanation of the current state of macro theory, which I agree with.

[Marco] lacks a theoretical structure as solid or as well supported as price theory—popularly but misleadingly called “Micro.” One result is that a course on the subject is a tour of either a cemetery or a construction site.

The cemetery is the orthodox Keynesian account according to which a depression is the result of insufficient demand due to the exhaustion of investment opportunities, monetary policy is useless because the economy is in a liquidity trap, and the proper solution is for the government to run a large deficit, converting the excess savings into government expenditure. That was the accepted wisdom fifty years ago. As best I could judge, as observer not participant, it fell out of favor among academic economists in the ensuing decades, due to both theoretical and empirical problems.

The construction site is the attempt to replace the old orthodoxy. Some of it gets labeled “monetarism,” some “neo-keynesianism,” some other things. None has been sufficiently successful to have achieved the status of a new orthodoxy.

I don’t believe any of these constructions sites will ultimately win out and become the new orthodoxy. I think a knew, not-yet-forumlated, theory needs to arrive. I want to become an Economist to help discover whatever that may be…

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