Mainstream Macroeconomics: A 'Keynesian' Revival?

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1. Introduction

He is convinced against his will Is of the same opinion still (Joan Robinson 1977: 125)

The status and relevance of mainstream macroeconomic theory have been subjected to increased scrutiny in the shadow of the 2008-9 'Global Economic Recession' [GER]. There has been renewed criticism from within mainstream economics itself, while the challenges by 'non-mainstream' economists and commentators have gathered some momentum and received increased exposure in the wider public arena. Recent commentary on the status of mainstream macroeconomics by the 2007 Nobel Laureate, Paul Krugman, provides an appropriate setting in which to develop a general discussion of the current situation:

   It's hard to believe now, but not long ago economists were
   congratulating themselves over the success of their field. Those
   successes--or so they believed--were both theoretical and
   practical, leading to a golden era for the profession. On the
   theoretical side, they thought that they had resolved their
   internal disputes. Thus, in a 2008 paper titled 'The State
   of Macro' (that is, macroeconomics, the study of big-picture issues
   like recessions), Olivier Blanchard of M.I.T., now the chief
   economist at the International Monetary Fund, declared that 'the
   state of macro is good'. The battles of yesteryear, he said, were
   over, and there had been a 'broad convergence of vision'. And in
   the real world, economists believed they had things under control:
   the 'central problem of depression-prevention has been solved',
   declared Robert Lucas of the University of Chicago in his 2003
   presidential address to the American Economic Association. In 2004,
   Ben Bernanke, a former Princeton professor who is now the chairman
   of the Federal Reserve Board, celebrated the Great Moderation in
   economic performance over the previous two decades, which he
   attributed in part to improved economic policy making ... Last
   year, everything came apart.

Few economists saw our current crisis coming, but this predictive failure was the least of the field's problems. More important was the profession's blindness to the very possibility of catastrophic failures in a market economy (Krugman 2009: 1). (2)

The 'convergence of vision' description of 'modern macro' is in one respect misleading, as in terms of theory and methodology, mainstream macroeconomics has become somewhat fragmented over recent years. Two distinct approaches can, however, be isolated. Firstly there is the so called 'quantitative dynamic stochastic general equilibrium' [QDSGE] family of models, considered in Section 2 of this paper. As is indicated in the title of Lucas and Sargent's (1978) paper, After Keynesian Macroeconomics, these models are indicative of an approach which is openly antagonistic towards macroeconomics that even vaguely resembles the Keynesian tradition. On the other hand, the 'new neo-classical synthesis' [NNS] approach, discussed in Section 3, attempts to establish a 'consensus' in macroeconomic theory, encompassing both Keynesian and Neo-classical elements. A 'convergence of vision' may be more directly associated with the widespread recommendation of 'policy restraint' prior to the GER, encompassing a range of recommendations that opposed the implementation of discretionary macroeconomic policy and the adoption instead of a rules-based method of policy making. In the case of the general equilibrium models, the 'laissez-faire' principle is better seen as a fundamental premise upon which the theoretical arguments are founded and intended to validate. The NNS approach on the other hand is sufficiently flexible to support diverging views on the role of macroeconomic policy, with the widely espoused 'self restraint' principle for policy makers not necessarily implied by the theoretical content of the model itself. More than anything else, the 'convergence in vision' within mainstream economics reflects a shared ideological perspective more than it does convergence in theory and method. …