Anyone who found something useful or provoking in my Jacobin piece on the state of economics might also be interested in this 2013 article by me and Arjun Jayadev, “Strange Defeat: How Austerity Economics Lost All the Intellectual Battles and Still WOn the War.” It covers a good deal of the same ground, a bit more systematically but without the effort to find the usable stuff in mainstream macro that I made in the more recent piece. Perhaps there wasn’t so much of it five years ago!
Here are some excerpts; you can read the full piece here.
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The extent of the consensus in mainstream macroeconomic theory is often obscured by the intensity of the disagreements over policy… In fact, however, the contending schools and their often heated debates obscure the more fundamental consensus among mainstream macroeconomists. Despite the label, “New Keynesians” share the core commitment of their New Classical opponents to analyse the economy only in terms of the choices of a representative agent optimising over time. For New Keynesians as much as New Classicals, the only legitimate way to answer the question of why the economy is in the state it is in, is to ask under what circumstances a rational planner, knowing the true probabilities of all possible future events, would have chosen exactly this outcome as the optimal one. Methodologically, Keynes’ vision of psychologically complex agents making irreversible decisions under conditions of fundamental uncertainty has been as completely repudiated by the “New Keynesians” as by their conservative opponents.
For the past 30 years the dominant macroeconomic models that have been in use by central banks and leading macroeconomists have … ranged from what have been termed real business cycle theory approaches on the one end to New Keynesian approaches on the other: perspectives that are considerably closer in flavour and methodological commitments to each other than to the “old Keynesian” approaches embodied in such models as the IS-LM framework of undergraduate economics. In particular, while demand matters in the short run in New Keynesian models, it can have no effect in the long run; no matter what, the economy always eventually returns to its full-employment growth path.
And while conventional economic theory saw the economy as self-equilibrating, economic policy discussion was dominated by faith in the stabilising powers of central banks and in the wisdom of “sound finance”. … Some of the same economists, who today are leading the charge against austerity, were arguing just as forcefully a few years ago that the most important macroeconomic challenge was reducing the size of public debt…. New Keynesians follow Keynes in name only; they have certainly given better policy advice than the austerians in recent years, but such advice does not always flow naturally from their models.
The industrialised world has gone through a prolonged period of stagnation and misery and may have worse ahead of it. Probably no policy can completely tame the booms and busts that capitalist economies are subject to. And even those steps that can be taken will not be taken without the pressure of strong popular movements challenging governments from the outside. The ability of economists to shape the world, for good or for ill is strictly circumscribed. Still, it is undeniable that the case for austerity – so weak on purely intellectual grounds – would never have conquered the commanding heights of policy so easily if the way had not been prepared for it by the past 30 years of consensus macroeconomics. Where the possibility and political will for stimulus did exist, modern economics – the stuff of current scholarship and graduate education – tended to hinder rather than help. While when the turn to austerity came, even shoddy work could have an outsize impact, because it had the whole weight of conventional opinion behind it. For this the mainstream of the economics profession – the liberals as much as the conservatives – must take some share of the blame.