Cochrane on Economic Orthodoxies

John Cochrane has a good post  saying something I’ve been thinking about for a while. There are two disjoint orthodoxies in economics, one in policy and one in scholarship. Both are secure on their own territory, but they have little connection with each other. This isn’t obvious from the outside since many of the same institutions and even individuals contribute to the reproduction of both orthodoxies, but as intellectual projects they are entirely distinct.


There is … a sharp divide between macroeconomics used in the top levels of policy circles, and that used in academia. 

Static ISLM / ASAD modeling and thinking really did pretty much disappear from academic research economics around 1980. You won’t find it taught in any PhD programs, you won’t find it at any conferences …, you won’t find it in any academic journals…  “New-Keynesian” DSGE (Dynamic Stochastic General Equilibrium) models are much in vogue, but have really nothing to do with static Keynesian ISLM modeling. Many authors would like it to be so, but when you read the equations you will find these are just utterly different models. 

Static ISLM thinking pervades the upper reaches of the policy world. … If you read the analysis guiding policy at the IMF, the Fed, the OECD, the CBO; and the larger policy debate in the pages of the Economist, New York Times, and quite often even the Wall Street Journal, policy analysis is pretty much unchanged from the Keynesian ISLM, ASAD, analysis I learned from Dornbush and Fisher’s textbook, taught in Bob Solow’s undergraduate Macro class at MIT about 1978. 

Note that Cochrane is agnostic about which of these projects is on the wrong track.  This is a habit of mind we should all try to cultivate: The interesting questions are the ones where we can seriously imagine more than one answer.