Old vs. Modern Macroeconomics?

Krugman's Conscience of a Liberal piece on Oct. 9, in which he comments on some of Laurence Meyer's thoughts, was less of a screed against macroeconomic theory than one would have expected. As Krugman acknowledges, "Keynesian" ideas (which he seems to refer to loosely) can be and have been fruitfully incorporated into "new-classical-based" macroeconomic models for the past two decades. And speaking to some of Meyer's apparent views, large-scale "macroeconometric models" are back at policy institutions such as the Board. They have been under construction for at least several years -- i.e., dating to before the events of the past couple of years.

But these newest "macroeconometric models" (which sit side-by-side with the older generations of macroeconometric models) take as a starting point exactly the neoclassical theory that both seem to dismiss. Which seems to be an inevitable point for the profession to have evolved to over the past few decades. Both seem to miss the point that the "old" macroeconometric models failed spectacularly during the last large recessions of the mid- and late-1970's, a time when the academic and policy communities had also seemingly converged on a consensus, "engineering"-based foundation of macro. The events then paved the way for the more "science"-based foundation of macro that has developed since. A "consensus" amongst the academic and policy communities once again emerged --- King and Goodfriend in the mid-1990's dubbed this the "new neoclassical synthesis" --- at least as regards methodology, which is surely neoclassically-based.

Surprise, surprise, these models and ideas also proved to be incomplete and missed many important things.

If the point of commentaries such as these by Krugman and Meyer (and many others) is to point out that "modern macroeconomics" didn't have everything figured out, or even anywhere close to figured out --- sure. Agreed.

But neither did the old Keynesian macroeconometric models, as the events of the 1970's proved. But, clearly, we should go back to those models now?

The Myth of the Rational Market

I'm about two-thirds of the way through Justin Fox's book, The Myth of the Rational Market. I've read it very quickly, since it's an entertaining century-long history of the progression of ideas that underpin modern financial market theory and, related, economic theory. For the layreader, I can see this potentially being a difficult read; not because it's overly technical or dense on theory, but even the snippets of theory (which are well-exposited if you've had some exposure to them) I'd bet, unfortunately, many readers may find a put-off.

But I think many more economists, in particular academic economists --- I'll focus on macroeconomists, since that's the small sphere about which I think I know something --- should be versed in the kind of history of thought that Fox narrates in this book. To provide some perspective on the extremely technical things we usually do in our "scientific" work. The kind of historical and social contextualization of the development of economic and financial theory this book aims for should be part of a good economics education, undergraduate and beyond.