Monday, January 20, 2014

Will The Financial Crisis Lead To Another Revolution In Macroeconomics?

Simon Wren-Lewis responds to a lecture by Martin Wolf that raised this question.  Wolf argued that the Great Depression led to the Keynesian revolution that created macroeconomics.  He also argued that the great inflation of the 1970's led to a second revolution.  He concluded that the financial crisis should lead to a third revolution. 

Lewis agreed that the Great Depression indeed led to a revolution in macro.  He is not sure that the great inflation of the 1970's led a revolution in macroeconomics.  The intellectual arguments in favor of a microfoundation based macro were powerful, but it may have also have been a counter revolution against Keynesian theory, which raised too many questions about classical economics, and which provided for a more powerful role of the state in the management of the economy.

Lewis believes that there will some tinkering around the edges in macroeconomics, and that he lists some of the tinkering that has been happening.  He does believe, however, that the financial crisis was a deadly blow to neoliberal ideology.  We deregulated the market and let the unregulated market run its course.  Eventually, the state was required to rescue the failed market.  There is a strong link, however,  between neoliberal ideology and those in political power.  Lewis has learned through experience that this link cannot be ignored. He doubts that Wolf's revolution in macro will be forthcoming.

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