How macro theories become influential

In reply to Scott Sumner’s question

How was it that just a few years later it was almost impossible to get anything published without assuming rational expectations, efficient markets, etc.

Arnold Kling complains that a handful of influential economists fell in love with the mathematical techniques involved, and refused to hire young economists who didn’t jump on the bandwagon.

But Kling doesn’t really say just why it was that these influential guys liked Rational Expectations (Ratex) so much. I was a few years behind Kling in grad school, starting in 1984, and the new way of doing macro (or not doing it, as Kling might argue) was well-established by then. But we did cover some of the older stuff in our classes, and I later read quite a lot of it.

What Kling forgets is the terrible mess macroeconomics was in before Ratex. It featured interminable arguments between Keynesians and Monetarists, with Keynesians holding the academy while recent history favored the Monetarists. There were a few people like Clower and Leijonhufvud looking for ways to come up with reasonable assumptions that would explain patterns seen in real-world data, but their models had an adhoc feel to them.

Ratex was a clean and rigorous approach that bypassed the stale arguments, at least at first. You can argue that the simplifying assumptions needed to make the models tractable are wrong, or that they’re leaving important stuff out, but as Tom Sargent often says, “It takes a model to beat a model” and Ratex is the only game in town.

After all the effort that’s been put into it, however, none of the macroeconomic theories have really convinced most people that they’re right enough to serve as a reliable guide to policy. What policymakers mostly believe in is experience. Friedman and Schwartz’s Monetary History had a huge impact because it presented a lot of empirical evidence, not theory. Keynesian economics purported to explain the Depression, and was later discredited by it’s failure to explain the 1970’s. Especially when it comes to arguments aimed at the general public, theoretical considerations don’t seem to persuade anyone of anything.

Milton Friedman used to say that the job of the theorist is to have a new theory ready to go when the current one fails. By that standard, it seems the quasi-monetarists have earned a shot at the big leagues.


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