Paul Krugman: Macrofoundations: Noted

Paul Krugman: Macrofoundations:

[Keynsian] macro is the only reason anyone listens to all those microeconomists who think they’re being rigorous.... If you go back to the state of American economics in the 1930s and even into the 1940s, it was not at all the model-oriented, mathematical field it later became. Institutional economics was still a powerful force....So why did model-oriented, math-heavy economics triumph? It wasn’t because general-equilibrium models of perfect competition had overwhelming empirical success.... [It] was Keynesian macroeconomics.... In the 1930s you had a catastrophe.... Institutionalists... [provided] long, elliptical explanations that it all had deep historical roots and clearly there was no quick fix.... Keynesians, who were model-oriented... said “Push this button”.... And the experience of the wartime boom seemed to demonstrate that demand-side expansion did indeed work the way the Keynesians said it did....

The perceived success of macroeconomics did double duty, establishing the bona fides of a model-oriented approach and also suggesting that full employment was not too bad an assumption--given the right monetary and fiscal policies. Oh, and economists who are upset that the public seems to judge the profession by its success at macro diagnosis and prediction are missing the point: it has always been thus, and purists who disdain macro are making mock of the only reason anyone takes them at all seriously. The academic enterprise of economics as we know it, in other words, rests on a macro foundation, and in fact a Keynesian foundation...