The Keynesian method, complexity, and the training of economists

Abstract

This paper argues that there are serious problems both with the grand synthesis IS/LM macroeconomics and with the modern DSGE macroeconomics. It argues that the reasons for the problems are not with the models per se but with the way the models are used. Specifically, it argues that both approaches have deviated from the Keynesian method, which in the author's mind, should have been the most important legacy of Keynesian economics. The paper provides a brief history and explanation of how the profession evolved from Keynes' writings to the modern DSGE approach. It argues that the problem was that academic incentives drove the profession away from the Keynesian method and instead directing economists to become more concerned about publication than about understanding. The paper concludes by explaining why the loss of the Keynesian method is of concern. Keynes is dead; dynamic programming; Keynes is still dead. That's the way Stanford graduate economics students recently summed up what they had learned in their core graduate macroeconomics course (Colander 2007: 152). Graduate students at other top U.S. programs concurred, and in my recent interviews with them the strong feeling among students was that the core graduate macro course provided them little in the way of macro policy thinking and that the course had nothing to do with Keynes. It was a course in which, by design, students learn dynamic stochastic programming.1 A comment of an M.I.T. student was representative of students' view of what they learned about policy in macro. He stated: Monetary and fiscal policy are not abstract enough to be a question that would be answered in a macro course (Colander 2007: 169). As Robert Solow (2007) points out, the situation is a far cry from the core macroeconomics courses of the grand macro synthesis period of the 1950s-1970s period when students studied Keynesian synthesis models and macro policy in their core courses. In the synthesis period students learned variations of IS/LM models, and how that IS/LM type of reasoning underlay both large econometric macro models and macro policy. Compared to modern DSGE models, the synthesis models were technically simple, and macro graduate student training of the time was not highly technical. It involved a blend of institutional, historical, and policy training. In this grand neoKeynesian/neoclassical synthesis, macro theory, empirical work, and policy were entwined in a superficially connected, but ultimately unsatisfying, set of models that built differences of policy position on slim reeds such as Pigou effects and wage and price rigidity assumptions. The models could be adjusted to explain just about any observation, which meant that, more often than not, researchers' judgments determined the results of the model. By that I mean that it was a synthesis in which one could predict the policy implications of models based on who was doing the modeling. It was hardly a situation that inspired confidence in the usefulness of the models. As should be clear from the above description I am no fan of the grand synthesis macroeconomics. But I am also no fan of modern DSGE macro as a basis for policy analysis. Robert Solow nicely captured my view of current macro theory when he wrote that modern macro is best seen as a rhetorical swindle that the macro community has perpetrated on itself, and its students (Solow 2008: 235). In this paper I (1) explain why I am not a fan of either grand synthesis macro or modern DSGE macro and how both have deviated from the Keynesian method, which I believe should have been the most important legacy of Keynesian economics; (2) provide my explanation of how the profession moved from Keynes' writings to the modern DSGE approach; and (3) explain why I believe the loss of the Keynesian method is of concern. © 2011 Springer-Verlag Berlin Heidelberg.