on using

Incorrect microfoundations are worse than no microfoundations at all because they make you disregard the macro-evidence that your microfoundations tell you is impossible. Therefore, since micro is not yet sufficiently well understood, micro and macro should be studied separately for the time being, and any inconsistencies that arise between them reconciled down the road.

Solow refers to it as “Hahn and Solow’s universally unread Critical Essay“, so I think we can assume it hasn’t had much impact. Me, I read the prose; as for the algebra, I took their word for it. But it’s good to have my low opinion of the state of macro confirmed by two such distiguished theorists.

yes they are! the idea that the financial accelerator literature gives us new possibilities that weren’t ever considered in Keynes (or for that matter, Irving Fisher because the “financial accelerator” is basically the same thing as “debt deflation” in a recessionary context) is really quite odd.

Representative consumers and the like are not micro-based. They are just the tools to provide a simple, elegant and absolutely irrelevant representation of macro problems

I think the issue here is not some much that Lucas and the Chicago School’s macro models aren’t micro-based, but that microeconomics isn’t, not really.

I will say now, that the work of the last 25 years has not proved to be of great value either in warning of the current crisis or in formulating policy responses. Those who saw a crisis coming mostly focused on old-style concerns about aggregate imbalances and financial hypertrophy. And the policy debate has turned, much more, on the validity or otherwise of standard Keynesian arguments and policy proposals than on issues illuminated by DGSE models.

Allow me to paraphrase a claim which I have heard again and again recently: ‘everything done in macroeconomics in the past 25 years (or since the early 1970’s) is irrelevant.’ This claim is typically accompanied by suggestions that all the answers to the current crisis are in Keynes’ General Theory or in some other dusty text. Often, commentators go on to casually toss whole collections of macroeconomics into the dustbin without really thinking about their rationale for doing so. For instance, in the post above, John Quiggin asserts that the “appealing idea that macroeconomics should develop naturally from standard microeconomic foundations must be recognised as a distraction.” Professor Quiggin provides essentially no argument as to why he believe it to be a distraction, he just thinks it has to go. His assessment might come from the observation that the push towards “micro-foundations” came during the late 70’s and is thus in the irrelevant period.

Despite the fact that these claims and others like them are repeated and embellished again and again, these suggestions are wildly off target. For instance, throughout the 90’s a substantial area of macroeconomics was developed focused on the idea that financial market frictions and credit market failures could be an important factor in destabilizing the economy. Often these theories were referred to as “financial accelerator” theories. The researchers who developed the financial accelerator were not at the fringes of the field. Rather they include people like Ben Bernanke, Mark Gertler, Greg Mankiw, Joeseph Stiglitz, Nobuhiro Kiyotaki, Anil Kashyap, Narayana Kocherlakota, Thomas Cooley, Jeremey Stein, Frederic Mishkin, John Moore, and so forth. It is worth pointing out that virtually none of the insights from this work is contained in the General Theory or in any other early text. It is also worth pointing out that the models they developed were entirely micro based and explicitly dynamic. (At the end of Paul Krugman’s article “How Did Economists Get It So Wrong?” it seems he realizes that he might have been a bit too hasty – reluctantly acknowledging the contributions of Bernanke and Gertler and others as an “exception.”)

The idea that we need to abandon all of the recent work in macroeconomics is desperately misleading. The notion that macroeconomists should turn away from “micro-foundations” is also dubious. My guess is that the best young macroeconomists in the coming years will spend most of their energy doing research on credit market frictions building on the previous work from the 1990’s. This work -Krugman’s “exception” – is likely the future of the field in the near term. I doubt very much if it will bear much resemblance at all to Keynesian economics.

On the absence of hyphens with “co”, I (like Douglas Adams IIRC) find the word “coworkers” particularly hard to take unhyphenated.

Neoclassical micro tends to assume a non-monetary economy, which has meant that money has generally been an afterthought when building DSGE macro models – hence the freshwater school’s blindspot about Say’s law. And it means you can’t tell Krugman’s babysitting co-op story – probably one of the simplest demonstrations of where Say’s law doesn’t hold.

ps – am I the only person outside North America to have originally to thought a “babysitting coop” was something to do with a chicken coop?

FWIW, my general program is Old Keynesianism+Minsky+bounded rationality, but working out how to combine these elements isn’t easy.

Are you going to get into Minsky? IIRC, he was pretty caustic about IS/LM and the Hicksian interpretation of Keynes generally.

Just from what I’ve read on CT, you’re stronger on the attack than on the defense. The stuff knocking down EMH/rational expectations/etc is fantastic, but the arguments in favor of (what appears to be) orthodox Keynesianism feel weaker.