ȁȂȁ Partʺ: EconomicsRobert Clower and Paul Krugman are among the minority of econo-
mists who have spoken out emphatically against the methodology-driven
excesses of the equilibrium-always approach. “[T]he approaches of the
Keynesians, monetarists, and new classical economists to monetary theory
and macroeconomics will get us exactly nowhere,” Clower writes, “because
each is founded, one way or another, on the conventional but empiri-
cally fallacious assumption that the coordination of economic activities
is costless.” While established value theory has indisputable merits, “for
some purposes, such as the fruitful analysis of ongoing processes of mon-
etary exchange, models of a very different kind may be required” (ȀȈȇȃ,
“Afterword,” p.ȁȆȁ).
Ļe “Lucas Project,” as Paul Krugman calls it, tried “to build business-
cycle theory on maximizing microfoundations.... Ļe ramshackle,ad hoc
intellectual structures of theȀȈȄǿs andȀȈȅǿs were ruthlessly cleared away,
making room for the erection of a new structure to be based on secure
microfoundations. Unfortunately, that structure never got built” (Krug-
manȀȈȈȂ, pp.ȀȄ–Ȁȅ). Ļe Lucas Project “destroy[ed] the old regime but
failed to create a workable new macroeconomics.... Ļe true believers in
equilibrium business cycles shifted to real-business-cycle theory” (p.Ȁȅ).
“[R]ational-expectations macroeconomics ... collapsed in the face of its
own internal contradictions,” leaving macroeconomics in “a terrible state”
(p.Ȁȇ).
In Krugman’s view, “the effort to explain away the apparent real effects
of nominal shocks is silly, even if one restricts oneself to domestic evidence.
Once one confronts international evidence, however, it becomes an act of
almost pathological denial” (ȀȈȈȂ, p.ȀȆ). Krugman mentions tight corre-
lation between nominal and real exchange rates (p.Ȁȅ). Finding interna-
tional macroeconomics in a painful dilemma, Krugman alludes to fads
and tacit methodologizing: “to write a macroeconomic model with sticky
prices is professionally dangerous, but to write one without such rigidities
is empirically ridiculous” (p.ȀȆ).Ȅ
Ȅ“It’s easy to be cynical about the motivations of the people who write these papers.
You don’t progress as an economics professor by solving the real problems of the real econ-
omy, at least not in any direct way. Instead, you progress by convincing your colleagues
that you are clever. In an ideal world you would demonstrate your cleverness by devel-
oping blindingly original ideas or producing definitive evidence about how the economy
actually works. But most of us can’t do that, at least not consistently. So professors look
for more surefire approaches. And thus the most popular economic theories among the
professors tend to be those that best allow for ingenious elaboration without fundamental