The New Neoclassical Synthesis

Simon Wren-Lewis, an economics professor at Oxford University put up an interesting blog post a couple years ago called The Return of Schools of Thought Macro. He recalled when he was studying macroeconomics and it was almost necessary for people to take sides, picking a school of thought to adhere to. Wren-Lewis called this more of a belief system than a science.

Then suddenly macroeconomics become unified in what was called The New Neoclassical Synthesis. The Development of New Keynesian theory and microfoundations created what is today mainstream macroeconomics. Wren-Lewis claimed that during this time he had all his masters students forget about schools of thought and focus on what was mainstream:

“…start with Solow, but quickly replace a fixed savings propensity by an optimising intertemporal consumer to get the basic Ramsey model. Add endogenous labour supply to get RBC. Probably talk a bit about overlapping generations. Hopefully add to what was in Romer by doing some open economy stuff. Then add New Keynesian theory built around sticky prices. If the student went on to work in a central bank, they would probably encounter this framework as a central part of that institution’s forecasting and policy analysis.”

Although the idea of having a unified field in macroeconomics sounds pretty nice, it is easy to see that today the synthesis is gone. Growing suspicion of New Keynesian models after the recession caused students to think that the field of macro is once again a battle of the schools. Wren-Lewis complains that having competing schools of thought is confusing and things would be much better with everyone buying into New Keynesianism. Clearly he thinks macro is broken for reasons different than what we are looking at. His definition of broken is having macroeconomics believe in theory other than what is mainstream.

Of course I do not agree with him. I understand how life would be easier if macro was a unified field like micro but I do not think that the New Keynesian school is the one to stick with. Especially since we know that the economists who did predict the recession were not the mainstream economists. For now I think it is dangerous to play along with what is “mainstream.” We would just end up missing out on more of the big stuff.

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