David Warsh's Take on New Classical Economics, Circa 1985
For many years, David Warsh has been writing about economists in a weekly column that moved in 2002 from the Boston Globe to his own website economicprinciples.com. On February 24, 1985, in the middle of my time in graduate school, he wrote a piece in the Boston Globe pondering the significance of Robert Barro’s intermediate textbook, which had been out for about a year. Given the heavy-duty discussions of economic methodology in the economic blogosphere in recent years, I thought you might be interested in this excerpt to get a sense of how things looked back then. To begin with, let me say that David Warsh gives a book recommendation:
“Barro certainly has a very optimistic way of thinking about how markets work,” says Wellesley College’s Arjo Klamer, whose book, Conversations with Economists, expertly details the scope and history of the controversy between the New Classicals and everybody else.
David himself gives this description of New Classical Economics:
The late 1960’s were a time of great ferment in technical economics. Out of the period grew a movement called the “New Classical” economics, designed to depose the Keynesian orthodoxy. At a time when Keynesians were moving to tackle what were viewed as imperfections in markets–sticky wages in particular–the New Classicals chose to see things differently.
Just suppose, the new view went, that markets, especially labor markets, are working the way they are supposed to. Suppose that those who aren’t working aren’t really involuntarily unemployed, that they simply prefer leisure to the prevailing wage. Suppose also that because people correctly anticipate attempts by government to manage the economy, of the sort designed by Keynes and his followers, these managing effots have little or no effect–or worse, actually contribute to instability.
If so, then the thing for government to do would be to recognize that all was almost always for the best, and to retreat into following a few simple rules, such as keep money growth steady and government spending down.
Sound like Reagonomics? Well at a deep and satisfying level, maybe so. It was far more sweeping than monetarism, though in its defiant rejection of the conventional medicine, and in its emphasis on mind over apparent illness, it seemed a little like Christian Science to its detractors.
Let me make two comments. First, perhaps because I was a student of Greg Mankiw, I have always thought that sticky prices were the issue rather than sticky wages. You can see a discussion of that in “Sticky Prices vs. Sticky Wages: A Debate Between Miles Kimball and Matthew Rognlie.”
Second, David Warsh’s emphasis on involuntarily unemployment makes me wonder how Saltwater and Freshwater economists view the now popular labor market search theory in relation to their perennial debates with one another. I don’t really have a good sense of this, except that the folks in the labor search literature seem to be afraid to talk about labor market demand shocks coming from aggregate demand shocks; the literature routinely moves around labor demand through ritual technology shocks, perhaps to avoid the Saltwater/Freshwater controversy. Since labor demand shocks do the same kinds of things to the labor market regardless of where they come from, this is OK except insofar as unwary listeners are lead to think that aggregate demand shocks don’t exist, or that they don’t matter for the labor market!