History of economic thought : Battle of ideas to continue..

Ravi Saraogi of IFMR investments has a series of posts (one, two and three) on perhaps the most important subject in economics – history of economic thought.

He tracks how eco thought has evolved from Age of enlightement (1650s) to Neoliberalism (1990s to 2007).

In the end, he says the process of ideas has hardly settled. It has only become more bitter due to the crisis:

In 2003, in a Presidential Address delivered at the 115th meeting of the American Economic Association, Robert E. Lucas, Jr., (recipient of the Nobel Prize in Economic Sciences in 1995) said,“Macroeconomics was born as a distinct field in the 1940s, as a part of the intellectual response to the Great Depression. The term then referred to the body of knowledge and expertise that we hoped would prevent the recurrence of that economic disaster. My thesis in this lecture is that macroeconomics in this original sense has succeeded: Its central problem of depression prevention has been solved, for all practical purposes, and has in fact been solved for many decades.”[7]

This optimistic view was also echoed by Olivier J. Blanchard, the chief economist at the IMF. In his 2008 paper, The Sate of Macro, he concluded that the “state of macro is good” and that there is substantial convergence among different macroeconomic ideas. Blanchard wrote, “For a long while after the explosion of macroeconomics in the 1970s, the field looked like a battlefield. Over time however, largely because facts do not go away, a largely shared vision both of fluctuations and of methodology has emerged.”[8]

So, do we live in a world where economists have broadly a homogenous view of macroeconomics? Not really. Keynes’ ideas are far from dead and not everybody is a neo-liberal. Paul Krugman (who won the Nobel Prize in Economic Sciences in 2008), wrote in 2009, that “Until the Great Depression, most economists clung to a vision of capitalism as a perfect or nearly perfect system. That vision wasn’t sustainable in the face of mass unemployment, but as memories of the Depression faded, economists fell back in love with the old, idealized vision of an economy in which rational individuals interact in perfect markets, this time gussied up with fancy equations.”[9] Krugman is foremost amongst several economists who have advocated for a revival of Keynesian ideas. The global financial crisis has also led to the re-emergence of Marxian theories that capitalism will always be cursed with crises (what is commonly referred to as ‘crisis theories’).

The spate of crises in the twenty first century- the dot come bust, the US subprime crisis and the Euro crisis, have brought the differences in economic ideology right to the forefront. Reminiscent of Winston Churchill’s remark, “Never let a good crisis go to waste”, economists of all hue have been sharpening their argumentative knifes and dishing out varying policy prescriptions.

Undoubtedly, the global economic turmoil has led to a sharp polarization of economic ideas and it is difficult to forecast whether a new consensus is building. Perhaps we should not be surprised. As the evolution of economic ideas over the last 300 years has shown, one thing has been elusive – unity among economists. The battle of economic ideas is far from over.

Nice bit..

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