Future Scenarios for Economics
By Arnold Kling
The consulting incomes of finance economists will fall and fewer talented people will go into finance. Speaking fees will fall since fewer economists will give talks at hedge funds. The relative status of macroeconomists will rise and the relative status of microeconomists will fall. Economists will gain in fame and lose in income.
I think that macroeconomics has suffered a crash. As recently as six months ago, the consensus was that it was sufficient for monetary policy to engage in inflation targeting or to follow a Taylor rule. Now, Brad DeLong refers to this view contemptuously as “Greenspanism.”
If you look closely, you will find that there is no consensus now. Olivier Blanchard’s triumphal history of the last thirty years of economics is exactly wrong.
What will emerge? What the public wants is a theory of control. That is, the demand is for a theory that includes ways for policymakers to control booms and busts. To satisfy that demand, my guess is that the economics profession will put most of its effort into rationalizing or tinkering with the consensus. The leaders of the profession have too much invested in New Keynesianism to be able to back away or acknowledge that it has been refuted.
I would not be surprised to see unorthodox theories of control gain traction. Perhaps, to justify current policy trends, a theory that socialized investment is necessary for stability.
To me. the logical thing for the economics profession to do is admit that we are nowhere near understanding what is happening. However, taking that position will not get you invited to panels.
I think that there are two questions. First, what are the generic causes and consequences of bubbles? Second, why did the specific bubble in real estate and mortgage finance occur? The first question is harder. But I would say that 99 percent of the economics profession cannot even correctly answer the second.