We're All Heterodox Now
They have thrived on the back of massive disillusion with mainstream economics, which held that the economy would grow steadily if central banks kept inflation low and stable, and that there were no great gains in the offing from fiscal expansion, nor any great cause for concern over financial instability. And they have benefited hugely from blogging.
Pointer from Tyler Cowen.
1. If the financial crisis and subsequent recession had not happened, heterodox macro blogging would have amounted to nothing.
2. As of August, 2008, Olivier Blanchard could write that “The state of macro is good.” But by the end of 2008, the consensus that Blanchard described has shattered. The paper “A DSGE model that explains the financial crisis and the subsequent recession” has yet to be written (or if it has, it has received no attention). Policy makers have not employed anything like mainstream macro. Instead, in their determination to justify a large fiscal stimulus, pundits have trotted out long-discredited macroeconometric models.
3. The Economist article gives a somewhat limited view of the influence of heterodox macro. For example, it does not include the influence of Minsky. It refers to Paul Krugman as mainstream, but he is better described as heterodox. What Olivier Blanchard described as macroeconomic orthodoxy Krugman famously called “Dark Age Macro.” Krugman’s liquidity trap analysis is a blogosphere phenomenon; in the professional journals, it has little credence. One can make a good case that Scott Sumner, portrayed as heterodox in the article, is more mainstream than Krugman.
I think that the experience of the past few years cries out for a Reformation of macroeconomics. With or without blogs, the previous consensus would have fallen apart, various old and new heterodoxies would have been championed, and new thinking would have been entertained. I probably would not have written my paper on PSST, but most of the ferment in macro would still be taking place.
UPDATE: Scott Sumner comments.