For the past 60 or 70 years, macroeconomics was dominated first by “Keynesian” theory—or, I should say, by what was widely thought to be Keynesian theory—then by Monetarism and most recently by Dynamic Stochastic General Equilibrium (DSGE) theory—an evolutionary sequence of theories that ended up in a fool’s paradise conducive to much mathematical elaboration, and thus very congenial to modern economists. Intertemporal equilibrium models incorporating no financial markets did not offer much help in understanding the events of recent years.
In other words, Stan Fischer and Olivier Blanchard were no better than their Dark Age counterparts from Minnesota.
AL’s wry tone belies the seriousness of the problems he identifies. The end of Glass-Steagall is usually criticized from the left, but his metaphor about the watertight compartments makes me reconsider my views. The additional moral hazard of conversion from partnerships to LLCs has been noted before, but still makes sense in helping to explain the increase in riskiness in the financial system.
The human brain, even one possessed by a Very Smart Person, is incapable of accounting for more than a handful of factors in an economic scenario. Models are little better, unless the elements of the model can be tested individually in repeated situations and thus proven sound. Would any outcomes cause the Central Bankers to question the soundness of the entire edifice? They seem like current day astrologers in their attachment to their models and systems. Epistemological modesty is very valuable, but is unfortunately in short supply among our masters.
Genghis Khan?
Arnold’s symbol of Fischer’s having fathered a disproportionate share of today’s economic (economists) thinking. I like the metaphor, but would point that most of the symbolic sex was between consensual adults (grad students and their advisers). I contrast this to Samuelson’s paternity among the middlebrow (think all those high school students and those who studied econ for cultural literacy) which I see as being all about who had the power — to write and specify the textbook…