A war’s been brewing ever since the beginning of the financial crisis. Some have called the recent battles in macroeconomics the “macro wars”. And this war has been defined as being between the “salt water” school (the US Universities on the coasts primarily – MIT, Berkeley, etc) and the “fresh water” school (the schools in the mid-west like the Chicago School). The “fresh water” schools are basically Monetarists while the “salt water” schools are referred to as Keynesians of some sort. But Thomas Palley a Post-Keynesian, has cited an important distinction. He’s pointed out that the so-called “salt water” school is actually more of a “brackish water” school. In other words, they make a big mess out of many of JM Keynes’s original points and so calling themselves Keynesians is kind of like calling a donkey a horse.
This is important to note because once you understand the “New Keynesian” “salt water” views you realize that they actually have more in common with the “fresh water” guys than you might think. The salt water really is brackish water! For instance:
- Both schools adhere to some version of general equilibrium.
- Both schools utilize loanable funds and quantity theories of money.
- Both schools reject the importance of endogenous money and banking.
- Both schools utilize the concept of a “natural rate of interest”.
- Both schools use marginal product theory.
- Both schools rely on some version of the efficient market hypothesis and rational expectations.
These aren’t minor similarities. They are hugely important overlapping underpinnings. And so this brings up an even more interesting entrant into the war – the Post-Keynesians, who are of the true “salt water” school of Cambridge, UK. Yes, this is a global war and not merely one between American economic schools. The Post-Keynesians reject all of the above views. And in my view, it is the true “salt water” school, the Post-Keynesians, who the fresh water and brackish water schools should be most afraid of. Our army is small at present, but our arsenal is powerful because it is grounded in reality and not myth.
It should be no surprise that the Post-Keynesians are having their voices heard in this debate. After all, we got so much right after the financial crisis that you’d have to have a hole in your head to brush our real-time predictions off as unimportant. But this isn’t about predictions. This is really about having a realistic framework for understanding the economy and money so we can all better understand the world we live in. And the Post-Keynesians are proving that the framework makes a great deal of sense. And now people in important places are beginning to question the foundation of many of the overlapping ideas between the brackish school and the freshwater school.
I said it a year ago and I’ll say it again today – the Macro Wars aren’t really between the American schools. The real macro wars are global in nature and it is the true “salt water” Post-Keynesians who are the biggest threat to the brackish and fresh water schools. Hopefully they will continue to fight amongst themselves and ignore us. That way they won’t even know we’ve defeated them until the war is practically over.
- Frustrations of the Heterodoxy – Paul Krugman
- Looking for flimflam – Simon Wren Lewis
- Looking for flimflam, where to find it – Thomas Palley