Macroeconomics at the Crossroads: Stagflation and the Struggle between "Keynesian" and New Classical Macroeconometric Programs

Abstract

Lucas and Sargent’s “After Keynesian Macroeconomics” is considered as a cornerstone of macroeconomics history and is supposed to have seriously undermined “Keynesian” approach to macroeconometric modelling. I study the context of this article, its writing, its presentation in a conference with many advocates of large-scale models and the debates that followed. I demonstrate that the issue of stagflation was closely linked to Lucas and Sargent’s argument, and the opposition of “Keynesians” relied on their different interpretation of stagflation. I show this interpretation of stagflation led to a different research program, which has been overlooked by history of macroeconomics.

Edmond Malinvaud’s Criticisms of the New Classical Economics: Restoring the Nature and the Rationale of the Old Keynesians’ Opposition

“…As these models provided the Old Keynesians with a methodological framework to think in terms of “applied economics” and dealing with economic policy issues, they turned into the actual target of New Classical Economics in their crusade against mainstream macroeconomics. Such a confrontation took place at the conference “After the Phillips Curve” (1978), where both camps crystallized their oppositions in regard to the large-scale macroeconometric models (Goutsmedt 2019).…”

“…Still, this observation did not make them more willing to adopt the rational expectations postulate. Instead, they saw good reason for moving forward, and some even embarked on evaluating the actual state of agents’ expectations after George Katona’s method (Goutsmedt et al 2015; Goutsmedt 2019).…”

“…12;Da Silva 2017). Second, it has been documented that the Old Keynesians opposed the New Classical Economics from the early 1970s onwards, whether this criticism concerned the Lucas Critique and the reliability of the large-scale models or the Phillips curve (Goutsmedt et al 2015(Goutsmedt et al , 2019Goutsmedt 2019;Goutsmedt and Rubin 2018). Third, it has been shown that the Old Keynesians opposed the New Classical Economics for methodological concerns more than for ideological ones.…”

“… 25 This table is mainly based on recent research in the history of macroeconomics (Assous 2015; Backhouse and Cherrier 2019; Ballandonne and Rubin 2020; Da Silva 2017; De Vroey and Duarte 2013; De Vroey 2016; Goutsmedt 2019; Goutsmedt et al 2015, 2019; Goutsmedt and Rubin 2018; Rancan 2020). To complete it, a few pieces of primary literature have been considered (Buiter 1980; Blinder 1986, 1987, 1988, 2001; Fair 1992; Klein 1992; Lipsey 2001, 2000, 2016; Tobin 1972, 1977, 1980a, 1980b, 1984, 1992, 1993, 1995; Solow 1978, 1983, 1984, 1985, 2008).…”

“… 26 Arguably, the Old Keynesians proposed ways to explain stagflation from the mid-1970s, whether through the AS-AD model or through the introduction of additional variables such as oil prices into the macroeconometric models (see Goutsmedt 2019). In the same way, Malinvaud suggested ways to account for stagflation from the 1970s onward.…”