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Overcoming Bias Commenter's avatar

Since they're moderated, I'd ask that this version, w/o typos and with a few additional sentences be used instead. I apologize for the sloppiness.

This description of the academic macroeconomic consensus is wildly off the mark. It’s just a description of the “freshwater” rational expectations (or real business cycle) school associated with the University of Chicago, and completely ignores the “saltwater” school prevalent at Harvard or MIT. Freshwater views are stil, I'd guess, narrowly the minority among academic economists, and have essentially no adherants in the policy world (e.g., the Fed, ECB, IMF, World Bank, BIS, etc.) or among Wall Street economists. Brad DeLong, Paul Krugman, Simon Johnson and a variety others have been arguing in a various fora that the RE school has proved its uselessness in the current crisis. (Larry Summer’s takedown of real business cycle theory in the Minneapolis Fed Quarterly Review still says most of what needs to be said.) The school’s preeminence in academic macroeconomics probably peaked a few years ago. Alex Tabarok and Alex Cochrane are showing their intellectual insularity, not accurately summarizing the academic consensus. It's ironic that the freshwater view would receive such strong expression on this website, where biases and heuristics in decion-making are key themes. The now abundant literature on behavorial economics and finance has taught us that people simply don't make decisions as idealized rational agents optimizing an intertemporal objective function. (Even if individuals did, additional strong assumptions are needed to move to statements about the behavior of the macroeconomy.)

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Overcoming Bias Commenter's avatar

It's odd that the comments have focused on the mention of Keynsian economics. (I can't resist commenting myself - it was frustrating earlier this year to hear the New Deal invoked almost daily on the radio as proof that a stimulus was needed, when my excursions using Google indicated that this was controversial at best. It looks to me like what pulled us out of the depression was selling war supplies to the British; but I know little about it.)

But, I thought this was the more important part of the post:

The US has a finance and policy elite defined by college ties and related social connections, an elite with a strong sense that only people in their circle can really be trusted, and that their institutions must be saved at all cost at taxpayer expense if necessary.

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