1988 KEYNESIAN ECONOMICS 283 but is meant to signify a theory in which inflation for statistically significant breaks really depends on expected inflation and autoregression at the ends of 1970, 1971.1972 and 1973. The resulting Fstatistics were as follows P=Er-1(A)+f(Up+er It thus el distributed lag a(l)p 1971:4/1972: ucas pointed out 19724/1973:1 that (1)will continue to fit the data well only as 9734/197 long as a(L)Pt-I remains the best predictor(i.e. None of these F statistics is remotely close to the rational expectation) of inflation. If policy conventional significance levels Thus, there is no changes, the best forecasts of future inflation might evidence for a shift in the lag coefficients a(L) also change, making(I)break down even if nd that, in turn, suggests that the breakdown of Academic readers of Lucas put two and two attributed to the reason emphasized by Lucas. The together and jumped like lemmings to the wrong strongest evidence for a break emerges if the onclusion. The facts were(a) that inflation rose sample is split 1955: 2-1970: 4 vS. 1971: 1-1987: 4 and (b) that the correlation between inflation and In that case, the a(L) coefficients sum to 0. 73 in employment changed. The(untested) assertion n the first period and 0. 88 in the second, which is as that the lucas critique explained why (b) an increase, though not a dramatic one followed from (a): the government had adopted I have already noted that like their ance borary Phillips curves look much a more inflationary policy, which in turn had are added, con It was remarkable how uncritically the Lucas not only provide a more parin go. Supply shocks changed a(l) rs of 15 years critique was accepted. Had governments really for both the rise of inflation and the fall of the decided to ride up 'the Phillips curve toward higher Phillips curve, but one that can be substantiated inflation, as Lucas claimed, or had they simply empirically. Yet academic economists, at least encountered bad luck from the supply side? The American academic economists, opted en masse quantitatively 20 Did the more inflationary environ- my personal answers. They are rooted in the seek evidence on this point, partisans of the Lucas in ideology--not in empiricism. I take up the three rtique became econometric nihilists Theory, not factors in turn data, was suppose theory allegedly said yes But. in fa se in inflation need no Many people have observed that economics ha that the univariate autoregressive representation of become a highly technical subject in recen inflation must change(other than its constant). decades, more so in the US than elsewhere. And Whether or not the lag coefficients a(L) actually technicians, of whatever discipline, prize techniqe shifted in the early 1970s is an empirical question. it's how the young cut their The ration To investigate whether or not such a shift took expectations revolution was a godsend for aspiring or Us young technicians. It not only pushed place, I estimated simple autoregressions 1987:4 macroeconomic theory in more abstract and subperiods. As a way of guarding against the mathematical directi quarters)and the price index(the GNP deflator) sought to replace. 2 vere specified a priori and never changed. I tested The tools needed to carmy out the new of theory and econometrics could not be brands for the US and supports the statement, which hold 21 Thomas Sargent and Lars Hansen led in developing ough the world-wide boom of 1972-1973 the new econometric methods. Sargent always referred to it as'a technology
THE ECONOMIC RECORD DECEMBER in the kit bags of the older economists, mpenetrable prose, regularly impress referees and the young a heavy competitive edge. Ne they better trained mathematicall ounger, more flexible of mind, but they were also government, where the important thing is to ss distracted by other pursuits and hence more oduce the right answer-or, rather, to appear to willing and able to absorb the new techniques. as roduce the right answ an extra bonanza, the Lucas critique provided a innovation and purity count for little, cuteness for reason to shun the previously accumulated stock nothing, and technical virtuosity is unappreciated of econometric results as unreliable. Thus freed A professional forecaster seeks accuracy, not f any need to absorb the knowledge of the past, scholarly kudos. a policy analyst wants to newly-minted Ph. D economists could concentrate communicate with policy makers, not to dazzle on developing what they saw as the wave of the them with technique That new classical ideas failed to migrate from for generational conflict within the enough, the young government-as Keynesian ideas had done 40 recruited disproportionately into the new classical ears earlier-suggests that they failed to meet the ranks while few older economists converted, 22 nonacademic market test: they did not produce Traditional Keynesian tools like IS/LM and \sg> useful results. But that is getting ahead of my story ale macroeconometric models came to be vie s relics of the past and, in a strange kind of guilt y association, Keynesian ideas like those discussed The Nature of economic Thec in Section 2 also came to be seen as outmoded. The triumph of new classical ideas in academia By 1980 or so, the adage there are no Keynesians was also rooted in the nature of economic theory under the age of 40"was part of the folklore of and in economists' fierce loyalty to it. w (A The saying, of course, was meant to encompass lower social sciences by pointing to our illustrious eoretical heritage. In the economists world, in the elite institutions. In fact, virtually no non- rational and self-interested people optimize subject academic economists converted to new classicism. to constraints. The resulting decision rules equating Why the sharp bifurcation between professors on marginal this to'marginal that' lead to supplies the one hand and business and govermment and demands, which interact in markets to economists on the other? Part of the answer is determine prices. These prices, in turn, guide the that scholars are naturally the producers of ne allocation of resources and the distribution of ideas while practitioners are the consumers. income. If not interfered with, markets tend to be Fundamental debates over theory and statistical highly competitive and have a strong tendency to method belong in the academy, where the clear by price. (Here the consensus begins to fray protagonists are better equipped to deal with them a bit. and have the luxury of a long time horizon. That, These are the canons of our faith. They are what I suppose, is what ivory towers are for gives economics the unity and cohesion that, say, But another part of the explanation lies in the sociology lacks. Rightly or wrongly, they also different market tests the two groups must meet. imbue economists with an imperialistic attitude In academia, as in fashion, it is more importan to be fresh and creative than to be correct. Cute Kiplings attitude toward India. We have a tight models, after all, make snappy papers; the real theory; they don 't We should treat the heathen world can be left to less original minds. I have kindly, if condescendingly, while we firmly heard it said that the surest route to academic success is to devise a clever proof of an absurd proposition. And dazzling displays of technical is entirely microeco fireworks, perhaps accompanied by some nomics coexists with central k at best In at least some Keynesian models, workers are Regretfully, I have no data to support this less than rational. (For example, they may harbour quantitati Barro, and Wallace money illusions )Relative wag nd notions of are, of course,older economists'in this context. But they faimess probably matter in labour markets were the founders of the new school of thought Decision makers frequently bump into corners, so