If you are a regular reader of Paul Krugman's books, blog posts, columns and feature stories, you most likely won't find much that is particularly new in his magisterial "How Did Economists Get It So Wrong?" article for the New York Times Sunday Magazine. Professor Krugman is consistent, and the great financial crisis of 2008-2009 gives him ample opportunity to restate and reargue one of his major themes -- that government can and should play an aggressive role in preventing and ameliorating recessions, by any means necessary. But the new piece is exquisitely written and well put together, so I join the entire econoblogosphere in recommending it as a good read.
Krugman has always been a proud follower of economist John Maynard Keynes, which means, even despite the respect he has always commanded from his colleagues, that the last few decades have been hard times psychologically. The rise of Milton Friedman and resurgence of neoclassical economics pushed Keynes to the side. The most striking aspect of Krugman's new feature, I think, is his contention that the renewed relevance of Keynes, in the wake of the financial crisis, has driven the neoclassical Chicago schoolers into a frenzy. The worldview of the so-called freshwater economists (named because of their physical proximity to the Great Lakes) has crumbled, and they are not happy about it.
Such Keynesian thinking underlies the Obama administration's economic policies -- and the freshwater economists are furious. For 25 or so years they tolerated the Fed's efforts to manage the economy, but a full-blown Keynesian resurgence was something entirely different. Back in 1980, Lucas, of the University of Chicago, wrote that Keynesian economics was so ludicrous that "at research seminars, people don't take Keynesian theorizing seriously anymore; the audience starts to whisper and giggle to one another." Admitting that Keynes was largely right, after all, would be too humiliating a comedown.
And so Chicago's Cochrane, outraged at the idea that government spending could mitigate the latest recession, declared: "It's not part of what anybody has taught graduate students since the 1960s. They [Keynesian ideas] are fairy tales that have been proved false. It is very comforting in times of stress to go back to the fairy tales we heard as children, but it doesn't make them less false." (It's a mark of how deep the division between saltwater and freshwater runs that Cochrane doesn't believe that "anybody" teaches ideas that are, in fact, taught in places like Princeton, M.I.T. and Harvard.)
Note to some HTWW readers: In Krugman's world, the profession is divided up mainly between the neoclassicals and the New Keynesians. There is not a whisper of the Austrian School.