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George A. Akerlof — What They Were Thinking Then: The Consequences for Macroeconomics during the Past 60 Years

Summary:
This article begins with a review of the two main textbook approaches that had evolved by the early 1960s to incorporate the musings of Keynes: the Keynesian cross from Samuelson’s (1948) introductory textbook and the complete, well fleshed-out model in Gardner Ackley’s (1961) advanced macro textbook. This Keynesian- neoclassical synthesis followed a pattern set by Hicks (1937) by focusing on certain elements of Keynes, while setting aside others. Some potential weaknesses of the specific approach in these models were, at least vaguely, sensed at the time. For example, Hicks had, at least obliquely, mentioned the neglect of inflation expecta- tions. In other cases, the model left out topics that Keynes had treated as important, such as the dangers of financial crises and the role of

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This article begins with a review of the two main textbook approaches that had evolved by the early 1960s to incorporate the musings of Keynes: the Keynesian cross from Samuelson’s (1948) introductory textbook and the complete, well fleshed-out model in Gardner Ackley’s (1961) advanced macro textbook. This Keynesian- neoclassical synthesis followed a pattern set by Hicks (1937) by focusing on certain elements of Keynes, while setting aside others. Some potential weaknesses of the specific approach in these models were, at least vaguely, sensed at the time. For example, Hicks had, at least obliquely, mentioned the neglect of inflation expecta- tions. In other cases, the model left out topics that Keynes had treated as important, such as the dangers of financial crises and the role of social norms in wage bargaining, and what these topics implied about the potential importance of multiple equilibria in macroeconomic outcomes. However, the Keynesian-neoclassical synthesis of the 1960s was flexible enough that it encouraged a large body of work. The article will show that this work was based on a style that I call “one-deviation-at-a-timism” (a phrase adapted from Caballero 2010). As I will demonstrate, one-deviation-at-a-time constraints have had real consequences for macroeconomics. For example, they have resulted in lack of attention to financial crashes as a macro topic; they have also resulted in the omission of plausible models with very different core conclusions regarding the effectiveness of macro stabilization.
My concerns can be expressed in the terminology of Thomas Kuhn (1962). What was the dominant paradigm for macroeconomics in the early 1960s? What were its vulnerabilities? What was the resistance to addressing these vulnerabilities? Do these vulnerabilities still remain? I shall address these questions regarding the field of macroeconomics from two intertwined perspectives: my perception of what they were thinking as I began graduate school at MIT in 1962, and my view as I look back on the developments in macroeconomics over the past 57 years.
Journal of Economic Perspectives
What They Were Thinking Then: The Consequences for Macroeconomics during the Past 60 Years
George A. Akerlof
Mike Norman
Mike Norman is an economist and veteran trader whose career has spanned over 30 years on Wall Street. He is a former member and trader on the CME, NYMEX, COMEX and NYFE and he managed money for one of the largest hedge funds and ran a prop trading desk for Credit Suisse.

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