The usual suspects took part of this and reverberated it appropriately: Simon Wren-Lewis, Mark Thoma, Paul Krugman, and Noah Smith. At this time, new fellow bloggers joined in: Robert Waldman and Arnold Kling. Wren-Lewis made the point that:
Stagflation did not kill IS-LM. In fact, because empirical validity was so central to the methodology of macroeconomics at the time, it adapted to stagflation very quickly. This gave a boost to the policy of monetarism, but this used the same IS-LM framework. If you want to find the decisive event that led to New Classical economists winning their counterrevolution, it was the theoretical realisation that if expectations were rational, but inflation was described by an accelerationist Phillips curve with expectations about current inflation on the right hand side, then deviations from the natural rate had to be random. The fatal flaw in the Keynesian/Monetarist theory of the 1970s was theoretical rather than empirical.
Interestingly, this debate led Wren-Lewis to revisit Lucas and Sargent’s 1979 famous manifesto, “After Keynesian Macroeconomics.” He then came back to the issue of the new classical revolution being empirical or theoretical – a blog post “mainly for macroeconomists and those interested in macroeconomic thought” –, now focusing on the criticism raised by Lucas and Sargent from a methodological viewpoint. And a new round of opinions on this very manifesto spread over the blogosphere. In particular, John Cochrane re-read Lucas and Sargent’s “classic” article and took this discussion to use history as a criticism to present-day policy prescriptions, longing a time when macroeconomic discussions were scientifically based on quantitative models and led by technical economic experts. He decreed:
A complete split occurred. “Equilibrium” models, in which I include new-Keynesian DSGE models, took over academia. The policy world stuck with simple ISLM logic – not “models” in the quantitative scientific tradition Lucas and Sargent praised – despite Lucas and Sargent’s devastating criticism. And, as I remarked in the earlier blog posts, the “purely verbal” or literary style of analysis is becoming more and more common now in academia as well as policy.
We have here a very lively historical debate among practitioners. The canonical history of macroeconomics as composed by rival schools of thought and revolutions and counter-revolutions lives on. The usual titans of the field reemerge: Friedman and Lucas versus Keynes, new Keynesians versus new classicals, etc.
What is also curious in all this is the need that macroeconomists have had to set a glossary and to discuss what Lucas and Sargent really meant, and what really was at stake in the “new classical revolution.” Why is this curious? Because Keynes seems no longer to be alone as having written a book that Cochrane (echoing widespread opinions) described as “one of those big muddy things that people are still writing ‘what did Keynes really mean’ articles and books about nearly a century later.” Not a century has elapsed since 1979 and no muddy book has been written by Lucas and Sargent, but the “what did X really mean” is a rather thriving industry in the blogosphere.