26th May 2011
Is a re-union of the two churches of economics in the offing?
Once, long ago, there was only one "economics", like once there was just one church. If we ignore Marx who was a minor distraction in the discipline of economics (although his ideas were politically incendiary and ended up killing hundreds of millions of people and destroying the lives of billions), the Great Schism of Economics took place in 1936 with the publication of Keynes's General Theory of Employment, Interest and Money.
At that point economics split into two "churches": macro-economics and micro-economics, macro- essentially being Keynesian economics (I'm being a bit simplistic here in the interest of generalisation). The Keynesians took over the universities of America and UK, till finally the idea of a whole, combined theory of economics was forgotten in the universities. From the 1970s, a few sporadic attempts were made within "mainstream" macro-economics to connect it to 'micro-economics' but these were largely unsuccessful – for the simple reason that the real economy requires analysis far richer than what mathematics permits.
Despite the rapid growth of Keynesianism, one school of thought kept up its traditional study of economics as a whole discipline – the "Austrian" economics school, with F. A. Hayek being its most prominent votary, and Ludwig von Mises gaining prominence over time (being Hayek's teacher).
Economics thus comprises two distinct churches now – at loggerheads with each other: the Keynesians (including neo-Keynesians) and the Hayekians (basically the classicals).
These "churches" of economics rarely talk to each other. The Austrians don't publish their research in "mainstream economics" journals because they think that Keynesians are socialists who are not worth bothering about. The Keynesians (mainstream economists) return the favour by ignoring the Austrians, to the extent you are unlikely to find a single book by Austrians in most "standard" university libraries. Fortunately, with the internet, the Austrian (and classical economics) literature is now more widely available than Keynesian literature – that too FREE of cost. That has helped a lot in levelling the field. [E.g. here or here.]
Finally, after destroying Western economies, it appears that "mainstream" economists are now perhaps beginning to wake up.
I have already discussed this major work by George Selgin et al. here. Today I found that this article is soon going to be published in the Journal of Macroeconomics. That's a major breakthrough for the Austrians – that mainstream economists are willing to listen to them.
The paper is available here. Its publication will be a major event. One hopes its publication in a mainstream journal signifies the beginning of the demise of the Keynesian "church" and the re-emergence of ONE economics, where only TRUTH matters.
Here's the article's abstract:
As the one-hundredth anniversary of the 1913 Federal Reserve Act approaches, we assess whether the nation's experiment with the Federal Reserve has been a success or a failure. Drawing on a wide range of recent empirical research, we find the following: (1) The Fed's full history (1914 to present) has been characterized by more rather than fewer symptoms of monetary and macroeconomic instability than the decades leading to the Fed's establishment. (2) While the Fed's performance has undoubtedly improved since World War II, even its postwar performance has not clearly surpassed that of its undoubtedly flawed predecessor, the National Banking system, before World War I. (3) Some proposed alternative arrangements might plausibly do better than the Fed as presently constituted. We conclude that the need for a systematic exploration of alternatives to the established monetary system is as pressing today as it was a century ago.