Krugman on Equilibrium Macro
Economists who have spent their entire careers on equilibrium business cycle theory are now discovering, in effect, that they invested their savings with Bernie Madoff.It is funny. I have a similar pedigree as Paul. Both of us have PhDs from MIT, and we learned a lot of our macro there. Both of us see the world through the lens of the Keynesian framework (by which I mean the IS-LM model, etc.) But we have very different perspectives on the equilibrium business cycle theorists.
The difference may reflect our research paths. Most of Paul's research has been in international economics, and throughout his career, he could easily ignore equilibrium business cycle theory. By contrast, I have done a lot of work on "new Keynesian economics," which tries to fix the flaws in the Keynesian model that the equilibrium business cycle theorists pointed out. Perhaps that work has given me more appreciation for their contribution, as well as for the defects in the Keynesian worldview. When I teach graduate-level macro, no one shows up on my reading list more often than Robert Lucas, the father of equilibrium macro.
In my view, the intellectual framework created by Lucas and Ed Prescott needs to be taken seriously by students of modern macro. I think they both richly deserved the Nobel Prize. And I hope they did not invest any of their winnings with Bernie Madoff.