Margaret Macmillan, the distinguished historian and former Warden of St. Anthony’s College, Oxford University, offers the following advice on how to ‘ learn from history’. It is indeed a case of ‘looking into the rear-view mirror; if you only look back, you will land in the ditch, but it helps to know where you have come from and who else is on the road’.
Will economists tethered to so-called Dynamic Stochastic General Equilibrium (DSGE) models learn from history in the spirit that Professor Macmillan meant or will they continue with their model-driven approach to how economies in the real world are supposed to work? Two well-known macroeconomists – David Vines and Samuel Wills – ran an Oxford-based project dedicated to ‘the rebuilding of macroeconomic theory’ that brought together both supporters and detractors on whether DSGE models have a future after their dismal failure following the global financial crisis. Their answer seems to be a cautious ‘yes’ provided the profession is prepared to learn from history in the way that Keynes did and carry out the necessary intellectual adjustments that would challenge the hegemonic sway of the benchmark New Keynesian DSGE model and a yield a more pluralist discipline. But…detractors are not convinced, notably Paul Krugman, who simply said that there has been no new ‘big idea’ in macroeconomics since Keynes. In any case, he opines that the old-fashioned IS-LM model or some variation of it was good enough to enable one to understand how governments could respond to the global recession that was unleashed by the GFC. Hence, there was no failure of macroeconomics as an intellectual discipline, merely a particular version of it because the DSGE adherents failed to learn from history.