Oh, look at that

In Navigating the Turning Point, Perry G. Mehrling writes:

By the evidence of the recent IMF conference, there is apparently now consensus that the global financial crisis has killed--“shattered” (David Romer), “destroyed” (Stiglitz)--pre-crisis academic economic orthodoxy. But that orthodoxy had many dimensions, and there is no consensus on where repair efforts are most immediately necessary.

Pre-crisis academic orthodoxy was organized around the DSGE model and its variants, which suggested a minimal role for macroeconomic management, more or less limited to monetary policy at the level of the nation-state.

Wikipedia fills in a blank for me, on DSGE:

Dynamic stochastic general equilibrium modeling (abbreviated DSGE or sometimes SDGE or DGE) is a branch of applied general equilibrium theory that is influential in contemporary macroeconomics. The DSGE methodology attempts to explain aggregate economic phenomena, such as economic growth, business cycles, and the effects of monetary and fiscal policy, on the basis of macroeconomic models derived from microeconomic principles.

DSGE is the product of the "methodological revolution" set off by Robert Lucas.


DSGE has been shattered, according to Romer; destroyed, according to Stiglitz; killed, according to Mehrling. And I -- calling it Wanniski-nomics or Reaganomics -- I agree it has failed. Stephen Williamson understates it nicely: "There are parts of the theory that we don't like so much now..."

As Perry Mehrling puts it: there is apparently consensus.

Mehrling puts together "A map of current turnings" showing changes he sees arising since the economic crisis. Under the heading "economic theory" he notes the pre-crisis view that "DSGE is enough" but post-crisis, "Banking and finance needed." Pre-crisis, "Monetary analysis is enough" but post-crisis, "Credit and finance needed." I don't quite know what he means by this.

If he means we need a better understanding of finance and banking and credit, then I can help him out: The problem is excessive reliance on credit. But if he means what many people at the top seem to mean, that we need to find a way to allow the growth of finance to continue, then all I can say is: Perry, it ain't gonna work.

Using credit in the economy is like using fertilizer in the garden. Using a little gives much better results than using none. Using too much is a problem.