Modern Macroeconomics.pdf

The real business cycle school 339More than 30 years ago, Harry Johnson (1971), in his lecture to the 1970meeting of the American Economic Association, attempted to provide reasonsfor the rapid propagation of the Keynesian revolution in order to betterunderstand the monetarist counter-revolution which during the late 1960s andearly 1970s had begun to fill the intellectual vacuum created by the retreat ofthe Keynesian orthodoxy in the face of accelerating inflation. In Johnson’shighly perceptive article, attention was drawn to the shared characteristics ofboth the Keynesian revolution and the monetarist counter-revolution whichappear important in explaining the success of these developments. Accordingto Johnson, there are two types of factor which can help explain the rapidacceptance and propagation of new ideas among professional economists.The first factor relates to the ‘objective social situation in which the newtheory was produced’. The second important factor encompasses the ‘internalscientific characteristics of the new theory’. We would argue that these factorscan help in understanding the rapid propagation of new classical ideas,both the MEBCT and the REBCT (see Snowdon and Vane, 1996).Although an established orthodoxy, such as trend-reverting cycles, whichis in apparent contradiction to the ‘most salient facts of reality’ is the ‘mosthelpful circumstance for the rapid propagation of a new and revolutionarytheory’, Johnson also identified five internal scientific characteristics whichin his view were crucial because it was these aspects of the new theory whichappealed to the younger generation of economists. In summary, the five maincharacteristics Johnson identified involved:1. ‘a central attack, on theoretically persuasive grounds, on the centralproposition of the orthodoxy of the time’;2. ‘the production of an apparently new theory that nevertheless absorbedall that was valid in the existing theory’;3. a new theory having an ‘appropriate degree of difficulty to understand’that would ‘challenge the intellectual interest of younger colleagues andstudents’;4. ‘a new more appealing methodology’ than that prevailing;5. ‘the advancement of a new and important empirical relationship suitablefor determined estimation’ by econometricians.To what extent have these five internal scientific characteristics played animportant role in explaining the success of new classical macroeconomics, inparticular the REBCT?The first characteristic (that is, an attack on a central proposition of theestablished orthodoxy) can be straightforwardly identified in REBCT. Before1980 the established consensus regarded business cycles as socially undesirable.In sharp contrast, the main policy implication of real business cycle