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Keynes’s General Theory and Keynesian Economics

When you were a graduate student at Chicago, what interpretation did your

teachers put forward to explain the Great Depression?

Well that’s a very interesting question because I have believed for a long time

that the fundamental difference between my approach to Keynes and Abba

Lerner’s approach to Keynes, to take a particular example, is due to what our

professors taught us. I started graduate school in the fall of 1932 when the

Depression wasn’t over by any means. My teachers, who were Jacob Viner,

Frank Knight and Lloyd Mints, taught us that what was going on was a

disastrous mistake by the Federal Reserve in reducing the money supply. It

was not a natural catastrophe, it was not something that had to happen, it was

not something which had to be allowed to run its course. There were things

which should be done. Jacob Viner, from whom I took my first course in pure

economic theory as a graduate, had given a talk in Minnesota in which he

very specifically called for expansive policy on the part of the Federal Reserve

and the government. Therefore the Keynesian revolution didn’t come as

a sudden light from the dark showing what you could do about a situation

that nobody else seemed to know how to do anything about.

Can you recall when you first read the General Theory [1936] and what your

impressions were of the book?

I can’t really answer that; I don’t recall. I may be able to tell you if I look in

my original copy of the General Theory as I sometimes had a habit of

marking in my books the date when I bought them and how much money I

paid for them. Yes, here it is. I bought it in 1938 and paid $1.80 cents for it

[laughter]. That’s probably when I first read it but I can’t remember my

impressions, it’s a long, long time ago, but I do remember that in the early

1940s I wrote a book review in which I was very critical of the Keynesian

analysis contained in the book that I reviewed.

Why do you think Keynes’s General Theory captured the minds of such a

large percentage of the economics profession in such a relatively short period

of around a decade following its publication in 1936?

I don’t think there is any problem in explaining that at all. If you took the

economics profession as a whole, what I have described as the teaching at

Chicago was very much an exception. The bulk of the teaching in schools of

economics went more nearly along the lines of a Mises–Hayek view. If you

take the London School of Economics, that’s where the contrast with Abba

Lerner was most obvious because he, and most of the people who were

studying economics, were taught that the Depression was a necessary purgative

for the economy to cure the ills that had been produced by the prior

expansion. That’s a terribly dismal approach. Then all of a sudden out of the

blue comes this attractive doctrine from Cambridge, Keynes’s General Theory,

by a man who already has an enormous reputation primarily because of The

Economic Consequences of the Peace [1919]. He says: look, we know how to

solve these problems and there is a very simple way. Given a hypothesis

which tells you why we got into this trouble you would surely grasp at that

when the only alternative you had was the dismal Austrian view [laughter].

How important was Paul Samuelson’s [1948] introductory textbook and Alvin

Hansen’s [1953] intermediate textbook in contributing to the spread of

Keynesian economics?

They were very important. I think Hansen was really important in the USA; I

can’t say about the rest of the world, partly because he had undergone such a

sharp conversion. If you look at his early work before Keynes, it was strictly

along the Mises–Hayek line. Hansen was very much a believer that this was a

necessary purgative but then he suddenly saw the light and he became a

convinced exponent of Keynesianism. He was at Harvard at the time, whereas

he had been at Minneapolis when he expressed the earlier view. He was a

very good teacher, a very nice human being. He had a great deal of influence,

I don’t have any doubt at all. Samuelson’s influence comes later. Unless I’m

mistaken, Hansen converted by 1938 or 1939 but Samuelson’s elementary

text only came after the war so he was a much later influence. Hansen was

extremely important because of his effect on the people at Harvard. There

was a very good group of economists at Harvard who played a significant

role at the Federal Reserve, the Treasury and in Washington who were recruited

during the war. So I think Hansen had a very important influence.

A prominent real business cycle theorist, Charles Plosser [1994] has suggested

that in the absence of John Hicks’s IS–LM framework Keynes’s General

Theory would have been much less influential. Do you agree with this view?

I believe that there is a great deal to that because later Samuelson was able to

use his cross diagram that came entirely out of Hicks’s IS–LM framework. I

think that’s a correct observation.

If Keynes had lived to have been awarded the Nobel Prize in Economics,

what do you think the citation would have been?

It depends on when it would have been awarded. If it had been awarded at the

beginning in 1969 the citation would undoubtedly have been ‘the man who

showed us how to get out of depressions and how to pursue a policy that

would lead to reasonably full and stable employment’. But if the citation had

been in 1989, let’s say, I think it would have been written differently. It would

have said ‘an economist whose continued work beginning with his Treatise

on Probability [1921], and right on through, has had a major influence on the

course of the economics profession’. But you know that’s just conjecture,

who knows what it would have been? [laughter]. Let me make clear my own

view about Keynes. I believe that he was a great economist, one of the great

economists of our time and that the General Theory is a remarkable intellectual

achievement. We had a phenomenon that needed an explanation. How

could you have widespread unemployment in the midst of an economy with

such large productive capacity? That was a phenomenon in search of an

explanation and he produced an explanation for it which, in my opinion, was

the right kind of explanation. What you need to do is to have a very simple

theory that gets at the fundamentals. No theory is successful if it’s extremely

complicated and difficult, because most phenomena are driven by a very few

central forces. What a good theory does is to simplify; it pulls out the central

forces and gets rid of the rest. So Keynes’s General Theory was the right kind

of theory. Science in general advances primarily by unsuccessful experiments

that clear the ground and I regard the General Theory as having been an

unsuccessful experiment. It was the right kind of a theory; it had content

because it enabled you to make predictions, but when you made those predictions

they were not confirmed and as a result I regard it as an unsuccessful

experiment.

What do you think has been the main contribution that the new Keynesian

literature has made to the development of macroeconomics?

Well, I’m not going to comment on that because I really haven’t followed it

carefully enough. Since our Monetary Trends [Friedman and Schwartz, 1982]

came out and particularly since my book on Money Mischief [1992] came out

I really haven’t been doing any work on issues like that. In the past three or

four years I have rather been working on my wife’s and my memoirs.

Monetarism

Do you regard your [1956] restatement of the quantity theory of money as a

more sophisticated elaboration of the Keynesian theory of liquidity preference?

Not at all. I regarded it, as I said then, as a continuation of the general

monetary theory that I had been taught as a student before Keynes’s theory

came out. One component of it is consistent with liquidity preference analysis.

But if you are asking me whether at the time that was my motivation, or

my understanding of it, I have to say no.

Do you view your restatement then as a distinct break with Keynesian analysis?

No. I didn’t look at it in that way at all. I was just trying to set down what I

thought was a reformulation of the quantity theory of money. Remember

Keynes was a quantity theorist. Look at his Monetary Reform [1923], for

example, which I believe is one of his best books, a much under-appreciated

and more useful book than the General Theory. Unlike the General Theory it

was not an attempt to construct a new theory. It involved an application of the

existing theory to a set of interesting phenomena, the immediate post-war

inflations. It’s a very good piece of work, which is straight quantity theory,

and I was a quantity theorist. So if you ask in what way was Keynes’s

liquidity preference theory different from the quantity theory that he had

adopted in his Monetary Reform, it was different only in the idea of having a

liquidity trap. That was the only essential different idea. In my reformulation

I don’t have a liquidity trap, a liquidity trap is possible but that’s not a part of

the analysis.

Although the belief in a stable demand for money function was well supported

by empirical evidence up to the early 1970s, since then a number of

studies have found evidence of apparent instability. Does this undermine the

case for a fixed monetary growth rule?

Yes and no. If you have a stable money demand function that’s not the same

as saying that it’s never going to shift, never going to be affected by anything

else. Let’s take the case of the USA which I know best. If you take the period

after the Second World War to let’s say 1980, you have a very stable money

demand function and it doesn’t matter whether you use the base, M1, M2 or

M3, you’ll get essentially the same result. In the early 1980s there was a

series of structural changes in the system, in particular the payment of interest

on demand deposits which had the effect of changing the money demand

function, particularly for the base and M1. There’s a period of about five

years when it is very hard to know what’s going on because of these structural

shifts. Then from about 1985 on the earlier demand function with M2 is

re-established, but not with M1 or the base; they are very unstable. If you

plot, as I have done, the rate of change of these various aggregates year over

year against year over year changes in inflation two years later, up to 1980 it

doesn’t matter, they are all pretty good. After 1980 M1 and the base go

haywire completely. On the other hand the relationship with M2 stays pretty

much the same. So there is a real problem there because if, as many people

were (I was not), you were thinking in terms of M1 as the major monetary

aggregate it would have been a mistake to have continued this steady rate of

growth. But if you had continued a steady rate of growth of M2 you would

have been all right.

How do you react to Robert Lucas’s [1994b] suggestion that the 1970s were

a time of prosperity for the Friedman and Schwartz [1963] volume The

Monetary History of the United States, while the 1980s must be viewed as a

time of mild recession? Has this been due to the influence of real business

cycle theorists?

I’m not sure how to answer that. I really have never looked at the history of the

volume itself in terms of prosperity or recession [laughter]. There were three

reviews in all on what was the thirtieth anniversary of the volume. I must say

that the review I like best is the one by Jeffrey Miron because it emphasized

what I think is really important and is relevant, not merely to monetary issues

but to the economics profession as a whole, namely the importance of testing

your theories on historical and empirical material. It seems to me that in many

ways one of the contributions of the Monetary History was methodological. I

don’t mean it didn’t make a substantive contribution, but there was also a

methodological contribution and Miron emphasized that, if I remember rightly,

in his review. But now to your question. There is the problem of keeping

science distinct from politics. The 1980s was the Reagan period. I was known

as a close adviser to Reagan. The academic community was almost wholly

anti-Reagan, although that was probably less true of economics than it was of

any other academic discipline you can name. I’m talking here about the social

sciences and the humanities, not the natural sciences. I may be entirely wrong

on this, I hope I am, but I believe that the fact that I was connected with the

Reagan administration had something to do with the desire on the part of the

economics profession to separate themselves from my work. There’s one other

thing that has to be said. The interesting thing in any science, whether it’s

economics or mathematics or anything else, is not repeating the past but going

ahead to new things. Every science every ten or twenty years has to have a new

fad or it goes dead. I think that the emphasis on real business cycle theory did

provide a new fad for a while which has had a great deal of influence on the

work that economists have done.

Would you agree that your [1968a] paper on ‘The Role of Monetary Policy’

has perhaps turned out to be your most influential paper?

As to that, I don’t doubt that it had a great deal of influence. But when you

talk about comparisons it is hard for me to decide between that and ‘The

Methodology of Positive Economics’ [1953a] which had as much influence

in a different direction, not on the substance but on the methodology.

How far do you think that the influence of your [1968a] paper was greatly

enhanced because it anticipated the events of the 1970s and in particular

predicted accelerating inflation?

On that I don’t think there is any doubt whatsoever. It was a major reason for

the shift in attitude. As I said earlier, the right kind of a theory is one that

makes predictions that are capable of being contradicted. The Keynesian

theory made a prediction that was capable of being contradicted and it was

contradicted. The theory I was describing also made predictions; in this case

it made predictions that we would experience accelerating inflation and it was

not contradicted.

In the same year as your Presidential Address to the American Economic

Association, Edmund Phelps in his [1967] Economica article also denied the

existence of a long-run trade-off between inflation and unemployment. Are

there are significant differences between your Phillips curve analysis and

that of Edmund Phelps?

There are enormous similarities and tremendous overlaps. The main difference

is that I was looking at it from the monetary side whereas Edmund

Phelps was looking at it from the labour market side. But the theories are the

same, the statements are the same, there is no difference there.

Is there any significant difference between your definition of the natural rate

of unemployment and Keynes’s definition of full employment?

That’s a tough one. His definition of full employment is simply a situation in

which there is no unsatisfied employee, in which anybody who is willing to

work for the current wage has a job. I think I’m quoting it reasonably

correctly. My definition of the natural rate of unemployment is that rate at

which demand and supply are equal so there is no excess supply or demand

and in which people’s expectations are satisfied. I think both of these are

related to Wicksell’s natural rate of interest. I don’t think there is much

difference between us.

In your [1968a] paper on ‘The Role of Monetary Policy’ you highlighted the

implications of introducing inflationary expectations into the Phillips curve.

Since then adaptive expectations has gone out of fashion following what

could be described as a rational expectations revolution. Which hypothesis

do you favour as a way of modelling how economic agents form such expectations?

I’m not sure how to answer that. The theoretical principle has always been

the same, that what matters is what the expectations are and that they play a

very important role. That’s an old idea, that’s not anything new. I’m sure you

can find it in Marshall. I know you can find it in Schumpeter. In fact you can

find it everywhere. The adaptive expectations approach was simply a way to

try to make that empirically observable and in many cases it seemed to work.

The most obvious case was Philip Cagan’s [1956] study of hyperinflation in

Germany and other European countries and there adaptive expectations worked

up to the point at which you had reform. Then it didn’t work at all. The best

studies along that line were Tom Sargent’s [1982] later studies about the

effect of the monetary reforms.

Rational expectations, Bob Lucas’s approach, in a way is obvious and well

known. Everybody knew in the past that a rational man would not base his

expectations simply on what had happened in the past. If there was a major

change or any significant changes in public policy, he would also look at

what he knew about that. The contribution of Lucas was partly to give that

notion a name and I don’t think you want to underestimate the importance of

naming things. You know nobody can take everything into their head at one

time, as Marshall used to say; you can’t do it. You have to have ways of

simplifying things and showing how things fit together. Bob Lucas’s real

contribution was showing how you might be able to mathematize and empirically

design studies that would give you some way to get an empirical

counterpart of the hypothetical and unmeasurable rational expectation. That

was his real contribution.

I have always had great difficulties with the basic notion that there is some

sense in which you can say expectations are correct or not correct. Let me

explain what I mean. At the moment it is perfectly rational to suppose that

there will be a major inflation some time in the next 20 years. There have

been lots of major inflations. Suppose I have an expectation that there is a 10

per cent chance of there being a major inflation and no major inflation occurs.

All along I have been betting that there might be a major inflation and I have

been buying real assets, rather than nominal assets, in order to protect myself.

If a major inflation doesn’t occur, in what sense can you say I was wrong?

There was always a chance. In a way the probability of anything happening

ex post is always one. How do I judge whether someone’s so-called rational

expectations were correct? You might say that you have to get a distribution

of what happened. Do I have to take 1000 years, 100 years, 50 years? What is

the right basis? Moreover, every rational expectation notion recognizes that

in advance what you have is a probability distribution, not a single point, and

that gets to the question of whether there is such a thing as objective probability.

The only probability notion I can make sense of is personal probability

in the spirit of Savage and others. Keynes’s degree of belief is in the same

family. In fact I believe that Keynes’s contribution in his Probability book has

been underrated and overlooked. The whole Bayesian movement today in

statistics, which has had a great deal of influence on statistical methods, is

based on the idea of personal probability, of degree of belief. It is based on

the kind of idea that Keynes was putting forward in his [1921] Treatise on

Probability volume.

Should we worry about moderate rates of inflation when the evidence seems

to suggest that they don’t have strong effects on real variables?

No, we should not worry about moderate inflation except as a breeder of

larger inflation, and that’s a big exception [laughter]. My summary of the

evidence on that, and I really can’t pretend this is authoritative because I

haven’t followed the research in that area for the past few years, is that there

is a short-term relation between unexpected inflation and unemployment. But

there is no long-term relation and even the short-term relation is very weak.

The main case that I cite on the long-term relation is the USA from 1879 to

1896 and from 1896 to 1913. From 1879 to 1896 prices fell at about 3 per

cent per year, not regularly of course but on the average, and from 1896 to

1913 they rose at about 3 per cent per year. Yet the rate of real growth is

roughly the same in the two periods.

Over the years monetarism has often been associated with conservative

politics. Is this alleged association inevitable?

The alleged association is not inevitable. Karl Marx was a quantity theorist.

The Bank of China (communist China) is monetarist. Moreover, I am not

myself a conservative. I am a liberal in the classical sense or, in the terminology

that has become common in the USA, a libertarian in philosophy. In any

event, monetarism properly interpreted is an objective set of propositions

about the relation between monetary magnitudes and other economic variables.

Conservative, radical, communist, socialist, any ruling authorities can

only achieve their objectives if they can predict what the consequences of

their actions will be. A correct body of monetarist propositions is as necessary

to authorities of one stripe as of another.

New Classical Macroeconomics

It can be argued that one of the most difficult things in economics is to create a

new vision. Is this one of the most important features of Robert Lucas’s impact?

No, because I think that vision was present in a way before. Everybody knew

that you ought to be forward-looking. What he did was to develop a method

whereby you could make that vision operational. Once I got together some

quotations on expectations. One particularly good one from Schumpeter just

stated out and out the notion of rational expectations in the sense of the

vision, but it wasn’t operational. I think Lucas’s big contribution was to make

it operational. Everybody understood that people behaved on the basis of

what they anticipated in the future and the question is how you approximate

that. Of course the real start of rational expectations was John Muth’s [1961]

piece in Econometrica.

Why do you think new classical macroeconomics proved to be so attractive to

the younger generation of economists in the USA?

The policy ineffectiveness proposition was very popular for a while but it’s

another one of those theories which is the right kind of a theory but is

contradicted by its predictions. Nobody in the face of the experience of the

early 1980s can believe the policy ineffectiveness proposition is a valid

prediction of what will happen in the short term. The 1980–82 recession

completely contradicted it. I don’t know how popular the approach was. It

was popular with a small group. The beauty of it is that it brings you back to

a pure theoretical analysis. It’s not sort of besmirched by any complexities,

any complications, any friction, anything else [laughter]. It hangs together as

a theoretical matter if people correctly anticipate the future, but the situation

will be wholly different if they don’t.

Kevin Hoover [1984] has drawn a methodological distinction between your

work as a Marshallian and that of Robert Lucas as a Walrasian. Is that

distinction valid?

There is a great deal to that. On the whole I believe that is probably true. I

have always distinguished between the Marshallian approach and the Walrasian

approach. I have always been personally a Marshallian. That doesn’t mean

that the Walrasian approach is not a useful or appropriate approach. People’s

temperaments and attitudes are different, I guess. I yield to no one in my

admiration for Marshall as an economist, but he had real flaws as an individual.

The way he treated his wife was disgraceful. We found out about it

way back in the 1950s when we spent a year at Cambridge in 1952–3. We

spent a lot of time at the Marshall library and read a good deal of the

Marshall documents. It seemed that Mary Paley, his wife, was a very able,

competent woman. I won’t go into that story; it will take us too long.

How important has the Kydland–Prescott time inconsistency argument been

in the rules v. discretion debate?

That has been quite influential in the debate and is a very nice and entirely

valid point.

Since the demise of the monetary-surprise version of new classical macroeconomics

in the early 1980s the new classical approach has been revitalized

by real business cycle theory. Has this, in your opinion, been a fruitful line of

research?

I have some hesitancy in answering that question because I have not followed

or investigated that literature as much as I should in order to give a considered

answer. I don’t believe that there is a business cycle; it is a misleading

concept. The notion of a business cycle is something of a regularly recurring

phenomenon that is internally driven by the mechanics of the system. I don’t

believe there is a business cycle in that sense. I believe that there is a system

that has certain response mechanisms and that system is subject over time to

external random forces (some large, some small) that play on it and it adapts

to those forces. The adaptation process has certain regularities that in a way

go back to the basic Slutsky idea of an accumulation of random forces. Some

of those forces are unquestionably real and in so far as the real business cycle

people emphasize that the disturbances come from outside, that’s all to the

good. On the other hand the mechanism that reacts to the real disturbances is

largely monetary, and by underplaying the monetary role in the process the

so-called real business cycle theory has not been very helpful. You probably

know my own little piece on what I call the ‘plucking model’ in Economic

Inquiry [1993]. It was written many years earlier in an annual report of the

National Bureau of Economic Research and it’s also in the collection of

papers contained in The Optimum Quantity of Money [1969] though I modified

it a little for the Inquiry version, but not much. To quote: ‘consider an

elastic string stretched taut between two points on the underside of a rigid

horizontal board and glued lightly to the board. Let the string be plucked at a

number of points chosen more or less at random with a force that varies at

random, and then held down at the lowest point reached. The result will be to

produce a succession of apparent cycles in the string whose amplitudes

depend on the force used in plucking the string’ and so on. For me personally

I find that a much more useful model than the model of a self-generating

cycle.

With the growth in the popularity of real business cycle models in the 1980s

many new classical macroeconomists have turned to the calibration method

rather than conventional econometric techniques to test the performance of

their models. How do you view the calibration method?

I believe that it is evading the issue. It isn’t enough to show that the characteristics

of the time series can be duplicated in a model. If the model has any

meaning it is going to make predictions about things that can be observed and

contradicted. You can match any set of data precisely with a least squares

regression if you have enough variables in it.

Methodological and General Issues

You commented earlier that your [1953a] essay on the ‘Methodology of Positive

Economics’ has been one of your most influential papers. Did you in any

way anticipate the controversy that your paper would subsequently generate?

No.

Is the philosophy of science and formal methodology an area that still interests

you?

It was an area that interested me at the time but after I wrote that paper I

decided I really would rather do economics than tell people how to do

economics. I found out that my views were very similar to Karl Popper’s and

I followed his writings in a sort of a vague way, but not very seriously. One of

the major reasons why that article led to so much controversy is that I

decided early on that I wasn’t going to answer attacks on it [laughter]. I am

serious. If you want to get controversy about one of your articles, write

something which will be attacked and then don’t answer the attackers because

it opens a field day.

Why do you think there is more consensus among economists over microeconomic

issues compared to macroeconomic issues?

Primarily because there has not been in the microeconomic area anything

comparable to the Keynesian revolution in the macroeconomic area. For a

time it looked as if the imperfect competition developments of Chamberlin

and Robinson would play the same role in the microeconomic area, but they

turned out to be more readily absorbed in the traditional classical body of

microeconomic theory as presented in Marshall’s Principles. A second reason,

indeed the one that gave rise to the Keynesian revolution, was that the

issues of employment/unemployment and business cycles became major political

issues.

How important do you think it is for macroeconomic models to have choicetheoretic

microfoundations?

It is less important for macroeconomic models to have choice-theoretic

microfoundations than it is for them to have empirical implications that can

be subjected to refutation. Choice-theoretic microfoundations may provide

hypotheses for improving macroeconomic models, but the key macroeconomic

models have been of long standing and have had a great deal of

success without the more recent emphasis on choice-theoretic microfoundations.

Do you think that attempts to try to understand the reasons for wage and

price rigidities are a fruitful line of research?

I don’t believe that you can tell people what is a fruitful line of research.

Everything is a fruitful line of research. I remember very well when I was

advising doctoral students about their theses, they would come in and say

well, a lot’s been done on that subject. There is no subject on which there

isn’t more to be done, building on what’s gone before. I don’t have any doubt

that there are wage rigidities because obviously there are; it’s a fact of life,

it’s hard to deny it. The question is whether they are important or not, in what

ways they are important and in what kind of phenomena are they important.

As I said before, the essence of a successful theory is that it extracts the key

elements from the whole host of attendant circumstances. So I wouldn’t want

to discourage anybody from doing research in that area. Moreover I wouldn’t

want to discourage anybody from doing research in any area. What people

have to do is to do things that interest them, follow up their own insights and

their own ideas.

Robert Lucas [1994a, p. 226] has argued that ‘Professional economists are

primarily scholars … [whose] responsibility is to create new knowledge by

pushing research into new, and hence necessarily controversial, territory’.

Where do you see macroeconomic research heading?

Economists are scholars but they are going to be influenced by developments in

the world around them. There is no doubt that the great interest in business

cycles was partly a consequence of the phenomenon of the Great Depression.

We have in the world today the most striking phenomena: on the one hand there

is the worldwide technological revolution, and on the other hand there is the

political revolution – the collapse of the Soviet Union and the independence of

its satellites. Both influences have had one common effect – what has been

called the globalization of the economy, a term I hate. Both revolutions have

led to a situation in which a producer can produce a product anywhere in the

world, sell it anywhere in the world, use resources located anywhere in the

world and be himself located anywhere in the world. So it is no longer meaningful

to talk about the domestic content of things. Is a car made in America

when parts of it come from Japan and parts come from another country? That’s

always been true, but it’s a much more important phenomenon today. In addition

there are also issues relating to the so-called underdeveloped or backward

countries which are now coming into the modern stream for the first time.

Those are phenomena of major importance and they need to be discussed and

analysed. It is appropriate that economists should move to see how they can

understand those phenomena and what can contribute to those phenomena. I

have no doubt that this will be a major focus of research over the coming years.

In your [1991] Economic Journal paper you drew attention to major improvements

in the ‘engine of analysis’ but seemed to suggest that the quality

of much economic research had declined. Can you elaborate on this view?

I don’t believe I was saying that. What I would say is that economics has

become increasingly an arcane branch of mathematics rather than dealing

with real economic problems. There is no doubt that that has happened. I

believe that economics has gone much too far in that direction, but there is a

correction on the way. Take the Economic Journal. It has introduced a section

on current controversies which is a real departure from the kind of thing it

had before. There is no doubt that it’s become harder for anybody to keep up

with the literature, except in his or her own special field, and I believe that’s a

very bad feature of the developments in economics. In that sense, what you

said about the decline and deterioration in economic research is true. But the

engine of analysis as a technical, theoretical structure has certainly improved

over the period a great deal.

Why do you think the leadership in macroeconomic research passed from the

UK to the USA after the Second World War?

The answer is simple. If you have too strong an orthodoxy you are not going

to have any leadership. What happened was that Britain was a leader in the

1930s, no question. But that became solidified into a rock of orthodox opinion

which was not going to be a breeding ground for leading the future. Of

course this is a complicated question because it is all tied up with the change

in the role of Britain as a whole in the world as a result of the Second World

War. The First World War reduced the influence of Britain a great deal as a

world leader and the Second went further. But I think fundamentally the

problem was that the leadership in economics at Cambridge, England became

hardened into an orthodoxy, which is not a good breeding ground for revolutionary

or innovative work.