The end of comfortable Keynesianism

Rob Green/Bergman Group

I was delighted to learn yesterday that Tom Sargent and Chris Sims were awarded this year’s Nobel Prize in Economics. I had the good fortune to study macroeconomics briefly with Sargent and to be a faculty colleague of Sims’s for a number of years.

Tom Sargent’s graduate macro course was hard. I don’t mean hard in the “I hate equations and graphs make me break out in hives” kind of hard. I mean hard in the “I’m normally really good at this stuff and it all used to make sense, but what’s going on?” kind of hard. In the world of undergraduate economics, from whence my classmates and I had all emerged, there were Keynesian truisms that one could master. The state of the economy was set by the intersection of aggregate demand and aggregate supply curves. An adept policy maker could, by pulling the right levers and twisting the right knobs, shift these curves and thereby set the economy on the proper course. Implicitly, to such a policy mastermind, the economy was populated with individuals who acted in reliable, predictable ways.



Philip I. Levy is a resident scholar at AEI.

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