The Rapid Shift to Keynesian Thinking Shows How Shallow Mainstream Economics Has Been for Decades

The New York Times had a marvelous story on Wednesday about the sea change in economic thinking that has occurred over these last four months. It begins: “Frightened by the recession and the credit crisis that produced it, the nation’s mainstream economists are embracing public spending to repair the damage — even those who have long resisted a significant government role in a market system.”

The American Economics Association has been meeting in San Francisco, and it seems that the profession has finally admitted how wrong most of them have been for the last three decades. The story quotes Janet Yellen, president of the Federal Reserve Bank of San Francisco., as saying: “The new enthusiasm for fiscal stimulus, and particularly government spending, represents a huge evolution in mainstream thinking.” The report adds that she said current shift in thinking is “likely to last for as long as the profession is dominated by men and women living through this downturn.”

Paul Krugman, the 2008 Nobel laureate for economics, has always recognized the validity of what's called Keynesian economics in some circles. But in many universities, the line of thinking has not been popular at all. My favurite economist and a few of his cronies have felt quite isolated as they insisted that government regulation is essential, that cutting taxes for the rich is not good policy, and that Keynes was right about stimulus and economic downturns. Now they are vindicated, and he says the swift turn-around in the thinking of mainstream economists shows just how shallow all the monetarists were. I imagine there are a lot of his former students who may have shaken their heads at the time over some of the ideas he brought forth in his micro and macro classes—ideas that were absent from the courses given by most other economists—who are now trying to remember what he said. There may even be some mumbles of: “old Soderstrom was right, after all!”

Too bad it takes a crisis that hurts so many people for foolish ideas to be unmasked.