Which seems to capture how Paul Krugman thinks about the economics profession. Here's the part of Krugman's post I want to focus on:
Let me offer an example of how this ended up impoverishing macroeconomic analysis: the strange disappearance of James Tobin. In the 1960s Tobin developed and elaborated a sophisticated view (pdf) of financial markets that offered insights into things like the role of intermediaries, the effects of endogenous inside money, and more. I’ve found myself using Tobinesque analysis a lot since the financial crisis hit, because it offers a sophisticated way to think about the role of finance in economic fluctuations.Tobin has indeed disappeared from the curriculum in any PhD programs in economics that I know about. I work in the field of money and banking, go to conferences, publish papers, edit papers, referee papers, and I have never come across a paper in the mode of Tobin (1969) in my whole professional career - I got out of graduate school in 1984. I have certainly read Tobin's stuff. There was a set of papers that I read while in graduate school that I thought were interesting, including the 1969 paper that Krugman mentions.
But Tobin, as far as I can tell, disappeared from graduate macro over the course of the 80s, because his models, while loosely grounded in some notion of rational behavior, weren’t explicitly and rigorously derived from microfoundations. And for good reason, by the way: it’s pretty hard to derive portfolio preferences rigorously in that sense. But even so, Tobin-type models conveyed important insights — which were effectively lost.
Then came the financial crisis, and many economists apologetically admitted that they had erred by not incorporating finance into their models, and announced plans to try to do that in the future.
To understand why Tobin's work has disappeared from modern discourse in macroeconomics, a good starting point is Sargent's 1982 paper on "Beyond Demand and Supply Curves in Macroeconomics." In 1982, there was a budding literature on the foundations of monetary exchange, and explicit models of financial intermediation. Sargent discusses Tobin's work directly, points out what the insights were from that work, and goes on to explain how the new literature deepened our understanding of Tobin's insights, and gave us new insights. In the 1980s, there was extensive work on financial intermediation models - Diamond and Dybvig's work (banking panics) and Diamond's delegated monitoring work. Yours truly, Bruce Smith, and Bernanke and Gertler, among others, thought about how to integrate some of those ideas into general equilibrium frameworks. There has been a wide-ranging program in monetary economics for the last 35 years or more, including work by Kiyotaki and Wright, Rocheteau, Lagos, yours truly (again), and many others. As one example of what you can do with those types of models, you can look at some of my papers (this one, or this one). As well you can look up some of the work of Randy Wright (Wisconsin), Ricardo Lagos (NYU), Guillaume Rocheteau (UC Irvine), Mark Gertler (NYU), Nobu Kiyotaki (Princeton), or Markus Brunnermeir (Princeton).
Why did Tobin's work disappear from discussion? It was superceded. We now have better models, that are much richer in their implications. Tobin was fine for his time, but why drive on the freeway in a golfcart, when you can drive a Ferrari (as one of my friends once said)? Krugman should read this stuff. I think he would like it. I, my colleagues, coauthors, and students, have not been "apologetically admitting that we erred by not incorporating finance into our models." That's what we do, and some of us have been doing it for a long time. As Krugman says, "it’s pretty hard to derive portfolio preferences rigorously..." So, I guess we must be pretty smart, as we can do some of that.