First Matt does us the favor of defining "freshwater macro."
freshwater" macroeconomics ... focuses heavily on the idea of a "real" business cycle and disparages the notion of either fiscal or monetary stimulus...Matt also mentions yours truly:
Stephen Williamson, a proponent of freshwater views...So, I don't know who Matt has been talking to, but in all of my published work, I don't think you can find a real business cycle model. Further, the models I work with are replete with various frictions - including private information and limited commitment - that make monetary and fiscal policy matter in important ways. I have even on occasion put sticky prices in models, studied credit rationing, and thought about multiple equilibria. So, I guess I couldn't be one of the those freshwaters. Indeed, there appear to be few currently active economic researchers who could actually be pigeonholed as real business cycle types who are sour on government intervention, or somehow don't want to think about it. So what am I, and what is it that most macroeconomists are actually up to?
I think Paul Krugman has the answer, and he makes it simple for us simple-minded folks. You just have to answer a question:
Can you live with that reality, and accept the notion that not everything you put in your model has microfoundations? If you can, you’re a saltwater economist, in some sense a Keynesian. If you can’t, you’re part of what has gone wrong with the field.Excellent. We're all saltwaters, including Bob Lucas. So, as far as I can tell, Krugman has no one to pick a fight with. Maybe he can go provoke some Austrians. I hear they are very feisty.
I recall in the paper Noah linked, Chicago was the "saltiest" freshwater school (partly an artifact of how they ignored citation's to one's own university), and Lucas himself is old enough to have a foot in Friedmanite monetarism. But might Prescott be pure freshwater/RBC? He's often pointed to as the most extreme example of that. I recall when Lucas gave that talk at CFR, Prescott questioned why OMOs would have any effect and Lucas acted incredulous that Prescott could think otherwise (though he was laughing as soon as Prescott was pointed out as having a question, before hearing what he had to say).ReplyDelete
That's a good example of why these labels are such nonsense, and why thinking and talking about them is such a waste of time. Lucas and Prescott can talk to each other, and they wrote together, but they have some very different ideas.Delete
Steve, while the insistence may be a waste of time to you, it may make perfect sense to those who perpetuate the idea of the divide. After all, without "them" then can be no "us". And then, some may have to start seriously defending their ideas. Anyway, this whole thing reminded me of this poem by fellow Greek poet C.P. Cavafy:ReplyDelete
What would you call this? It's not a straw man, as in that case you actually have an opponent, and you're mischaracterizing his or her side of the argument. This is just fictitious opponent I guess.Delete
I believe that this behavior is based on our tendency towards tribalism, perhaps an evolutionary remnant of our earlier days as a species.Delete
Except that some end up encouraging this tendency in order to obtain status and leadership positions within the tribe. By reducing the size of their audience, they are able to hinder competition. And by creating a sense of us versus them they are able to deflect opposing views and avoid the need to defend or refine their ideas.
In this particular case, the theme is that any criticism of "our saltwater" ideas stems not from real weaknesses of these ideas, but rather from "their freshwater" beliefs. And since our ideas are just fine, what is the point of trying to refine them further? There is nothing we can do to convince those "freshwater" types. For example, I remember a post by Krugman in which the bottom line was, look, Eggertsson and I derived a microfounded ISLM, yet these "freshwater" guys are still refusing to accept the model as a tool for policy analysis, so there is really no point talking to them. It is a way of justifying intellectual laziness and inaction.
What utter nonsense. Krugman pointed out that there is a methodological divide, that there are people who think that macro can be reduced to micro and that there are people who think that the whole is more than the sum of its parts. This is simply correct.Delete
Take Williamson, his main issue with Krugman is that the guys uses non-microfounded models like good ol' IS-LM (plus some not explicitly modeled insides from the Japanese liquidity trap) to analyze the current mess. He has a methodological problem with this approach and favours clearer microfounded models over ad-hoc models plus loose arguing.
You also find this divide when you take a look at empirics. Krugman is fine with looking at the data or estimating VARs, Williamson wants more sophisticated empirical work that directly tests a model.
Whether you wanna call these two approaches saltwater vs. freshwater or whatever is just a matter of naming. But denying that two schools of though exist, well, that's a just a weak attempt at denying that the intellectual opponent even exists (or actually a smart attempt to take over the entire field and implicitly declare guys like Krugman heretics).
Personally I generally favour the second school. But during the last years it were the "heretical" ad-hocs folks who made the best predictions (about inflation staying low, about the recession enduring for a long time, about the limited traction of monetary policy) so I see merit in their work.
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It's really strange that Yglesias felt a need to write a post on this subject; his understanding of modern macro appears to be the product of blogs, not the literature. The bottom line is that this is a political argument--it's about signaling tribal affiliation and drawing caricatures of ideas you don't like, without ever having to actually describe what ideas you are talking about. This is why the argument falls apart when anyone writes down an actual definition, as you show here.ReplyDelete
I bothered Noah Smith about this until he finally defined Saltwater to mean models with Calvo pricing. Obviously this makes the whole idea seem pretty silly--if Smith prefers models with Calvo pricing to those without, he should just describe the distinction that way instead of referencing obsolete heuristics.
Here's my post: http://updatedpriors.blogspot.com/2013/12/freshwater-saltwater-and-econ.html
Noah has a remarkable knowledge of macroeconomics and the history of thought in the field, for an experimental finance guy fresh out of graduate school.Delete
"Noah has a remarkable knowledge of macroeconomics and the history of thought in the field, for an experimental finance guy fresh out of graduate school."Delete
Noah is also my good buddy. I love the guy's enthusiasm, and I'm sure he understands this is nothing personal.Delete
"I knew what those terms meant in 1975,.."ReplyDelete
Why 1975? I would have said early 1980's. IIRC, 1975 was still monetarists vs Keynesians. People were still digesting Lucas 72, and Kydland and Prescott's RBC hadn't appeared yet.
Depends where you were at the time, I guess.Delete
Here's what Wikipedia says:Delete
The terms 'freshwater' and 'saltwater' were first used in reference to economists by Robert E. Hall in 1976...
Here is a blog post by Timothy Taylor providing some thoughts on the geography of salt-water and fresh-water.Delete