Even when mainstream Macro disagrees on some level they all recite this oath every day. Even those like Krugman, Delong, or Simon Wren-Lewis who call themselves Keynesians. Here is Wren-Lewis-from here on WL-on Lucas' New Classical manifesto:
"Following this little interchange (me, Mark Thoma, Paul Krugman, Noah Smith, Robert Waldman, Arnold Kling), I reread what could be regarded as the New Classical manifesto: Lucas and Sargent’s ‘After Keynesian Economics’ (hereafter LS). It deserves to be cited as a classic, both for the quality of ideas and the persuasiveness of the writing. It does not seem like something written 35 ago, which is perhaps an indication of how influential its ideas still are."
http://mainlymacro.blogspot.jp/2014/07/rereading-lucas-and-sargent-1979.html
So are New Keynesians like WL really fake Keynesians? How do they explain their homage to Lucas' manifesto? WL doesn't conceive the most important thing about Lucas' manifesto to be any alleged defeat of Keynesian ideas. Yet it ought to be understood that this is what Lucas thought it was. In his manifesto, he spoke a good deal about how Keynesian economics-what is now called Paleo-Keynesianism-failed on a 'grand scale.'
Lucas clearly thought the hits 'Keynesian' economics had taken was fatal:
“Though not, of course, designed as such by anyone, macroeconometric models were subjected to a decisive test in the 1970s. A key element in all Keynesian models is a trade-off between inflation and real output: the higher is the inflation rate, the higher is output (or equivalently, the lower is the rate of unemployment). For example, the models of the late 1960s predicted a sustained U.S. unemployment rate of 4% as consistent with a 4% annual rate of inflation. Based on this prediction, many economists at that time urged a deliberate policy of inflation. Certainly the erratic ‘fits and starts’ character of actual U.S. policy in the 1970s cannot be attributed to recommendations based on Keynesian models, but the inflationary bias on average of monetary and fiscal policy in this period should, according to all of these models, have produced the lowest unemployment rates for any decade since the 1940s. In fact, as we know, they produced the highest unemployment rates since the 1930s. This was econometric failure on a grand scale.”
WL can claim to be a Keynesian who pages homage to Lucas because he argues that what was important about Lucas' manifesto and the NC-and later New Keynesian-revolutions was not about ideology but method. He claims that what was important here was not stagflation-even though Lucas alleges that the existence of stagflation is an 'emprical failure on a grand scale of Keynesian models.'
"What I want to explore is whether this manifesto for the New Classical counter revolution was mainly about stagflation, or whether it was mainly about methodology. LS kick off their article with references to stagflation and the failure of Keynesian theory. A fundamental rethink is required. What follows next is I think crucial. If the counter revolution is all about stagflation, we might expect an account of why conventional theory failed to predict stagflation - the equivalent, perhaps, to the discussion of classical theory in the General Theory. Instead we get something much more general - a discussion of why identification restrictions typically imposed in the structural econometric models (SEMs) of the time are incredible from a theoretical point of view, and an outline of the Lucas critique."
"Following this little interchange (me, Mark Thoma, Paul Krugman, Noah Smith, Robert Waldman, Arnold Kling), I reread what could be regarded as the New Classical manifesto: Lucas and Sargent’s ‘After Keynesian Economics’ (hereafter LS). It deserves to be cited as a classic, both for the quality of ideas and the persuasiveness of the writing. It does not seem like something written 35 ago, which is perhaps an indication of how influential its ideas still are."
http://mainlymacro.blogspot.jp/2014/07/rereading-lucas-and-sargent-1979.html
So are New Keynesians like WL really fake Keynesians? How do they explain their homage to Lucas' manifesto? WL doesn't conceive the most important thing about Lucas' manifesto to be any alleged defeat of Keynesian ideas. Yet it ought to be understood that this is what Lucas thought it was. In his manifesto, he spoke a good deal about how Keynesian economics-what is now called Paleo-Keynesianism-failed on a 'grand scale.'
Lucas clearly thought the hits 'Keynesian' economics had taken was fatal:
“Though not, of course, designed as such by anyone, macroeconometric models were subjected to a decisive test in the 1970s. A key element in all Keynesian models is a trade-off between inflation and real output: the higher is the inflation rate, the higher is output (or equivalently, the lower is the rate of unemployment). For example, the models of the late 1960s predicted a sustained U.S. unemployment rate of 4% as consistent with a 4% annual rate of inflation. Based on this prediction, many economists at that time urged a deliberate policy of inflation. Certainly the erratic ‘fits and starts’ character of actual U.S. policy in the 1970s cannot be attributed to recommendations based on Keynesian models, but the inflationary bias on average of monetary and fiscal policy in this period should, according to all of these models, have produced the lowest unemployment rates for any decade since the 1940s. In fact, as we know, they produced the highest unemployment rates since the 1930s. This was econometric failure on a grand scale.”
WL can claim to be a Keynesian who pages homage to Lucas because he argues that what was important about Lucas' manifesto and the NC-and later New Keynesian-revolutions was not about ideology but method. He claims that what was important here was not stagflation-even though Lucas alleges that the existence of stagflation is an 'emprical failure on a grand scale of Keynesian models.'
"What I want to explore is whether this manifesto for the New Classical counter revolution was mainly about stagflation, or whether it was mainly about methodology. LS kick off their article with references to stagflation and the failure of Keynesian theory. A fundamental rethink is required. What follows next is I think crucial. If the counter revolution is all about stagflation, we might expect an account of why conventional theory failed to predict stagflation - the equivalent, perhaps, to the discussion of classical theory in the General Theory. Instead we get something much more general - a discussion of why identification restrictions typically imposed in the structural econometric models (SEMs) of the time are incredible from a theoretical point of view, and an outline of the Lucas critique."
"In other words, the essential criticism in LS is methodological: the way empirical macroeconomics has been done since Keynes is flawed. SEMs cannot be trusted as a guide for policy."
Well we get the idea of what NKers tell themselves when they drink the DSGE coolaid. Is it what Lucas thinks of? I'm not so sure. Here is Noah Smith
"The Keynesian SEMs predicted that when the Federal Reserve lowered interest rates, it should have given the economy a boost; instead, all it did was create useless, harmful inflation. This made a big impression on economists. About a year ago I asked a group of economists whether the Fed should temporarily adopt a higher inflation target. Robert Lucas, who probably has more claim than anyone to being the father of modern macroeconomics, thundered: “We tried (stupid) inflation! It didn’t (dang) work!”
Was the important thing methodology-for Lucas and friends or was it ideological, the opportunity to dance on the 'Keynesian grave'? I think this at least debatable. Lucas clearly sees it as simple as 'Keynesians told us inflation was good and it turned to be bad'-though no 'Keynesian' of any repute ever made such simplistic claim. The vulgar idea of the Phillips' Curve was clearly wrong but did you really need to burn Keynes to know that?
I suspect that what WL thinks is important about Lucas' counter-revolution may be different from what Lucas thinks. As for the area that they agree on-SEMs, well, what's interesting is that neither the finance industry or even the Fed have given up on SEMs, 35 years later:
http://noahpinionblog.blogspot.com/2014/07/why-doesnt-finance-industry-use-dsge.html
http://noahpinionblog.blogspot.jp/2014/01/the-most-damning-critique-of-dsge.html
http://noahpinionblog.blogspot.jp/2014/04/the-foxy-fed_7.html
So both Wall Street and the Fed still haven't heard of the grand failure of Keynesian SEMs yet-it's hard to square this fact with Rational Agents. Neither of them declare 'In Bob Lucas we trust.'
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