The Chicago coup

I already commented on this Paul Krugman post, but I thought of another angle that seems kind of odd.  See what you guys think.  Krugman was commenting on this statement by Laurence Meyer:

There’s also another tradition that began to build up in the late seventies to early eighties””the real business cycle or neoclassical models. It’s what’s taught in graduate schools. It’s the only kind of paper that can be published in journals. It is called “modern macroeconomics.”

I found this confusing, as it wasn’t clear where Meyer put new Keynesianism, which is surely the dominant macro paradigm in the last 30 years.  Paul Krugman also seemed a bit perplexed, and offered this interpretation:

My first reaction, on reading this, was to say that Meyer overstates the case “” and he does, a bit. It has been possible to publish New Keynesian models in the journals, and these models do, I think, provide some useful guidance “” if only as a consistency check on more ad hoc approaches.

But fundamentally Meyer is right. And it has been going on a long time. By the early 1980s it was already common knowledge among people I hung out with that the only way to get non-crazy macroeconomics published was to wrap sensible assumptions about output and employment in something else, something that involved rational expectations and intertemporal stuff and made the paper respectable. And yes, that was conscious knowledge, which shaped the kinds of papers we wrote.

When I left Wisconsin for Chicago in 1977, some of my professors suggested that it was a rather nutty place.  Most schools were Keynesian in 1977, only Chicago and a few others (Rochester, Minnesota, etc) dissented from this orthodoxy.  Certainly the elite Ivy League universities that dominated the field were not sympathetic to Chicago.

Here’s what I’d like to know.  How was it that just a few years later it was almost impossible to get anything published without assuming rational expectations, efficient markets, etc.  I’d like to offer two hypotheses:

1.  Sometime around 1980 an elite team of Chicago macroeconomists stormed the offices of all the major economics journals with AK-47s, ousting all the editors and replacing them with inferior people who just happened to have studied under Lucas and Fama.  Call it the academic equivalent of the Chilean coup.

2.  The discovery of rational expectations and the efficient market hypothesis at the University of Chicago caused a scientific revolution.  A paradigm shift.  Economists began to realize that the expectations assumed in a model ought to be consistent with the model’s predictions.  That it made no sense to have models that assume the world works one way, and populate it with people who believe the world works in an entirely different way.  And economists also realized that it made no sense to build models that implied it was easy to set up mutual funds that would out-perform an indexed fund, simply by following the implications of a model.  After all, it’s really hard to beat indexed funds, despite the fact that lots of very smart people try hard to do so.

So which view seems more plausible?

I hope I haven’t unfairly stacked the deck by presenting only these two hypotheses.  I’ve tried to present both views in an even-handed way.  Please let me know what you think.  (I don’t doubt that readers will provide a third hypothesis in the comment section.)

HT:  Matt Yglesias

PS,  I recall that Yglesias is highly critical of conservatives who reject the scientific consensus on global warming.  I agree.  But I wonder how he feels about liberals who reject the economic consensus about rational expectations and efficient markets.  Krugman says you can’t get published without assuming ratex—doesn’t that sound a lot like climate science, where it’s almost impossible to get published without assuming global warming?  (And don’t say economics is a soft science where proof is difficult to achieve.  Prediction is also difficult in climate science; and for the same reason—both the economy and the climate are very complex.)