7 - Fresh Water, Salt Water, and Other Macroeconomic Elixirs

Summary

Viewed from a distance of 10,000 miles, the dominant features of American academic macroeconomics are the worldwide prominence of its leading creative thinkers, and the surprising insularity of its scholastic debates. Nothing seems further from the main macroeconomic concerns of the United States, not to mention of the twenty-three other industrialized nations that constitute the OECD, than the “fresh water, salt water” dichotomy between new-classical and new-Keynesian traditions which has dominated the coffee-break oral tradition of American macroeconomic conferences for the past decade. I suggest here that the “salinity criterion” no longer serves its original purpose of describing the central disputes in American macroeconomics, not only because it is no longer geographically accurate but, much more important, because (1) it leads commentators greatly to exaggerate the influence that new-classical economics ever had on the main battlefield of any academic debate – the campaign for the minds of the young, and (2) because it is no longer relevant to the central unsolved puzzles concerning macroeconomic behavior.

BACKGROUND

More than a decade has now passed since Robert Hall (1976) brilliantly christened the central schism in macroeconomics as a debate between the “fresh water” and “salt water” schools of thought. His nomenclature was based on the geographical location at that time of the three major developers of new-classical macroeconomics (Robert Lucas, Thomas Sargent, and Robert Barro) in four universities placed on or near bodies of fresh water, Carnegie-Mellon, Chicago, Minnesota, and Rochester, and of the major defenders of Keynesian economics at universities on either coast.