Simon Wren-Lewis thinks some more about macroeconomics gone astray; Robert J. Waldmann weighs in. For those new to this conversation, the question is why starting in the 1970s much of academic macroeconomics was taken over by a school of thought that began by denying any useful role for policies to raise demand in a slump, and eventually coalesced around denial that the demand side of the economy has any role in causing slumps.

I was a grad student and then an assistant professor as this was happening, albeit doing international economics – and international macro went in a different direction, for reasons I’ll get to in a bit. So I have some sense of what was really going on. And while both Wren-Lewis and Waldmann hit on most of the main points, neither I think gets at the important role of personal self-interest. New classical macro was and still is many things – an ideological bludgeon against liberals, a showcase for fancy math, a haven for people who want some kind of intellectual purity in a messy world. But it’s also a self-promoting clique.

I don’t think this clique could have formed and grown powerful in the first place without the intellectual and ideological foundations. Economics as a discipline being what it is, attacks on Keynesian economics as being inconsistent with rational behavior were bound to get some traction, and the stagflation of the 1970s certainly helped that attack, even if it was less relevant than claimed. Animus against government activism also played a key role, both in motivating the new classical economists themselves and in guaranteeing them external support.

Once the thing had gotten going, however, I think you understand its dynamics much better if you stop assuming that the motives of the movement’s leaders were pure.

Consider the extremism of Lucas and Sargent (pdf) in the early days, declaring Keynesian economics a complete failure – or Lucas talking about how Keynesian papers were greeted with “giggles and whispers”. As Wren-Lewis notes, the actual empirical failures of Keynesian economics weren’t nearly bad enough to justify that kind of total rejection – and as Waldmann says, the new classicals themselves turned their backs on empirical evidence when it began rejecting their own models. So why the utter rejection of anything Keynesian?

Well, while the explicit message of such manifestos is intellectual – this is the only valid way to do macroeconomics – there’s also an implicit message: from now on, only my students and disciples will get jobs at good schools and publish in major journals. And that, to an important extent, is exactly what happened; Ken Rogoff wrote about the “scars of not being able to publish sticky-price papers during the years of new neoclassical repression.” As time went on and members of the clique made up an ever-growing share of senior faculty and journal editors, the clique’s dominance became self-perpetuating – and impervious to intellectual failure.

OK, I know the members of the clique will be outraged – distorting incentives only apply to other people, only bureaucrats hijack institutions to serve their personal aggrandizement, etc.. As they say in Minnesota, ya sure, you betcha.

But what about me and my friends? Why, we’re pure and selfless seekers of truth. How dare anyone suggest otherwise?

OK, I think there is a sense in which I’m part of a counterclique. In fact, if you look at just about every economist in my cohort playing an influential role in formulating or discussing macroeconomic policy — Rogoff, Bernanke, Draghi, Blanchard, Summers — you’ll find that they studied macroeconomics at MIT or Harvard, and were formally or informally advised by Rudi Dornbusch and his good friend Stan Fischer.

As I said, international macro went in a different direction. I’ve written in the past that this had a lot to do with the overwhelming international evidence against a new classical view, although that view persisted on the domestic side despite compelling evidence after 1980. It also had to do with events. For domestic macro types, the big event of the 70s was stagflation; in international macro it was the collapse of Bretton Woods, and the shocking volatility in both nominal and real exchange rates that followed.

In that context, the very tight correlation between nominal and real rates meant that international macroeconomists kept sticky prices in their models. The famous Dornbusch “overshooting” analysis paired sticky goods prices with volatile, forward-looking asset prices, and seemed to have very interesting things to say – so international macro had a program other than the demolition of all things Keynes.

Also, my sense – it would be interesting to have some evidence – is that international macro has all along had stronger ties to real-world policymakers, especially at central banks, maybe because there are a lot of currencies and US-based economists therefore have a lot more opportunities to weigh in on actual policy decisions. Certainly Rudi pioneered a new role that combined highly regarded research with lots of country consulting. Since central banks never went all in for new classical – they tend to have this “but it doesn’t work in the real world” hangup – this too pulled international along a different path.

And yes, DornbuschFischerites tend to value research and people consonant with their worldview. I like to think that it’s nothing like the scourge-and-purge style of the new classical types, in part because my side of this thing likes to think of itself as open-minded, sometimes giving the impression of desperately seeking common ground (hi Olivier). But the friends-and-disciples effect certainly has some relevance, and there are a lot of DornbuschFischerites in influential places. Have I congratulated my old student Catherine Mann on her appointment as chief economist of the OECD?

These stories are not, of course, unique to economics; episodes like this have played out in many academic disciplines. Unfortunately, the rise of the new classical clique had consequences far beyond the academy, because it ended up playing an important role in the failure of policy to effectively confront the Lesser Depression.