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The development of modern macroeconomics

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 BRIAN SNOWDON
[hme~,ity ~ Northumbria
Neu:castle-upon-Tyne, United Ki)~gdom

HOWARD R. VANE
Liverpool John Moores Unitecsity
l,i~>eq~ool, United Kingdom

The Development of Modern

Macroeconomics: Reflections in the
Light of Johnson's Analysis after
Twenty-Five Years*
This paper considers how far factors advanced by Harry" Johnson some twenty-five years ago to
explain the success of the Keynesian revolution and subsequent monetarist counter-revolution,
can help in understanding why new classical macroeeonomics has had such an impact on the
more recent development of macroeconomics. At least three of Johnson's five "internal scientific
characteristics" are seen to have played an important role in the development of both versions
of new classical macroeconomics.

1. Introduction
Twenty-flve years ago Harry Johnson (1971) in his lecture to the 1970
meeting of the American Economic Association attempted to provide reasons
for the rapid propagation of the Keynesian revolution in order to better
understand the monetarist counter-revolution which during the late 1960s
and early 1970s had begun to fill the intellectual vacuum created by the
retreat of the Keynesian orthodoxy in the face of accelerating inflation (see
Friedman 1968, 1970; Kenway 1994). In Johnson's highly perceptive article
attention is drawn to the shared characteristics of the Keynesian revolution
and the monetarist counter-revolution that appear important in explaining
the success of these developments. According to Johnson there are two types
of factor which can help explain the rapid acceptance and propagation of new
ideas among professional economists. The first factor relates to the "objectiw'
social situation in which the new theory was produced" (italics added). The
second important factor encompasses the "'scientific characteristics of tile
*This paper is based on a series of lectures given within the Faculty of Economics at Ryukoku
University and Doshisha University, in Kyoto, Japan, in mid-January 1995. The authors are
grateful to Faculty members for their stimulating discussions and hospitality' during their visit.
The authors would also like to thank an anonymo, ls referee for helpful comments and suggestions
on an earlier draft of this paper.

Journal of Macroeconomics, Summer 1996, Vol. 18, No. 3, pp. 3 8 1 4 0 1 38 t

Copyright © 1996 by Louisiana State University Press
0164-0704/96/$1.50
Brian Snowdon and Howard B. Vain'

new theory"' (italics added). Since tile early 1970s, when Johnson's article
appeared, maeroeconomics has been in a state of"disarray" (Brunner 1989!.
The Keynesian-monetarist debate whieh dominated macroeconomics up to
the mid-1970s has been superseded by the appearance of a number of
conflicting and competing approaches. During the 1970s the new elassical
research programme replaced monetarism as the main rival to Keynesianism,
By the early 1980s many new classical theorists abandoned the mark I version
of equilibrium business cycle theory and with the development of a mark II
version emphasized real supply-side factors, rather than monetary impulses,
in their explanation of aggregate instability (see Hoover 1988, 199"2a; Stadler
1994). These two versions of new classical equilibrimn theor?~have in turn
been challenged by a revitalized group of new Keynesian theorists (see
Gordon 1990; Mankiw and Romer 1991; Romer 1993).
The purpose of this paper is not to critically assess in detail the central
tenets underlying, and policy implications of, the new classical and new
Keynesian schools (for such a diseussion see Snowdon, Vane, and Wynarc~k
1994) rather it is to consider how far the factors identified by Johnson can
help in understanding the rapid propagation of new classical ideas. Our focus
on new classical maeroeconomics can be justified on two main grounds. First,
new classical economists have set the agenda for macroeeonomies to the
extent that "whether for or against, the views of the new classical school have
been the ones to debate; the problems it set have been the ones to solve; the
techniques it used have been the ones to adopt" (Hoover 1992a). As such,
new Keynesian economics can be seen as a reaction to the new classical
challenge. Second, there is no single unified new Keynesian model, rather
there are a multiplicity of explanations of wage and price rigidities and their
maeroeeonomie consequences. Although the numerous explanations are not
necessarily mutually exclusive (indeed they often complement each other)
different economists within the new Keynesian school emphasize various
aspects and causes of market imperfeetions and their macroeeonomic effects
(see Stiglitz 1992),
In Section 2 of the paper we review Johnson's arguments with respect
to the Keynesian revolution and the monetarist counter-revolution. In Sec-
tion 3 we briefly review the main features of new classical maeroeeonomics
before proceeding in Section 4 to apply Johnson's insights to these new
classical developments in an attempt to identify the "scientific characteris-
tics" of modern macroeeonolnies. In Section 5 we briefly consider the ob-
jective social situation in which new classical maeroeeonomics was produced
and the influence of rhetoric. In eonelusion we reflect on how relevant
Johnson's analysis is in helping understand the rapid propagation of new
classical macroeeonomics, an approach which has had a dramatic influence
on the more recent development of macroeconomics.

382
 The Develop~lwnt qf Moderv~ Macroeconomics

2. The Keynesian Revolution and the Monetarist

Counter-Revolution
The first factor identified by Johnson in his explanation of the success
of the Keynesian revolution and subsequent monetarist counter-revolution
was the existence in each case of an "objective social situation" where the
established orthodoxy was "clearly inconsistent with the most salient facts of
reality." In the case of the Keynesian revolution this problem was persistent
and severe unemployment. In Britain the experience of tile 1920s and 1930s
appeared to shatter the classical assmnption that fidl employment eqnilib-
rium was the normal state of affairs. Between 1921 and 1938 the rate of
unemployment never fell below 10% and exceeded 20% in 1931 and 1932.
In tile United States unemployment reached 25% in 1933, and despite rapid
rates of growth of real output in the mid and late 1930s unemployn~ent was
still almost 10% in 1941 (see Romer 1992). For Keynes this crisis suggested
that capitalism was not terminally ill but unstable. His objective was to modit\
the rules of the game within the capitalist system in order to preserve and
strengthen it. He wanted lull employment to be the norm rather than the
exception and his would be a conservative revolution. Against this back-
ground Keynes (1936) put forward a new and revolutionary, theory to explain,
and provide a remedy for, the then-prevailing sew~re unemployment. In a
parallel fashion the inability of Keynesian theory to provide an adequate
explanation of and solution for inflation, which by the late 1960s had come
to be seen as the major social and economic problem t:acing capitalist market
economies, paved the way for a monetarist counter-revolution.
The second factor identified by Johnson to explain the rapid progress
and widespread acceptance of Keynesian and subsequently monetarist theory
was that in each case the new ideas possessed certain "scientific character-
istics" which helped to win intellectual acceptance. Although an established
orthodoxy which is in apparent contradiction to the "most salient facts of
reality" is the "most helpfid circumstance for the rapid propagation of a new
and revolutionary theory" Johnson also identified five internal scientific
characteristics which in his view were crucial because it was these aspects of
the new theory which appealed to the younger generation of economists. In
summary the five main characteristics Johnson identified involved:
(i) "a central attack, on theoretically persuasive gr(mnds, on the central
proposition of the orthodoxy of the time" (italics added). Keynes (1936)
attacked the classical assumption that the economy automatically tends
to full employment equilibrium. In turn monetarists attacked the ex-
treme Ke)aaesian case that money does not matter represented in the
Keynesian IS-LM model by the liqnidity trap and interest-inelastic
investment cases.
(ii) "'theproduction of an apparently new theorTj that nevertheless absorbed

3S3
Brian Snowdon and Howard B. Van(:

all that was valid in the existing theory while so far as possible git in~
thes'e valid concepts confitsing new names" (italies added). In tile latter
case Johnson cited examples taken from Keynes's (1936) General 77u'-
or~j which included the classical concept of tile marginal productM~,
of capital being re-named the marginal efficiency of capital. To support
this characteristic with regard to monetarist theory Johnson made
reference to Don Patinkin's (1969) article in which it was suggested that
Milton Friedman's (1956) restatement of the quantity theo U of money
should be regarded as an "elegant exposition of the modern portfolio
approach to the demand for money which . . . can only be seen as a
continuation of the Keynesian theory of liquidity preference."
(iii) a new theory having an "'appropriate degree of difficulty to understand"
that would "'challenge the intellectual interest of younger colleagues and
students" (italics added). In essence Johnson's argmnent is that there
is little incentive tbr older academies to invest time mastering a new
theory, especially as they have already invested considerable intellec-
tual capital in the established orthodoxy. In contrast a new theory offers
younger academies an opportunity to be part of a new and exciting
approach and gain intellectual recognition with associated promotion
possibilities. A case of having the opportunity to run with and be the
leaders of the pack rather than follow in its wake.
(iv) "a new nmre appealing nwthodology'" (italics added) than that pre-
vailing. In the case of the Keynesian revolution Johnson suggested that
this involved the move away from a partial to a general-equilibrimn
approach. On the other hand the monetarist counter-revolution offered
the new methodology of positive economies and a move away from
large-scale models of the economy.
(v) "the advancement of a new and important empirical relationship suit-
ablefi)r deter~nined estimation" (italics added) by econometricians. As
in the ease of the first characteristic this is easily identified in that the
Keynesian revolution offered the consumption function, and the mon-
etarist counter-revolution the stability of the demand for money fnne-
tion, as subjects for empirical scrutiny.
To what extent have these five internal scientific characteristics played
an important role in explaining the success of new classical maeroeeonomies?
Before attempting to answer this question we briefly review the main features
of new classical macroeconomies.

3. N e w Classical Macroeconomics
Although the mark I version of new classical macroeconomics initially
evolved out of monetarist macroeconomics during the 1970s it is clear that

384
 The Developl~wnt (!f Modern Macroeconomics

it should be regarded as a separate school of thought from orthodox mon-

etarism (see for example Hoover 1984; Laidler 1992). In new classical analysis
continuous market clearing ensures that aggregate demand shifts impact first
of all on prices. Quantity adjustment follows if rational agents misperceive
global price lnovements as relative price movements due to incomplete
information. By contrast, in Keynesian and orthodox monetarist analysis
quantities adjust first because prices are sticky in the short run. David Laidler
(1986) regards this as a "fundamental theoretical difference" which leads him
to treat new classical macroeconomics as a "distinct body of analysis, rather
than a simple extension of monetarism.'" From the mid 1970s to the early
1980s (at least as t~aras the United States was concerned) the mark I version
of new classical inacroeconomics replaced monetarism as the main counter-
revolutionary theory to Kevnesian economics. Such was the impact of new
classical theorizing, particularly in the U.S. that by 1978 Robert Lucas and
Thomas Sargent were contemplating lil~ "After Keynesian Macroeconom-
its." In their view the Keynesian luodel could not be patched tAp. The
problems were much more fundamental and related in particular to (i)
inadequate micro foundations which assume non-market clearing; and (ii) the
incorporation in both Keynesian and monetarist models of a hypothesis
concerning the formation of expectations which was inconsistent with max-
imizing behavior; that is, the use of an adaptive rather than rational expec-
tations hypothesis. In 1980 commenting on "The Death of Keynesian Eco-
nomics: Issues and Ideas" Lucas went so far as to claim that "people even
take offense if referred to as Keynesians. At research seminars people don't
take Keynesian theorizing seriously anymore; the audience starts to whisper
and giggle to one another" (cited in Mankiw 1992). In a similar vein, Alan
Blinder (1988) has suggested that "by about 1981), it was hard to find an
American academic inacroeconomist under the age of 40 who professed to
be a Keynesian. That was an astonishing intellectual turnabout in less than
a decade, an intellectual revolution fi)r sure." Bv this time the United States
most distinguished "old" Keynesian economist had already posed the ques-
tion, "How Dead is Keynes?" (see Tobin 1977). ttowever~ it should be noted
that while Blinder (1988) recalls how "the yonng were recruited dispropor-
tionately into the new classical ranks" during the 1970s Robert Gordon
(1989), citing evidence on citation cou n ts and co~fe fence pa rticipant.s., rejects
this view arguing that the influence that new classical macro had on the
younger generation of economists has been greatly exaggerated and that "new
classical macro did not conquer the Ph.D.s during the decade when it was
most influential!" It is also true that few non-academic economists converted
to new classicism in the U.S.
In addition to the theoretical fidlings of the orthodox Keynesian model
it has also become part of the conwmtional wisdom that its demise was

385
Brian Stu~wdo~ arm Howard B. V(me

brought about by empirical failings (Mankiw 1990). The empirical thilings

were highlighted by Lucas and Sargent (1978) when they described Key-
nesian models as having experienced "econometric failure on a grand scale."
Barro (1989) also attributes the considerable loss of prestige of Keynesian
models to the disappearance of the Phillips curve in the mid-1970s. However
there is another possible interpretation. Critics of new classical macroeco-
nomics reject their view of grand empirical failure. By the mid-1970s, at least
as far as the U.S. was concerned, the vertical in the long-run view of the
Phillips curve had won the day and the influence of supply side shocks,
unforseen by Keynesians, monetarists and new classicists alike, was being
incorporated into mainstream models (see Blinder 1988 and Laidler 1986,
1992). Such developments led to an "empirical revival" of the Keynesian
model (Gordon 1989). As a result monetarist influences were absorbed
within the existing framework leading to a Keynesian-monetarist synthesis,
a development clearly anticipated by Johnson in his prediction that the
monetarist counter-revolution would gradually "peter out" as a result of
"compromises" with the Keynesian opposition. An acceptance of this inter-
pretation of academic developments during the 1970s suggests that "the most
salient facts of reali~," the stagflation of this period, did not constitute an
"objective social situation" incapable of explanation within the emerging
Keynesian-monetarist synthesis. Nevertheless such was the momentum of
the new classical bandwagon that it continued to have a dramatic influence
on the development of maeroeconomic analysis.
Underlying the first phase of new classical theorizing is the joint ac-
ceptance of three main sub-hypotheses comprising: (i) the rational expec-
tations hypothesis, (ii) the aggregate supply hypothesis and (iii) the Walrasian
assumption of continuous market clearing. The structure of mark I new
classical models in turn produces a number of well known and controversial
policy implications, namely: (i) the policy ineffectiveness proposition (Sar-
gent and Wallace 1975, 1976); (ii) the absence of output/employment costs
following credible monetary contraction (Sargent 1993); (iii) the time in-
consistency argument against discretionary policies in favor of rules (Kydland
and Prescott 1977); (iv) the strong Ricardian equivalence result limiting the
usefulness of tax changes as a stabilization instrument (Barro 1974); (v) the
role of microeconomic policies to increase aggregate supply (see Minford
1991a); and (vi) the Lucas critique of econometric policy evaluation (Lucas
1976). According to Gordon (1989) the influence of this first phase of new
classical theorizing peaked in the period 1976-1978. Gordon also dates the
downt~al] of this phase "precisely at 8.59 a.m. EDT on Friday 13th October
1978 at Bald Peak, New Hampshire" for it was here that Robert Barro and
Mark Rush began their presentation "of an empirical test of the policy-
ineffectiveness proposition on quarterly U.S. post-war data that was not only

386
 The Developuwnt of Modern Macroeconomics

severely criticized by three discussants, but also contained dubious results

that seemed questionable even to the authors" (see Hoover 1992a, vol 1,
211-61). Thus the early 1980s witnessed the demise of the mark I (monetary
surprise) version of the new classical approach ill large part due to the
implausibility of supposed information gaps relating to aggregate price level
and money supply data, and the failure of empirical tests to provide strong
support ior the policy ineffectiveness proposition (see Barro 1989). Mean-
while Stanley Fischer (1977) and Edmund Phelps and John Taylor (1977) had
already shown that nominal disturbances were capable of produeiug real
effects in models incorporating rational expectations providing the assump-
tion of continuously clearing markets was abandoned. Following these em-
bryonic new Ke~lesian contributions it was realized that the rational ex-
pectations hypothesis was a neeessa~ but not sufficient condition for polic.v
ineflbetiveness. As a result the policy-ineffectivenessproposition was left "to
die neglected and unmourned" and "into this vacuum stepped Edward
Preseott from Minnesota, who has picked up the frayed new classical hamlet
with his real business cycle theory" (Gordon 1989).
The first phase of equilibrium theorizing sowed the seeds tbr the de-
velopment of a mark II version which, while maintaiuing the assumption of
continuous market clearing, has reverted to a filll information assumption and
~4ews business cycles as being caused by persistent real (supply-side) shocks
to the economy. Whereas Lucas sought to improve the mierofbundations of
aggregate supply within a market clearing Walrasian general equilibrium
framework in order to explain the non-neutral impact of monetary- shocks,
real business cycle theorists provide an explanation of aggregate fluctuations
which have their origins predominantly in shocks to the supply side of the
macro equation. The impulse force driving most of these models is random
shocks to the production function. Following the development of unit root
econometrics by Charles Nelson and Charles Plosser (1982) it is now generalbT
accepted that shocks (demand and supply) have non-trivial permanent el}~cts
which existing theories need to incorporate (see Durlauf 1989; Stadler 1994).
While real business cycle theory has abandoned the monetary surprise ap-
proach to explaining business cycles it has retained and developed the prop-
agation mechanisms of the earlier mark I new classical models. Jolm Taylor
(1989) has even referred to these recent developments as comprising a "'real
business cycle revolution," It is somewhat of a paradox that while the idea
"that money does not matter" used to be associated with the ultra KQ,nesian
school it is now embraced by several prominant former new classical monetary
theorists (see Barro 1989; Kydland and Prescott 1!)90). Real business cycle
theorists find the use of the term "business cycle" unfortunate because it
suggests there is a phenomenon to explain which is independent of the fbrces
determining economic growth (see Prescott 1986). By providing an integrated

3,";7
Brian Snowdon and Howard R. Vane

approach to growth and fluctuations, they have shown that large fluctuations
in output and employment over relatively short time periods are "what stan-
dard neoclassical theory predicts." Indeed it "would be a puzzle if the economy
did not display large fluctuations in output and employment" (Prescott 1986).
Since instability is the outcome of rational economic agents responding op-
timally to changes in the economic environment, observed fluctuations are
an equilibrium phenomena and should not be viewed as welfare-reducing
deviations from some ideal trend path of output. In a competitive theory of
fluctuations the equilibria are Pareto optimal (see Plosser 1989; Stadler 1994).
The idea that the government should in any way attempt to reduce these
fluctuations is therefore anathema to real business cycle theorists. Such
policies are ahnost certain to reduce welfare. As Prescott (1986) has argued:
"The policy implication of" this research is that costly efforts at stabilization
are likely to be counter-productive. Economic fluctuations are optimal re-
sponses to uncertainty in the rate of technological progress." To real business
cycle theorists the emphasis given by Ke~lesian and monetarist economists
to the issue of stabilization has been a costly mistake. In a d~mmic world
instability is as desirable as it is inevitable.
As a result of these developments the impact of the new classical
approach can be seen in at least five main directions. First, it has led to the
widespread adoption of the rational expectations hypothesis, resulting in a
so-called "rational expectations revolution" in macroeeonomics. Second, the
insights provided by the time-inconsistency literature and the Lucas critique
have led economists to reconsider approaches to policy making and evaluation.
Third, it has led to the widespread practice of applying equilibrium modeling
to macroeconomie analysis (see Mullineux and Dickinson 1992). Fourth, as
noted earlier, it has set the agenda fbr macroeconomics to the extent that,
following the new classical contributions, it has become much more widely
accepted that any satisfactory macroeconomic analysis needs to be based on
firm microeconomic foundations. Fifth, real business cycle t h e o ~ has chal-
lenged the pre-1980 consensus that growth and fluctuations are distinct
phenomena to be studied separately an(] requiring different analytical tools.
Modern business cycle theory utilizes a unifying framework of the neoclassical
growth model to explain both growth and fluctuations (see Cooley 1995).
We now turn to consider how lhr Johnson's five internal characteristics
help to explain the rapid propagation of these new classical ideas.

4. The Scientific Characteristics of Modern Macroeconomics

The Ability qf a New Theory to Attack the Central Proposition ~f the
Established Orthodoxy
The first characteristic can be straight forwardly identified in both
versions of new classical theory. In the case of the mark I version of new

388
 The Development of Modern Maeroeconomics

classical macroeconomies the policy ineffectiveness proposition, first pre-

sented in two influential papers by Sargent and Wallace (1975, 1976), sug-
gests that only unanticipated monetary surprises have real output effects
and then only in the short run. This proposition has had major implications
tbr the Keynesian-monetarist controversy over the role and conduct of mac-
roeconomic stabilization policy. Most significantly the mark I version of new
classical analysis implies that the authorities will be unable to influence
output and employment even in the short mm by pursuing a systematic
monetary policy. The argument advanced against Keynesian policy activism
is therefbre subtly different and potentially more devastating than that put
forward as a result of the monetarist counter-rew)lution. Within the more
recent real business cycle approach economic fluctuations in ontpnt and
employment are seen as Pareto optimal responses to shocks to the produc-
tion function, largely resulting from fluctuations in the rate of technological
progress. Prior to 1980 the established consensus regarded business cycles
as socially undesirable (Sheffrin 1989). In shaq~ contrast the main policy
implication of real business cycle theory is that, because the existence of
fluctuations in aggregate output do not imply the failure of markets to clear,
the government should refrain from any attempt to reduce such fluctua-
tions, not only because such policies are unlikely to achieve their desired
objective, but also because reducing instability would reduce welt:are! While
monetary policy has no real effects in a fidl information equilibrium frame-
work, real business cycle theorists suggest that the government conld do a
great deal of harm if it created various distortions through its taxation and
spending policies.

The Construction of a New Theor~j Which Still Absorbs Valid

Components of the Existing Orthodox Theory
The application of Johnson's second internal characteristic can also be
applied to new classical theory. While the early new classical monetary-
surprise models absorbed the monetarist analysis of inflation and the natural
rate hypothesis, the real business cycle approach has pioneered the use of
the orthodox neoclassical growth model as a framework for the quantitative
analysis of aggregate fluctuations. These more recent developments can be
~fiewed as the latest phase of the agenda of some economists to reclaim the
short run for neoclassical analysis (see Lucas 1994, 224). While equilibrium
dynamics is inconsistent with tradition'a] Keynesian analysis it is a natural
development within the neoclassical paradigm. Finally with regard to
Johnson's second internal characteristic it is very difficult to find examples
where valid concepts have been re-named with new and confusing names,

389
Brian Snow&m and Howard B. Vaue

The Production of an Intellectually Challengin~ New Theory with Appeal

to the )~mnger Generation of Economists
Johnson's third characteristic is one that again can be readily applied
to new classical theory. There is no question that tile new classical revolution
pushed macroeconomic theory into new more abstract directions involving
the introduction of new techniques not tbund in the "kit bags of the older
economists" (Blinder 1988). Being better trained mathematically the
younger generation has been able to absorb the new techniques giving them
a "heavy, competitive edge" over the "older" economists. Examples of such
techniques include the mathematics of tbrward looking solutions to rational
expectations models and calibration in real business cycle theory. In the
former case the rational expectations revolution was a "godsend for aspiring
young technicians" (Blinder 1988). Furthermore, since the solution of larger
models requires considerable computing power, the rapid expansion of in-
terest in rational expectations modeling during the 1970s was greatly en-
hanced by the explosion "in the capability of the electronic computer"
(Minford and Peel 1983). Given the greater incentive and potential for the
younger generation of economists to lnaster new techniques the same kind
of generational conflict observed in the wake of the Ke)qlesian revolution was
also a feature of the debates which took place following the early new classical
contributions. As Lucas has observed in commenting on Keynesian reactions
to his ideas in the 1970s "it left me with a feeling of being way ahead of the
game" (see Klamer 1984, 34). The impression of being ahead of the game
undoubtedly wins converts. As Mayer (1993) has noted in his recent critique
of tbrmalist economics this characteristic appeals to the new generation of
economists. To Mayer the most admirable quality of new classical theorists
is their "infectious enthusiasm, a dedication to the advancement of econom-
ics, and an obvious sense of mission that conveys the impression of a research
programlne on the move . . . . No wonder their work excites the young" (Mayer
1993). In a similar vein McCloskey (1994) has argued that "The new classical
macroeconomics has enchanted many young economists with their lust for
certitude." As a result the new classical research progrannne has enabled
fresh and creative thinkers to produce "dazzling displays of technical ~re-
works" certain to impress referees and editors of prestigious journals (Blinder
1988). This is very important since there is considerable pressure, particularly
in North America, ~br economists to publish in respected academic journals,
not least in order to gain tenure of office. Hutchinson (1992) goes so far as
attributing many developments characterizing modern theory to "career-
ism," and Blanchard and Fischer (1989) also suggest that the incentive
structure in academia is such that strong pressures exist to differentiate
products. In commenting on the evolution of macroeconomics since the
Keynesian, revolution David Colander (1988) has also drawn attention to the

390
 The Development of Modern Macroeconomics

"article criteria" and the need to publish whereby "to succeed graduate
students needs topics upon which to write 'good' dissertations and professors
:need topics about which to write." Furthermore, as Colander notes "a
paradigm which is article laden is contagious." The new classical research
programme has proved to be article laden and has opened up a rich vein of
topics to mine. It is worth noting that according to Phelps (1990) the longevity
of the General Theory can in part be attributed to the fact that it remains a
text which is "not yet fully mined."

The Creation of a New More Appealing Methodology

Turning to the fourth characteristic the new classical research pro-
gramme has whole heartedly embraced a methodological framework involv-
ing a formal general-equilibrimn approach. Minford (1991b) has described
the new classical methodology as "tile only theoretical game in town.'" Al-
though new classicists "probably comprise a fairly small minori~ among
macroeconomists" (Hoover 1992a) they have succeeded in nurturing what
Blanchard (1992) has referred to as a "back to basics" mentality. This has
fostered an emphasis on a return to first principles in the quest to establish
sound microfoundations for general-equilibrium macroeconomic models.
Following the Lucas critique this movement towards microfoundations was
given a further boost since, when expectations are rational, the parameters
of aggregate eeonometrically estimated relationships are not invariant to
changes in the policy enviromnent. New classicists argue that invariance can
only be secured by getting back to first principles and solving the underling
optimization problem, taking economic agents' tastes and technology as given
(see Hoover 1992b). If Ke}mes set the research agenda in 1936 then Lucas
most certainly set the agenda after 1970.
In contrast to most traditional approaches new classical theorists place
emphasis on fbrmal mathematical technique in their analysis assigning a
much lower priority to conventional empirical testing. This is especially the
case with the advent of the calibration method in real business cycle the(nT.
The calibration method involves choosing quantitative values fbr the param-
eters of the model (e.g., from microeconomic studies) and then, using a
computer, simulating the behavior of the numerically specified model, in
terms of key macroeconomic variables~ when subjected to a series of random
(e.g., technology) shocks. The sinmlated results are then compared with the
behavior of the main macroeconomic time series. To some economists it is
this new research methodology which forms the substantive contribution of
real business cycle theory. Since real business cycle methodology is in prin-
ciple ideologically neutral it has the capability of fbstering models with
enormous diversity. This characteristic has wide appeal to the new generation
of macroeconomists (see Danthine and Donaldson 1993; Parkin 1992). AI-

39l
Brian Snowdon and Howard 1{. Vane

though Lucas regards the emphasis given in real business cycle theol.' to real,
as opposed to monetary,, Ltctors to be a "mistake" he freely admits that
Kydland and Prescott "have taken macroeconomic modeling into new ter-
ritory"(Lucas 1987, 46).
That prowess in new methods of mathematical modeling has become
"the halhnark of competence in macroeeonomics" appears to be confirmed
by the "triumph of technique" even among those who deny the fimdamental
premises of new classical macroeconomics (see Hoover 1992a). Bnt an
uMbrtunate by-product of the "quasi religions" adherence to micro foun-
dations and the emphasis on technique has been the construction of' nu-
merous elegant theories with "few interesting results," a "bewildering array"
of "monsters" which has taken maeroeconomics away from "data oriented
research" (Blanchard 1.992). The emphasis these "monsters" give to excessive
mathematical formalism has also come in for considerable criticism (see
McCloskey 1994; Quaddus and Rashid 1994). Excessive formalism and an-
alytical rigor at the expense of policy relevance associated with this meth-
odological force has been viewed in a negative light by many notable critics.
Blaug (1994) from a positivist perspective has restated his belief that "eco-
nomics must aspire to address real-world economic problems" and that this
objective "is best satisfied by the production of theories with empirically
refutable implications." For technical puzzle solving to be the only game in
town, "is not to be held out to as an ideal to students."

The Promotion of a New and Significant Empirical Relationship

for Estimation
The fifth characteristic is more difficult to apply to new classical de-
velopments. As Mayer (1993) points out in his articulate defense of empir-
ically orientated economics, while new classical maeroeconomics has em-
phasized rigor and focused on technique, it has downplayed empirical tests.
This is especially true of the more recent real equilibrium business cycle
theories which have attracted much criticism for their lack of fbrlnal empirical
testing (Fair 1992; Laidler 1992). However, in the case of the mark I version
of new classical macroeconomics it is possible to cite empirical studies which
relate to the Lucas "surprise" aggregate supply function and tire related
"anticipated-unanticipated money debate." Following Lucas's (1972) inter-
pretation of the Phillips curve within a Walrasian general equilibrium frame-
work the following testable proposition emerged; "the higher the variance of
demand, the more unfavourable are the terms of the Phillips trade-off (Lucas
1973). Lucas examined the experience of eighteen countries in the period
1952-67 and concluded that their experience supported the above propo-
sition that "the trade-off tends to fade away the more frequently it is used,
or abused" (for a critique see Ball, Mankiw and Romer 1988). As far as the

392
 The Development of Modern Macroeconomies

anticipated-unanticipated money debate is concerned some of the early

empirical tests undertaken seemed to offer support to the policy ineffec-
tiveness proposition (in particular, tile seminal papers bv Barro 1977 and
1978). Subsequent investigations did not lend support to the view that
systematic monetary policy has no real effects (see fbr example Mishkin 1982
and Gordon 1982). Furthermore, rather than attempting to provide models
capable of conventional econometric testing real business cycle theorists have
instead developed the "calibration method" ira which the simulated results
of their specific models (when hit by random shocks) in terms of key mac-
roeconomic variables are compared with the actual behavior of the economy.
Unfortunately calibration does not provide a method that allows one to judge
between the performance of real and other (e.g. Ke}~lesian) business cycle
models. As Hoover (1995) notes "the calibration methodology, to (late, lacks
any discipline as stern as that imposed by econometric methods . . . . Aboxe
all, it is not clear on what standards coxnpeting, but contradictoD', models are
to be compared and adjudicated." Finally it is interesting to note that new
Keynesian research has concentrated on providing more rigorous micro-
foundations for wage and price stickiness to the relative neglect of empirical
research. As Mankiw (1995) has commented "there is a small empirical
literature, but I can probably count the number of empirical papers on the
fingers of two hands."
From the above discussion it should be evident that while Johnson put
forward five main "internal" characteristics to help explain the success of the
Keynesian revolution and monetarist counter-revolution, at least three of
these same characteristics (most notably the first, third and fourth) also hell?
in understanding why new classical macroeconomics has had such a powerful
impact on the development of macroeconomics since the mid 1970s. From
roughly the mid 1970s to the early 1980s the new classical approach dom-
inated developments within macroeconomics. It is instructive to recall that
prior to the publication of the General Theory Ke~les made it clear, in a letter
to Roy Harrod, that his attack on the classical economists in his forthcoming
book was quite deliberate because he wanted "to fbrce the classicals to make
a rejoinder." His objective was "so to speak, to raise a dust" (see Skidelskv
1992, 534). We can only conclude that in this objective Keynes was spec-
tacularly successful. In the 1970s it was unquestionably Robert Lucas more
than anyone else who raised the dust, forcing Ke~lesians to make a rejoinder.
As one prominent new Keynesian has remarked when asked about the
dominant influences on macroeconomics in general and his own work in
particular during the past twenty-five' },ears,

tile biggest impact has undoubtedly come from Lucas. He put the cracks into
the Keynesian consensus that existed in the 1960s. He really pulled macro-

39:3
Brian Snowdon and Howard B. ~,~me

economies apart . . . . We need to address the concerns of Lucas while still

maintaining the element of tnlth in the neoclassical synthesis. . . . The new
Keynesian school has tried to fix these theoretical problems raised by Lueas anti
also to accept his argmnent that we need models supported by better micro-
economic {bundations (Mankiw 1995).

5. The Objective Social Situation and the Influence of Rhetoric

In Section 2 we noted that Johnson drew atteution to two types of factor
which contribute to our understanding of the rapid acceptance and propa-
gation of new ideas among economists. We have seen that at least three of
the "scientific characteristics" of new classical theory have played a crucial
role in its development. The other factor emphasized by Johnson was the
"objective social situation," unemployment in the 1930s and inflation in the
late 1960s and early 1970s. Indeed Johnson went so far as to argue that, in
his judgment, "the key determinant of success or failure lies, not in the
aeademic sphere, but in the realm of policy." On this basis undoubtedly
Johnson would have been surprised by the equilibrium business cycle rev-
olution especially the ultra neoclassical versions developed since 1982. So far
the technical wizardry which has been such a winning {brmula in academia
has "hardly made a ripple in the world of policy'" (Blinder 1988). While the
early development of new classical macroeconomics was certainly related to
the infation crisis (hence Tobin's 1981 description of new classical macro-
economics as "monetarism mark II") it is difficult to identil~ an important
social problem "that orthodoxy cannot solve" to account for the development
of real business cycle theory. Real business cycle theory has demonstrated
that in frictionless perfeetly competitive environments real shocks can gen-
erate cycles through the reactions of optimizing agents. As a result, while real
business cycle theorists are determined to explain economic fluctuations they
do not see such fluctuations as an issue requiring corrective public policy
actions since fluctuations represent the Pareto optimal response of the free
enterprise system to various shocks. In contrast to Keynesian and monetarist
analysis the inability to identify an important social problem addressed by
new classical macroeconomics further highlights the relevance and impor-
tance of Johnson's internal scientific characteristics in explaining the success
of the approach.
One line of argument regarded by some economists as playing a major
role in the evolution and spread of ideas is the use of rhetoric in economics
discourse (see Klamer 1984; McCloskey 1985; Colander and Coats 1989).
More recently Donald McCloskey (1994) has announced the death of pos-
itivism and David Colander (1994) and Roger Backhouse (1994) have re-
minded us that the optimism concerning the ability of econometrics to settle

394
 The Development of Modern Macroeconomics

disputes has waned considerably since the early 1970s. Because econometric
methods rarely produce decisive tests of economic theories by themselves
some economists have emphasized the,' importance of rhetoric in economic
analysis. That Johnson neglected the importance of the power of persuasion
in his analysis is puzzling given the well documented rhetorical powers of both
Keynes and Friedman. Arjo Klamer (1984) has argued that the art of" per-
suasion played a crucial role in the development of new classical macroeco-
nomics. What is also likely is that the rhetoric of laizzez-faire associated with
the policy recommendations of new classical models proved to be attractive
at a time when in the U.S. the ideological balance was drifting to the right
(see Blinder 1988; Taylor 1989). The failure of both monetarism and new
classical macroeconomics to have as much influence in U.K. academic circles
as they did in the U,S. particularly during the 1970s, has been attributed by
Patrick Minford (1994) to the tendency of U.K. economists "to be quite left
wing" and their "dislike of the policy implications of monetarism." Mintord
also suggests that they "liked even less the policy implications of new classical
macroeconomies." Nevertheless, the rise o f the word "rational" in the pre-
sentation of the expectations hypothesis proved to be an important rhetorical
weapon in the battle to win the minds of macroeconomists dnring the 1970s.
As Robert Barro (1984) has pointed out:
One of the cleverest features of the rational expectations revolution was the
application of the term rational. Thereby, the opponents of this approach were
forced into the defensive position of either being irrational or of modeling
others as irrational, neither of which are comfortable positions for an econo-
mist.
David Laidler (1992), in commenting on the rise of real business cycle
theory during the 1980s, notes that rhetoric has been central to the debate
between equilibrium theorists and economists who prefer m o n e t a u expla-
nations of the business cycle. With some cynicism he writes:
recent developments in business cycle theory provide a striking example of the
power of the right words to draw attention to an idea. Who could resist the
appeal of a "real" theory of the business cycle? How could it fail to be better
than, shall we say', a "mythical" theoD'?
To Laidler the empirical shortcomings of new classical economics failed to
prevent a new classical revolution because many economists were persuaded
by "theoretical elegance" and the "persuasive nse of langnage" (Laidler
1992).

6. Conclusion
The past quarter century has witnessed remarkable developments in
macroeconomic analysis. In 1971, writing on the eve of the classical resur-

395
Brian Sm~wclon and HowaM tl. Vatw

gence in macroeconomics, Johnson provided an insightful explanation of the

reasons fbr the rapid propagation of Keynesian ideas in the postwar period
in order to better understand the inonetarist counter-revolution. In this paper
we have highlighted the importance of at least three of Johnson's five "in-
ternal scientific characteristics" in explaining the development of" new clas-
sical macroeconoinics. As noted earlier in Section ,3 critics of new classical
macroeconomics deny that a modified mainstream model, involxdng a Key-
nesian-monetarist synthesis, is incapable of explaining macroeconomic
events in the post-1970 period. This in turn implies that the role of Johnson's
"internal scientific characteristics" takes on even greater significance as an
explanation of why new classical macroeconomics has had such a dominant
impact on modern macroeconomics. An article-laden new theory which
attacked the existing orthodoxy and provided a new methodology attractive
to the new generation of economists proved to be a powerful intellectual
force. Indeed the importance of Johnson's fourth internal scientific charac-
teristic, concerning the attraction of a new more appealing methodolo~', may
well turn out to be the most important and lasting new classical contribution.
Such an interpretation of the development of modern macroeconom-
ics, relying as it does on the important role played by internal scientific
characteristics, in no way denigrates the contribution of new classical the-
orists since progress is impossible without controversy. As Lucas (1994) has
recently argued, academic economists are primarily scholars and their re-
sponsibility is

to create new knowledge by pushing research into new and hence necessarily
controversial territory. Consensus can be reached on specific issues but con-
sensus for a research area as a whole is equiwflent to stagnation, irrelevance and
death.

Any Rip Van Winkle economist who had fallen asleep in 1971 would
surely be impressed on waking up in the mid 1990s and surveying tile changes
that have taken place in the macroeconomics literature, many of which have
been inspired and provoked by the contribution of new classicists.

Received: February 1995

Final version: September 1995

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