Theoretical Perspectives for the 1990s

Numerous commentators have for some time talked about the confused, distressing and even parlous state of macroeconomics. While the 1950s and 1960s were years of more or less Keynesian consensus, the two last decades have witnessed the rivalry of a number of new or reconstructed old schools with widely divergent modelling strategies and policy ideas. What caused this change? To a certain extent, the forces behind this heterogenous development may be said to be of a purely theoretical nature. For one thing, the profession was (around the late 1960s) seized with an urge that macroeconomic theory should have better microeconomic foundations,1 a drive which has subsequently raised several divergent themes. However, the main roots are obviously to be found in exogenous changes in the structure and working of Western economies which took place around 1960 or somewhat later. First and foremost, structural changes2 brought about the ‘stagflation’ phenomenon (the ‘sickness of the mixed economy’) and in similar vein played havoc with the previously fairly stable Phillips’ curve. Among other things, these changes implied that the Keynesian type of simple analysis that concentrated mainly on either the problem of unemployment or inflation was no longer adequate. Faithful Keynesians had to reconstruct their models, while other theorists turned to alternative types of model, some to model formulations inspired by pre-Keynesian theory.