The Future of Macroeconomics [predictions] … There will be much less emphasis on fiscal policy, and much more emphasis on sectoral reallocation and labor adjustment policy ..
… I believe that confidence in generic fiscal policy is .. misplaced. Superficially, it makes sense that government spending can replace private spending when the latter breaks down due to a crisis in the financial sector. However, the fiscal-stimulus theory fails to take into account the fact that what is going on in the real economy, particularly after a financial shock, is a reallocation of resources out of dying sectors and into emerging sectors. Instead of looking at fiscal stimulus, I think that economists should focus directly on the adjustment process, particularly in labor markets. How do new industries emerge to absorb the resources that are released from industries that collapse during a financial crisis? What sorts of policies can make this transition take place more quickly and with less difficulty?
we need to revert to an older, earlier way of thinking. Monetary policy is about changing the stock of money. The objective of monetary policy, in a recession, is to create an excess supply of money. People accept money in exchange for whatever they sell to the central bank, because money by definition is a medium of exchange. But they don’t want to hold all that money. Or rather, the objective of the central bank is to buy so much stuff that people don’t want to hold the money they temporarily accept in exchange. An excess supply of money is a hot potato, passing from hand to hand. It does not disappear when it is spent. It spills over into other markets, creating an excess demand for goods and assets in those other markets, increasing quantities and prices in those other markets. And it goes on increasing quantities and prices until quantities and prices increase enough that people do want to hold the extra stock of money.
Mr. Laidler believes that macroeconomists have a great deal to learn from studying the history of their field. I read several of his excellent books on the history of monetary theory, linked here and here. It seems to me that scholars like David Laidler occupy an increasingly marginal place in modern macroeconomics, mostly on the fringes–such as the history of economic thought. But I’m coming to believe that the field of macroeconomics made a big mistake in adopting a highly technical and abstract style in recent decades.
These are baby steps, but baby steps in the right direction. As they say, every journey begins with but a single step . .