Science advances one funeral at a time, to paraphrase Max Planck. The Nobel prize-winning physicist was arguing that new ideas in his field would only catch on once the advocates of older ones died off.
That saying also applies to economics, which advances one crisis at a time. Throughout history, economic theories and ideas have emerged and evolved in response to major economic and financial crises. The Depression gave rise to John Maynard Keynes’s theories, while the Great Inflation of the 1970s popularized monetarist ideas by Milton Friedman. Similarly, the global financial crisis of 2007-2009 spurred interest in credit and banking.
And so, the recovery from the Covid-19 pandemic has again given economists an opportunity to learn from their mistakes. Recent papers presented at the American Economic Association conference offer insights into the theories that may eventually become the standard wisdom for the next generation.
One such paper takes a deeper look at the Phillips curve, which describes a theoretical relationship between unemployment and inflation. Gauti Eggertsson of Brown University suggests that adding a kink to the Phillips curve could rescue the concept from turbulent years. This new idea could explain the absence of inflation in the 2010s and its sudden resurgence in 2021. Eggertsson’s new approach takes into account the interaction between tight labor markets and supply disruptions.
Stephanie Schmitt-Grohé, of Columbia University, points out that the experience of the 1970s inflation may have loomed too large in economists’ minds, leading to confusion over the Phillips curve. She suggests that shocks like climate change, conflicts, and pandemics mean a return to the greater volatility of earlier eras.
Other economists, such as Iván Werning of the Massachusetts Institute of Technology, are trying to refine models for the overall economy. His model is well-suited for the post-pandemic economy, which experienced shifts in demand, supply-chain disruptions, and significant changes in how people work.
Many of these new ideas are not exactly new. They draw on historical economic theories and notions, suggesting that crises often prompt a re-evaluation of old concepts. Thus, economic ideas have a way of getting resurrected, just as old theories and ideas resurface in response to new economic challenges.
In conclusion, while economics may indeed proceed one crisis at a time, it also has resurrections. New ideas and old theories come together to shape the future of economic thought. So, let’s continue to listen and learn from the evolving and changing landscape of economic theories and ideas.
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