True, during the 1970s and early 1980s macroeconomics suffered a crisis. The experience of stagflation--the combination of inflation and unemployment--badly damaged the prestige of economists in general and macroeconomics in particular, even though it was not that much of a theoretical surprise. Equally important was an internal crisis of self-confidence: "Rational expectations" theorists, led by Chicago's future Nobelist Robert Lucas, challenged the whole idea that governments could do anything to mitigate macroeconomic instability. In the end, however, rational expectations to Keynesian macroeconomics. So-called "new Keynesian" economists provided at least a theoretical fig leaf for more or less Keynesian ideas, and in practical terms the intellectual basis of modern U.S. monetary and fiscal policy is pretty much what was already in the textbooks 20 years ago.
Now, however, economists are in trouble again--trouble that is a sort of muted version of what happened in the 1930s. The world is not now in depression, nor is a full-scale replay of the 1930s likely. But substantial parts of the world economy are depressed--and for one reason or another apparently cannot or will not use macroeconomic policy to restore full employment. "Emerging market" nations, terrified of capital flight, dare not reflate their economies; on the contrary, we find the front-line economy of the moment, Brazil, compelled by fear of speculators to act in a precisely anti-Keynesian fashion: increasing interest rates, raising taxes, and cutting spending even as the economy slides into a nasty recession. Meanwhile, Japan--the world's second-largest economy and a country that by normal criteria ought to have no trouble increasing demand--finds itself stuck in exactly the trap Burnham described: "no longer able to find uses for the available investment funds, which waste in idleness in the account books of the banks."
So economists must be rushing to solve these problems, right? Well, not exactly. You see, the rational expectations challenge to Keynesian economics was half-successful: It did not build a workable new structure for macroeconomic theory and policy, but it did seriously damage the old structure. And the effect of that damage has been to discourage economists from even thinking about the traditional Keynesian issues. Most younger economists have simply avoided macroeconomics entirely, or--if they do work on macroeconomic issues--they choose "safe" topics such as long-run growth, avoiding the academic minefield of business cycle research. I can't blame them, but it leaves us with a dangerous lack of fresh thinking about how to handle recessions at a time when the usual remedies don't seem to be working.
I wish I had more of a sense that other economists understand what is at stake. The point is not that the world is going to collapse; that could happen, but it is not the clear and present danger. Rather, the point is that the theory and practice of more or less free market economics depend crucially on the availability of adequate solutions to the problem of macroeconomic instability--and for the first time in half a century, the availability of those solutions cannot be taken for granted.
If you didn't chase the links in the text, is a reminder of how some people react to the sort of pronouncements we economists are prone to make, and is a little more on why the "equilibrium macroeconomics" school of thought has recruited few pupils.
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