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.
If this crisis shows anything, it is the importance of having people who can think along a number of different dimensions at once. I am not impressed by young hotshot theoreticians who tell me that the liquidity trap “all boils down to X.” Or “monetary policy is simply this.” No, it doesn’t all boil down to anything, as you may have gathered from my other posts. You cannot understand liquidity traps without understanding the history of the Great Depression, and 1994-2008 Japan. In my other posts I argue that neither “trap” was what it seemed to be. You need to understand exactly how the Fed works, what the policy of paying interest on reserves means, and whether that rate could be negative. You need to understand the issue of policy credibility, and what sort of signals markets are likely to find credible. You need to understand the pros and cons of unconventional open market operations involving risky assets. You need to understand the many different channels by which monetary injections can impact AD. You need to understand the international political friction caused by currency devaluation. It even helps to understand how word choice subtly shapes our thinking i.e., use of the term “expectations trap,” for what is not necessarily a trap at all. It doesn’t “all boil down to” anything. It’s complicated, not mathematically complicated, but conceptually complicated.
The world economy right now desperately needs a lot more people with the depth of knowledge and wisdom of David Laidler, and fewer people who are adept at doing DSGE models, but are unable to offer practical advice in a crisis.
I only met him once, and I recall that we chatted about the tech bubble. Mr. Laidler argued that this event showed that inflation targeting was flawed, and that central banks needed to pay more attention to asset prices. I replied no surprise that I thought if the Fed targeted NGDP it would at least partially address the issues that he was worried about. I do think that my NGDP proposal is looking even better after the events of the past 5 years, but even I would have to concede that these events favor Mr. Laidler’s point of view even more strongly than mine.
David Laidler presented his Fabricating the Keynesian Revolution to my old Hayek-L email list, and the man truly is a model of what a scientist and gentleman and scholar should be.