VOL. 77 NO. 2 THE CONTRIBUTION OF KEYNES AFTER 50 yEARS 13 tries have never held a job and may never be bater's tactic, and a poor one at that, to productive workers. Facts like these have claim that supply shocks are outside the prompted several authors to seek models purview of Keynesian economics which explicitly reject the natural rate hy pothesis in favor of hysteresis. And recent VI. Does a Change in the Money Supply econometric work suggests hysteresis in have Real effects? postwar U.S. real GNP as well. It may well be that Keynesians caved in too readily to Keynes and the Keynesians answered yes, the natural rate hypothesis. without bothering to distinguish between an ticipated and unanticipated changes. Lu v. Is there a Reliable Short-Run Philips Curve? and the Lucasians answer that money has real effects only if it is misperceived. In their Keynes, of course, did not answer this view, a properly perceived injection of mon- question; the Phillips curve came later. I ey is like a currency reform include it on the exam because Lucas and Here, again, the weight of the econometric Sargent made it central to their attack on evidence(though certainly not all of it)sug- Keynesian economics. The alleged failure of gests that Keynes had the right answer after the Phillips curve was their main piece of all. Robert Barro's alleged empirical demon- evidenc at empirical Keynesian models stration that only unanticipated money has were wildly incorrect, and that the doctrine real effects did not hold up.Perceived on which they were based is fundamentally changes in money are not neutral flawed. "(Please notice the adverbs. This charge was repeated so often VIl. Does Social Welfare Rise when with such certitude that it became part of Business Cycles are Limited? conventional wisdom. Unfortunately, it is, to coin a phrase, wildly incorrect. The fact is Keynes tacitly, but that, the Lucas critique notwithstanding, the swered yes. If asked for proof, he probably Phillips curve, once modified to allow for would have chuckled with the condescension supply shocks(any one of several variables of the British upper crust-which is hardly a will do), has been one of the best-behaved scientific attitude empirical regularities in macroeconomics- fully agnostic, but clearly much better behaved, in fact, than we had leans toward the answer no. He has long any right to expect. A long list of studies been sympathetic to the idea that successful pports this conclusion. Nonetheless, Lucas stabilization policies that smooth business ontinues to speak of the Phillips curve as an cycles may actually decrease welfare. Pres- econometric basket case cott is less circumspect. Without bothering Let me anticipate the obvious objection to draw any distinction between modeling a that saving the Phillips curve after the fact conclusion and proving it, he asserts that by adding a supply variable does not absolve "costly efforts at stabilization are likely to be it of its ex ante forecasting errors. It is true counterproductive"because"economic fluc- that, while Robert Gordon,s latest Phillips tuations are optimal responses to uncertaint curves fit the data well, his pre-1972 equa- in the rate of technological change. "Clearly ions do less well. And they did not predict Harberger triangles look bigger and Okun e rise and fall of OPEC. But there is no gaps smaller near lakes than near oceans. Is sense in which new classical models either Prescotts attitude more scientific than tion: pated the error or pointed to the solu- Keynes ke Keynesian models, they were de- I think it is worth taking a moment to signed to analyze demand shocks. Events in explain why Lucas believes that the potential the 1970,s and 1980s demonstrated to gains from stabilization policy are so small Keynesian and new Classical economists The postwar standard deviation of log alike that Marshall's celebrated scissors also quarterly consumption around trend is about comes in a giant economy size. It is a de-.013. Lucas asks an infinitely lived consumer