VOL. 77 NO. 2 THE CONTRIBUTION OF KEYNES AFTER 50 YEARS 35 It is sometimes from solid microfoundations. Thermody namics and chemistry, for example, have reduction of money-wage done pretty well without much micro theory but not to resist a reduction of real wages,. But, whether logical or il- Boyle's Law applies directly to aggregates, logical, experience shows that this much like the marginal propensity to con how labour in fact behaves p sume. And the microfoundations of medi cine are often very poor; yet much of it works. Empirical regularities that are for- Lucas and other new classicists take a mulated and tested directly at the macro different view. They emphasize the impor- level do have a place in science ance of building up macroeconomic rela Second, it is far from clear that the par tionships from sound microfoundations, by ticular first principles selected by new classi- which they mean the solutions to dynamic I economists deserve to come first. Why stochastic games. Lapses from what Lucas don' t people know the money supply or the alled"the only 'engine for the discovery of price level within very small margins of er truth'"are one of the chief grounds or? Who imposed a cash-in-advance con- which Keynesianism is branded unscientific. straint? Why should price move to equate Now, neither side is hostile either to first supply and demand in markets with asym principles or to factual accuracy. We all metric information? Why, Keynes might ask agree that the ideal macro theory would be are these postulates more acceptable as first built up logically from first principles and principles than nominal wage contracting would explain the data well. But we also Third, the model of man as a strongly agree that such a theory is a long way off. rational maximizer is not the only option The issue is how religiously we must adhe open to theorists. There are theories of to frictionless neoclassical optimizing princi bounded rationality” and of“ near ration ples until that glorious day arrives. Here the ality. " Even within the strict optimizing devoutness of American economists dis- framework, neoclassical tangencies are not tinguishes us from our colleagues in other the only, nor even the most likely, alterna- lands. But which attitude leads to better tive. Pervasive lumpy transactions costs lead science? Is it better to start deductively from to"the optimality of usually doing nothing, axioms or inductively from facts? When the meaning that it rarely pays to change your time comes to choose between internal con- decision variable, even if it is not set at the sistency and consistency with observations, frictionless"optimal "value. In a word, near which side should we take? Must we be rationality is full rationality. It is continuous restricted to microfoundations that preclude optimization that would be irrational he colossal market failures that created Direct empirical evidence on individual macroeconomics as a subdiscipline? behavior is difficult-some would say im Here followers of Keynes and followers of possible-to come by. But what little we Lucas often part company. Like Keynes, know from experiments by psychologists like modern Keynesians are inclined to begin by Daniel Kahneman and Amos Tversky and taking things as they are; rigorous opti- others does not suggest that homo sapiens mizing explanations for what they observe behaves like homo economicus( Perhaps that such as nominal wage contracts)can come is why they have different names. )Incon later. The important thing is to make sure sistent choices are common. People put too our models are congruent with the facts. much weight on what has happened to them Lucasian. it everse the se- and to their friends and too little quence. They want to begin with fully cal evidence. Framing of the question mat articulated, tractable models and worry later ters. The von Neumann-Morgenstern axioms about realism and descriptive accuracy are routinely violated. It is remarkable how This is a judgment call; but I judge the little impact this evidence has had on mod Keynesian approach more scientific. First, ern economics. Is that scientific detachment good science need not always be built up or religious zealotry