In economics, the freshwater school (or sometimes 'sweetwater school') is a termed used on macroeconomists who in the early 1970s challenged the prevailing consensus in macroeconomics research. Key elements of their approach was that macroeconomics had to be dynamic, quantitative, and based on how individuals and institutions make decisions under uncertainty. Many of the proponents of this radically new approach to macroeconomics were associated with the University of Chicago, Carnegie Mellon University, the University of Rochester and the University of Minnesota. They were referred to as the 'freshwater school' since Pittsburgh, Chicago, Rochester, and Minneapolis are located nearer to the Great Lakes.[1] The established consensus was primarily defended by economists at the universities and other institutions located near the east and west coast of the United States, such as Berkeley, Harvard, MIT, University of Pennsylvania, Princeton, UCLA, Stanford, and Yale. They were therefore often referred to as the saltwater schools.[1][2][3]
The terms 'freshwater' and 'saltwater' were first used in reference to economists by Robert E. Hall in 1976, to contrast the views of these two groups on macroeconomic research.[1] More than anything else it was a methodological disagreement about to what extent researchers should employ the tools of microeconomic theory when striving to account for macroeconomic phenomena.
To a large extent, the saltwater-freshwater dichotomy is a thing of the past. In his overview article from 2006, Greg Mankiw writes:
An old adage holds that science progresses funeral by funeral. Today, with the benefits of longer life expectancy, it would be more accurate (if less vivid) to say that science progresses retirement by retirement. In macroeconomics, as the older generation of protagonists has retired or neared retirement, it has been replaced by a younger generation of macroeconomists who have adopted a culture of greater civility. At the same time, a new consensus has emerged about the best way to understand economic fluctuations. [...] Like the neoclassical-Keynesian synthesis of an earlier generation, the new synthesis attempts to merge the strengths of the competing approaches that preceded it.— Mankiw, Greg (2006), "The Macroeconomist as Scientist and Engineer", Journal of Economic Perspectives 20 (4): 29-46.
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Differences
According to saltwater economic theory, the government had an important 'discretionary' role to play in order to actively stabilize the economy.[4]
The freshwater school believed in the uttermost importance of government economic policies for both the economy's abilities to respond to shocks and for its long-term potential to provide welfare to its citizens. These economic policies are the rules and structure of the economy. They might be how markets are regulated, what government insurance programs are provided, tax system and degree of redistribution, etc. Most adherents to freshwater theory would, however, be very sceptical to whether it's possible for the government to actively stabilize the economy through discretionary public spending.[2]
Rationality vs. Irrationality
Economists usually disagree on how to evaluate rational-expectations assumption:
Behavioralists, like psychologists, tend to be interested in the behavior of single individuals, which they find on an individual basis often deviates from strict "rationality". Saltwater economists typically tended to find these "examples of irrational behavior interesting and important."[5]
Freshwater economists, in contrast, have in general been interested in quantitatively accounting for the behavior of large groups of people interacting in markets, and believe that understanding market failures requires framing problems that way.
Fiscal policy
Freshwater economists often reject the effectiveness of fiscal policy, advocating some form of Say's law, Ricardian equivalence, the Treasury View, and Policy Ineffectiveness Proposition, while saltwater economists generally reject these, and advocate the effectiveness of fiscal stimulus, following Keynesian economics.[citation needed]
Some freshwater economists, like John B. Long, Jr. and Charles Plosser, advocate the Real Business Cycle Theory, arguing that business cycles are efficient and government should not attempt to dampen them through fiscal policy and/or monetary policy. This contrasts with saltwater Keynesian economists, who argue that business cycles represent market failures, and should be counteracted.[citation needed] In 2009 Paul Krugman commented that "since then [forty years ago] macroeconomics has divided into two great factions: “saltwater” economists (mainly in coastal U.S. universities), who have a more or less Keynesian vision of what recessions are all about; and “freshwater” economists (mainly at inland schools), who consider that vision nonsense". However, Krugman noted that the difference had become mainly theoretical during the The Great Moderation, but that the financial crisis cast the dichotomy in a new, harder light.[6]
See also
Freshwater theories
- Bounded rationality
- Policy Ineffectiveness Proposition
- Rational expectations
- Real Business Cycle Theory
- Ricardian equivalence
- Say's law
- Treasury View
Saltwater theories
Schools
Notes
- ^ a b c Gordon, Robert J. (2003). Productivity Growth, Inflation, and Unemployment. Cambridge University Press. pp. 226-227. doi:. ISBN 052153142X. http://books.google.com/books?id=VXINsDT1sFwC&printsec=frontcover&source=gbs_v2_summary_r&cad=0.
- ^ a b Kilborn, Peter T. (1988-07-23), "'Fresh Water' Economists Gain", The New York Times, http://www.nytimes.com/1988/07/23/business/fresh-water-economists-gain.html, retrieved 009-11-27
- ^ Warsh, David (2006). Knowledge and the Wealth of Nations. W. W. Norton & Company. pp. 105, 270-272. ISBN 0393059960. http://books.google.com/books?id=woPhdVyCArcC&printsec=frontcover&source=gbs_v2_summary_r&cad=0.
- ^ Warsh, David (1988-09-04), "The Third Coast", The Boston Globe, http://www.encyclopedia.com/doc/1P2-8077621.html, retrieved 2009-11-27
- ^ Arnold Kling. (2002). Sweetwater vs. Saltwater.
- ^ Krugman, Paul (2009-09-02), "How Did Economists Get It So Wrong?", The New York Times, http://www.nytimes.com/2009/09/06/magazine/06Economic-t.html?pagewanted=4&em, retrieved 2009-11-27
External links
- The State of Economics:The other-worldly philosophers in The Economist.com.
- Background on "fresh water" and "salt water" macroeconomics, by Robert Waldmann
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