Well, He Did Say It Was A Caricature...

by the Sandwichman

Paul Krugman:

There was an old tradition of economics that focused on the origins and nature of economic institutions. This tradition was very influential before World War II.

But it proved not at all helpful during the Great Depression. My caricature version is that when the Depression hit, institutional economics, asked for advice about what to do, replied that well, it’s all very complicated, and has deep historical roots, and … Meanwhile, Keynesian economists, using very simple mathematical models, basically said "Push this button — we need more G".

My version -- still a caricature -- would go something like this: institutionalists, who "captured the powers of government during the first two terms of the Roosevelt administration" were quick to embrace Keynes's ideas. The policies of the New Deal were a mixture of Keynesian and institutionalist reforms. After the war, under intense pressure from business orthodoxy, the more radical implications of a Keynesian-institutionalist synthesis were played down (see the controversy over the 1947 Laurie Tarshis textbook) in favor of Samuelson's "apolitical" Keynesian-neoclassical synthesis. Institutionalists were thus recruited, absorbed, and demoted rather than competitively surpassed.