The current economic slowdown constitutes a breakdown for advanced capitalism. Its means of allocating capital – financial markets – froze up and would have collapsed completely if governments had not intervened on a massive scale. The rates of growth of output and employment in most industrialized countries are anemic and persistent. Does not the breakdown of capitalism require some fundamental rethinking of its explanation system, aka economic theory? Today’s troubles and the failure of most economists to predict them have given rise to a lively debate within the discipline about the sources of failure of economic theory and the ways in which it should be reformed. This is a good sign. But the current debate among economists is shallow and confined to a tweaking of its existing toolkit. There is no indication that this debate will produce the intellectual revolution needed to respond to the theoretical and policy challenges facing industrialized countries.

The discipline of economics has been no stranger to methodological controversy. The Methodenstreit (debate over method) among German social scientists in the 1880s, the Keynesian revolution in the 1930s, the ‘F-twist’ debate in the 1960s over the importance of realism of assumptions, and the ‘Cambridge controversy’ over the meaning of capital in the 1970s are some of the most notable debates. But not all methodological discussions are created equal. Some are profound—questioning the very structure of the reigning methodology—while others are more superficial, aiming at incremental reform or merely cosmetic change. We find that the current discussion is for the most part quite shallow, and will remain so unless certain voices in the debate are given more emphasis.

The central problem is that almost nobody dares to rethink the nature of economic life and the proper scope of economic thinking. This deeper approach is precisely what we find in the Methodenstreit and in Keynes’ innovations. On its surface the Methodenstreit was a debate over whether concrete historical analysis or mathematical modeling was better suited to explain economics. But this question ultimately rested on the question of what the realm of political . . .

Read more: Waiting for the New Keynes