One year after the start of the greatest economic crisis since the Great Depression, the editor of the journal American Economic Review: Macroeconomics claimed that “the state of macro [theory] is good”. How could he be so deluded? Macroeconomics has been distorted by appalling scholarship and a misguided belief that macroeconomics and microeconomics should be consistent. The best critics of this, ironically, include the economist most responsible for the state of macroeconomics, John Hicks and the architect of Neoclassical growth theory, Robert Solow.
Given how appallingly bad neoclassical economics is, an alternative economics that is at least roughly capable of reproducing the actual performance of the economy is badly needed. One of the best studies of the empirical data about the economy was ironically undertaken by the two neoclassical economists who developed Real Business Cycle theory, Kydland and Prescott. This lecture reports their findings, focusing on the conclusion that “credit should play a larger role” in future analysis of the business cycle. I then outline the basic propositions in the theory of endogenous money.