The American Economic Association met for three days over the weekend in Chicago. In some respects, its meetings remain pretty much the same from year to year. The cities change, but the kinds of things that raise eyebrows and fill the journal of its proceedings are conserved. Really significant developments are discernible mainly over time.

For example, ten years ago the meetings were held in San Francisco. Then, the scandal and intrigue were supplied by a prominent economic historian who enrolled on the program as a man but who arrived at the meetings, somewhat flamboyantly, as a woman, Deirdre McCloskey ; and by a mathematical economist, Graciela Chichilnisky, threatening to sue a colleague for a misappropriation of which she herself may have been guilty. Dueling introductory texts by members of the rising generation were a hot topic then. Principles texts by Joseph Stiglitz, N. Gregory Mankiw, Paul Krugman and John Taylor were then in or entering the market (or, in Krugman’s case, promising to enter the market: the final product took another seven years). Indeed, The Economist recently had devoted its cover to the topic of introductory textbooks, boosting the Mankiw text.

Perhaps the most interesting news emanating from San Francisco that weekend in December 1996 was made by Martin Feldstein, a former adviser to Ronald Reagan.  He used the platform of the meetings’ one big invited lecture to call for privatization of the Social Security system, foreshadowing ­ in some sense licensing ­ the determined effort that the Republican Party would make eight years later to do just that.

Tongues were wagging in Chicago, too, about a deal whereby Laura D'Andrea Tyson and Robert Reich, both of the University of California at Berkeley, would team up to write an introductory textbook. Tyson, who gained celebrity as an economic adviser during the Clinton administration, had been dean of the London Business School before she returned last month to Berkeley’s Haas School of Business; Reich, a lawyer, served for a time as Clinton’s Secretary of Labor. Neither has much experience teaching university economics.

And of course there were the usual several hundred sessions, most of them interesting and some of them downright important. Around 8,800 economists attended the meetings, which are dominated by university research professors and college professors, though economists from government, Wall Street and industry attend as well.  

The most interesting development this year was not the sole plenary lecture, as it had been in San Francisco, but rather the other big plenary meeting, for George Akerlof's presidential address, "The Missing Motivation in Economics." The Nobel laureate, a professor at the University of California at Berkeley, clearly hoped his talk would inaugurate a new chapter in the long-running argument between those who consider themselves Keynesian economists and those who consider the famous English economist to have been a relatively minor figure in the evolution of the field.

Akerlof has been a major producer of new economic ideas. His 1970 paper on the paralyzing suspicion that can arise when buyers and sellers possess differing degrees of information about a product ­ “Lemons,” it was called, since it dealt mainly with the market for used cars ­ ushered in an era of excitement lasting fifteen or twenty years, during which economists at the frontier turned their attention to the general problem they called “asymmetric information.”

Akerlof described the familiar story: 

How, amid great excitement, Keynes (during the Great Depression) and his followers (in the years after World War II) identified a series of relationships that they expected would render modern industrial economies manageable, relationships between consumption and current income, between investment and current profits and/or cash flow, between inflation and unemployment.

How, during the late 1960s and ’70s, a new, more rigorous school of thought, based on classical economics, insisted that such relationships be derived from economic fundamentals of profit-maximizing individuals and firms.

How these New Classicals in due course identified “five neutralities” that they felt short-circuited the policy conclusions about which the Keynesians had been highly confident, namely the independence of consumption and current income (the permanent income hypothesis), the irrelevance of profits to investment spending (the Modigliani-Miller theorem), the long-run independence of inflation and employment (the natural rate hypothesis), the inability of monetary policy to stabilize output (the rational expectations hypothesis), and the irrelevance of taxes and budget deficits to consumption (Ricardian equivalence).

How in the ’80s New Keynesians (Akerlof among them) had responded by acknowledging the logic of the New Classicals’ neutralities, but adducing an array of “frictions” designed to preserve the main tenets of Keynesian explanations of the business cycle and policies to mitigate it, namely credit constraints, market imperfections, information failures, tax distortions, staggered contracts, uncertainty and bounded rationality.

How there the matter stood. (He might have added how tiresome and unconvincing it had become to non-economists.)  

To this argument from friction, Akerlof then proposed an alternative approach. Such an approach would retain the New Classical and New Keynesian insistence that individual decision-making be modeled as economically purposeful, he said.  To the standard characterization of individuals’ purpose (their utility functions), though, another set of  motivations would be added, a well-known set of motives that over the years we have learned to call norms. 

Personal preferences as characterized by economists heretofore have been excessively narrow, he argued. Taking account of individuals’ feelings about how they should and should not behave in particular circumstances might make the landscape begin to resemble the one roughly sketched three-quarters of a century ago by Keynes.

How to learn about these norms? Observe them, Akerlof proposed.  Serious economists might actually talk to people about what they think, how they feel, what they say and what they do, instead of simply deriving narrow economic motives from abstract economic principles. He cited one particularly interesting example of such a program, a famous book (famous in economics, that is) by Yale economist Truman Bewley called Why Wages Don't Fall During a Recession.

Bewley, a theorist highly skilled in the most abstruse mathematical techniques, dropped everything in the early 1990s in order to conduct a series of lengthy, open-ended interviews with senior managers of manufacturing firms headquartered in Connecticut to ask why they didn’t try to cut their employees’ money wages in the recession of 1991-92.  The answer?  Because, they told him, they feared their workers would resent it deeply, would consider it unfair, and would withhold loyalty and cooperation in the years ahead.

Thus did a prominent theorist find powerful evidence of the motivation underlying the “sticky” wages routinely assumed by New Keynesians. Bewley’s friends scratched their heads at a very good mathematical economist gone off the rails. 

But where do these norms come from? How do they change over time? The question lurked below the surface of everything that Akerlof had to say. Mightn’t people gradually learn to behave as economists expect they ought? To substitute the economists’ should for their own?  It was a legitimate question, he admitted. It just wasn’t the question at hand. Economists first had to take norms as given before they could begin to spin models of how they might change in response to changing economic conditions.

Afterwards, “The Missing Motivation in Macroeconomics” stimulated all manner of sharp talk, pro and con, in the cocktail parties that followed. Little of it rose to the level of argument. It will take another ten years to know if Akerlof succeeded or failed in what he tried to do ­ to begin to end the reign of “the five neutralities.” He was, after all, speaking mainly to very young economists, just starting out on their careers.  

There was something undeniably picturesque about the occasion in Chicago. The neutralities began their conquest of mainstream economics just forty years ago, when the late Milton Friedman devoted his presidential address to a devastating (if largely intuitive) critique of the simple non-accelerating “Phillips Curve” of the day. Already then, Friedman’s direct influence on economists was beginning to ebb, just as is Akerlof’s today; a new generation would articulate his vision.

But, as Friedman was one of the most powerful minds among the professions’ senior generation in 1967, so Akerlof is today. For all his various political involvements (he is as outspokenly liberal as Friedman was conservative), he doesn’t pose deep questions lightly.  

Indeed, this much is clear already. The kind of argument that Akerlof advanced could go a long way towards explaining a major present-day mystery:  why the “personal security accounts” that Martin Feldstein outlined at the San Francisco meeting ten years ago ­ the very measure that George W. Bush made the centerpiece domestic policy initiative of his second term ­ failed so strikingly to attract widespread support among voters. Quite aside from politics, the sense that a new and deeper understanding of economics is within reach was the source of the real excitement in the air in Chicago.

* * *

A Correction:

The December 31, 2006 edition of Economic Principals misplaced the timing of events at Harvard University. It was in the late winter or early spring of 2006, not in December, that the dean of the Faculty of Arts and Sciences and the director of Harvard libraries told the economics department to shelve its ambitious renovation plans, according to department chair James Stock.  

The body of the weekly has been changed accordingly. Technical difficulties delayed the correction.