Any thoughts on Freshwater economics?
According to saltwater economic theory, the government has an important ‘discretionary’ role to play in order to actively stabilize the economy over the business cycle.
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.
Rationality vs. Irrationality
Economists usually disagree on how to evaluate rational-expectations assumption:
Saltwater economists typically tended to find “examples of irrational behavior interesting and important.” Like behavioral psychologists, they tend to be interested in situations where individuals and groups do not behave as one would expect given rationality.
Freshwater economists, in contrast, have in general been interested in 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.
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 cannot fiscal policy and/or monetary policy. This contrasts with saltwater Keynesian economists, who argue that “business cycles” represent market failures, and should be counteracted. 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.