The historic terrain of macro-economic theory is the explanation of the levels and fluctuations of overall economic activity. Macro-economists have b… - James Tobin

I suspect that many of the world's financial lords are somewhat embarrassed to tell Japan repeatedly at G-7 meetings and elsewhere to adopt a Keynesian solution. Within Europe, central banks and governments think Keynesian theories and policies are absolutely wrong. Despite the remarkable success of pragmatic policies in the United States, true believers in the Invisible Hand reject Keynesian diagnoses and prescriptions. Many observers of Japan have found it intellectually comforting to blame the slump on the plight of the banks, flooded with bad loans dated from the land and equity bubbles and their collapse. They hope that a governmentmanaged and -subsidized rectification of bank balance sheets will trigger overall economic recovery. I think this is a false hope. The bank problem is only a small part of the macroeconomic disaster. It has to be resolved, of course, but resolution that is no substitute for the needed fiscal and monetary stimuli.

Keynes did not challenge the efficacy of price adjustment mechanisms in clearing particular markets in the Marshallian partial equilibrium theory on which he had been reared. He did challenge the mindless application of those mechanisms to economy-wide markets. Founding what came to be known as macroeconomics, he was modeling a whole economy as a closed system. He knew he could not use the Marshallian assumption that the clearing of one market could be safely described on the assumption that the rest of the economy was unaffected.

For me, growing up in the 1930s, the two motivations powerfully reinforced each other. The miserable failures of capitalist economies in the Great Depression were root causes of worldwide social and political disasters. The crisis triggered a fertile period of scientific ferment and revolution in economic theory.