Saltwater vs. Freshwater Economics Presented By Osako Marie Ngoie

Origin and significance The contrast goes as back as 1970s (Hall, 1976) when a group of macroeconomists engaged in challenging the prevailing Keynesian consensus in macroeconomics. The core of their criticism was reduced around three main aspects ignored in the traditional macroeconomic thinking: the dynamic aspect of macroeconomics; the relevance of rigorous and empirical verification of economic theories; and different features of decision making under uncertainty.

The freshwater school is affiliated with University of Chicago and universities around the Great Lakes region. They believed the free market could correct and guide itself more efficiently without government involvement.

Saltwater School is affiliated to Universities on the East and West coasts of the US. Coastal schools gravitated towards the idea that the government could and should help to regulate the economy by controlling interest rates and budgets to avoid inflation or recession.

Main difference For the Saltwater economists advocate a greater role for government regulation and discretionary fiscal policy. the government plays a crucial 'discretionary' role in stabilizing the economy over the business cycle. Freshwater economists – also called ‘laisser faire economists’ - put a much greater emphasis on issues such as rational expectations, real business cycle, free market and monetarism. They identify major crises as illustration of government intervention leading to high unemployment and inflation. How can the uncertainty be included in the dynamic macro-economic model. Robert Lucas, Friedman Milton

Criticism Paul Krugman recently refuted a freshwater claim that the "stagflation in the 1970s proved Keynesian wrong" in his NY-Times blog, stating that it was 1979-1982 that made him a diehard saltwater economist. Robert expresses skepticism about the absoluteness of both fresh and saltwater economics, saying that economic models aren't necessarily scientific or absolute.

Innovation and Economists The freshwater economists will give the bigger emphasis on the role played by the market in promoting innovation while the saltwater will give emphasis on the discretionary polices of the government. Cobb Douglas function: Y = AKaLb Patent from the government