Brief and simple history of macroeconomic thought

If you ever wanted one, here it is.

One quibble: though Friedman advocated free markets on the microeconomic (structural) level, he didn't advocate a laissez-faire do-nothing macroeconomic policy. He was a "monetarist", meaning that he thought everything was caused by the money supply. The proper response to depressions, he thought, was for the government to print money and use the money to buy stuff. Later, "neoclassical" economists like Robert Lucas and Ed Prescott came along and said that even that would have no effect. Friedman's ideas, ironically, got incorporated into a theory called "New Keynesianism," which became the main alternative to neoclassical ("real business cycle") models. New Keynesianism is the philosophy our Fed subscribes to - when the economy gets worse, they cut interest rates (i.e. print money), and when inflation gets high they raise interest rates (i.e. sell bonds to sop up money).

Now, the financial crisis and our current "Great Recession" have essentially put a stake through the heart of neoclassical "do-nothing" economics (don't worry, it'll be back just like cockroaches after a nuclear winter), and is seriously straining the credibility of the New Keyesian/neo-monetarist mainstream as well. But good old-fashioned fiscal Keynesianism, which is the logic behind Obama's stimulus spending, is unlikely to become the new conventional wisdom. What will? Stay tuned...