So Paul Krugman has caused a bit of a stir within the economics profession by questioning the last 30 years of economics and pointing out that it was frequently sterile and often useless. Catherine Rampell quotes a noted "freshwater" economist's rejoinder to Krugman in Economix who tells us that Krugman:

If a scientist, he might be a global-warming skeptic, an AIDS-HIV disbeliever, a stalwart that maybe continents don’t move after all, or that smoking isn’t that bad for you really.

Which would be fine except that the basic results of the past 30 years of economics are sort of suspect. You see they all depend on a key assumption about our thought processes and our ability to predict the future. From Wikipedia:

Thus, it is assumed that outcomes that are being forecast do not differ systematically from the market equilibrium results. As a result, rational expectations do not differ systematically or predictably from equilibrium results. That is, it assumes that people do not make systematic errors when predicting the future, and deviations from perfect foresight are only random. In an economic model, this is typically modelled by assuming that the expected value of a variable is equal to the expected value predicted by the model.

This "insight" leads to the conclusion that economic policy designed to change the level of demand - as opposed to economic policy that improves incentives by cutting taxes for rich people - will have no impact on demand.

The rational expectations hypothesis has been used to support some radical conclusions about economic policy making. An example is the Policy Ineffectiveness Proposition developed by Thomas Sargent and Neil Wallace. If the Federal Reserve attempts to lower unemployment through expansionary monetary policy economic agents will anticipate the effects of the change of policy and raise their expectations of future inflation accordingly. This in turn will counteract the expansionary effect of the increased money supply. All that the government can do is raise the inflation rate, not employment. This is a distinctly New Classical outcome. During the 1970s rational expectations appeared to have made previous macroeconomic theory largely obsolete, which culminated with the Lucas critique.

Which, Wonks Anonymous will be the first to admit, worked pretty well in the 1970's. There is, however a corollary to this idea which our freshwater friends are not so eager to talk about. If the Federal Reserve attempts to lower the inflation rate through a publicly announced credible policy of monetary contraction this policy should only impact inflation without any adverse employment effects.

Which is the experiment that was attempted in 1980's at the point when Radical Rationality was beginning to take hold in the economics profession. The resulting recession - the worst post war recession up to the current disaster - should not have happened. The anti inflationary policy was public and observable. Paul Volker had already proved his bona fides as an inflation fighter under Carter. If anything, the supply side tax cuts should have improved incentives, stimulated the economy and given us a boomlet.

Thus the maiden voyage of freshwater economics was a disaster. Still the math was pretty and the conservative message was impeccable.