When the forecasts of Keynesian economics were exposed by the stagflation of the 1970s, mainstream macroeconomics reversed back into what was called ‘microeconomic foundations’, or the so-called Lucas critique.

Outside intervention into the market was no longer justified by theory.  Uncertainty and irrational expectations, part of Keynesian thought, were replaced with ‘rational expectations’ in a myriad of Dynamic Stochastic General Equilibrium models.  DSGE models had equilibrium because they started from the premise that supply would equal demand ideally; they were dynamic because the models incorporated changing behaviour by individuals or firms (agents); and they were stochastic as ‘shocks’ to the system (trade union wage push, government spending action) were considered as random with a range of outcomes, unless confirmed otherwise).

Mainstream Keynesian economics now concentrated on explaining ‘business cycles’ or ‘fluctuations’ in an economy using ‘modern’ techniques of  modelling.  Econometric analyses like the Phillips curve were ditched because such ‘correlations’…