Mark Blyth: Austerity - The History of a Dangerous Idea. The shakeup at the Minneapolis Fed is a battle for the soul of macroeconomics—again. A personnel shakeup at the US Federal Reserve Bank of Minneapolis last week at first flew under the radar; by the time the Minneapolis Star-Tribune reported the news, followed by other news outlets, it had been percolating through the economist grapevine for weeks. But the world should be paying attention, because the shakeup may be a part of big changes that are happening at the Fed, as well as a tectonic shift in the field of economics itself. What Happened Two of the Minneapolis Fed’s most eminent and long-serving economists, Patrick Kehoe and Ellen McGrattan, have been fired. The Star-Tribune article makes it clear that their departure was not voluntary on the part of either researcher. (Fortunately, both Kehoe and McGrattan will be fine, career-wise—both have stellar publication records and tenured professorships at the University of Minnesota.)
Why did this happen? Mr. Freshwater vs. The Freshwater school gained enormous clout in the ‘80s. Freshwater Not So Fresh? Your Product is Decisions. Next New Deal. Quantitative Ease by Carola Binder. Not Quite Noahpinion. Magic, maths and money: The Fundamental Theory of Asset Pricing. Within the field of Financial Mathematics, the Fundamental Theorem of Asset Pricing consists of two statements, (e.g. [Shreve, 2004, Section 5.4]) Theorem: The Fundamental Theorem of Asset Pricing 1. A market admits no arbitrage, if and only if, the market has a martingale measure. 2. The martinagale measure is unique, if and only if, every contingent claim can be hedged. The theorem emerged between 1979 and 1983 ([Harrison and Kreps, 1979], [Harrison and Pliska, 1981],[Harrison and Pliska, 1983]) as Michael Harrison sought to establish a mathematical theory underpinning the well established Black-Scholes equation for pricing options. One remarkable feature of the Fundamental Theorem is its lack of mathematical notation, which is highlighted by the use of mathematical symbols in the Black-Scholes equation, which came out of economics.
It is important to realise the fundamental position of probability in science. Two mathematical theories had become ascendant by the late 1920s.