The return of economic orthodoxy

That is the theme of my latest Bloomberg column, here is one excerpt:

This year has turned out to be a very good one for classical and traditional approaches to economics. Exotic doctrines have performed poorly, while standard predictions — based on common sense and straightforward mechanisms of operation — have done well.

Start with macroeconomics. The big story of the year has been inflation, and the two biggest culprits are in line with standard theory: growth in the money supply and hikes in energy prices. Over a recent two-year period, the US Federal Reserve allowed the M2 money supply to rise by about 40%. It is no surprise that prices increased so much…

One of the most classical of economic lessons is that supply constraints truly matter. Along these lines, energy price hikes, most of all in Europe, showed that downturns and recessions can be brought on by old-fashioned scarcity. Sadly, this was the year that Nobel Laureate Edward C. Prescott passed away. Critics mocked Prescott for emphasizing the supply side as a force behind business cycles, but this year showed that Prescott was right. If not for the war in Ukraine and its associated energy supply disruptions, the global economy would be in much better shape.

And the close:

As for the UK: Economists predicted that a move away from free trade with the EU would hurt the British economy. And it has.

Some years induce us to question established theory, and to see new and unusual possibilities for the future. Not 2022. This is the year that orthodoxy took its revenge.

Next year will perhaps be doctrinally weirder!  Or maybe not.