Saltwater and Freshwater Economics

Saltwater And Freshwater Economics

In economics, the freshwater school (or sometimes sweetwater school) comprises macroeconomists who, in the early 1970s, challenged the prevailing consensus in macroeconomics research. Key elements of their approach was that macroeconomics had to be dynamic, quantitative, and based on how individuals and institutions interact in markets and on how they make decisions under uncertainty. Many of the proponents of this radically new approach to macroeconomics were associated with Carnegie Mellon University, the University of Chicago, the University of Rochester and the University of Minnesota. They were referred to as the "freshwater school" since Pittsburgh, Chicago, Rochester, and Minneapolis are located nearer to the Great Lakes. The established consensus was primarily defended by economists at the universities and other institutions located near the east and west coast of the United States, such as Berkeley, Harvard, MIT, University of Pennsylvania, Princeton, Columbia, Stanford, and Yale. They were therefore often referred to as the saltwater schools.

The terms 'freshwater' and 'saltwater' were first used in reference to economists by Robert E. Hall in 1976, to contrast the views of these two groups on macroeconomic research. More than anything else it was a methodological disagreement about to what extent researchers should employ the theory of economic decision making and how individuals and firms interact in markets when striving to account for aggregate ("macroeconomic") phenomena.

The saltwater–freshwater dichotomy is a thing of the past. In his overview article from 2006, Greg Mankiw writes:

An old adage holds that science progresses funeral by funeral. Today, with the benefits of longer life expectancy, it would be more accurate (if less vivid) to say that science progresses retirement by retirement. In macroeconomics, as the older generation of protagonists has retired or neared retirement, it has been replaced by a younger generation of macroeconomists who have adopted a culture of greater civility. At the same time, a new consensus has emerged about the best way to understand economic fluctuations. Like the neoclassical-Keynesian synthesis of an earlier generation, the new synthesis attempts to merge the strengths of the competing approaches that preceded it.