A couple of months ago Brad DeLong wrote a post on the state of modern macroeconomic theory that every graduate student in economics really ought to read. He finds the current situation profoundly disturbing:
There is, after all, no place for economic theory of any flavor to come from than from economic history. Someone observes some instructive case or some anecdotal or empirical regularity, says “this is interesting; let's build a model of this,” and economic theory is off and running. Theory is crystalized history—it can be nothing more. After the initial crystalization it does develop on its own according to its own intellectual imperatives and processes, true, but the seed is still there. What happened to the seed?
This situation is personally and professionally dismaying. I do not say that the macroeconomic model-building of the past generation has been pointless. I don’t think that it has been pointless. But I do think that the assembled modern macroeconomists need to be rounded up, on pain of loss of tenure, and sent to a year-long boot camp with the assembled monetary historians of the world as their drill sergeants. They need to listen to and learn from Dick Sylla about Cornelius Buller’s bank rescue of 1825 and Charlie Calomiris about the Overend, Gurney crisis and Michael Bordo about the first bankruptcy of Baring brothers and Barry Eichengreen and Christy Romer and Ben Bernanke about the Great Depression.
If modern macreconomics does not reconnect—if they do not realize just what their theories are crystallized out of, and what the point of the enterprise is—then they will indeed wither and die.
What else should one be reading to make sense of the recent past? If I had to choose one book, it would be Hyman Minsky's Stabilizing an Unstable Economy, which has recently been republished. It is a work of macroeconomic theory of the highest order. And for a flavor of the arguments contained in it, take a look at The Plankton Theory Meets Minsky by Paul McCully of PIMCO.