- Saltwater economists are associated with economists from the Universities on the east and west coast of the US. In particular universities such as Berkeley, Harvard, MIT, Princeton, Pennsylvania Columbia and Yale.
- Economic thought from these universities tends to be more suspicious of free markets and advocate a greater role for government regulation and discretionary fiscal policy.
- Saltwater economists are more critical of rational expectations and point to examples of irrational behaviour. (However, it is worth noting the leading behavioural economists Richard Thaler went to Chicago and he played an important role in disrupting the old Chicago School of thought.
- Saltwater economists are more likely to be aligned to Keynesianism, either modern versions or classic Keynesianism. The essence is that they believe there can be a role for government spending and investment to kick-start an economy stuck in recession.
- With some exceptions, saltwater economists tend to be more on the ‘left’ / ‘liberal’ side of the political spectrum
Influential saltwater economists include
- Paul Krugman.
- Paul Samuelson,
- Joseph Stiglitz
- Robert Solow
- Olivier Blanchard
- George Akerlof
- Robert Hall
- Ben Bernankle
- N. Gregory Mankiw (usually centre-right position)
- Christina Romer
- Lawrence Summers
- Brad DeLong
Freshwater economists are associated with the Chicago School of Economics and other universities around the Great Lakes such as Rochester, Carnegie Mellon University, Northwestern University, Cornell University, the University of Minnesota. The Chicago School of Economics an important influence in Economics, it is probably a more common term than ‘freshwater Economists.’
Freshwater economists typically place greater emphasis on
- The benefits of free markets. They argue government intervention should be limited and where possible business allowed to operate without influence from the government.
- Rational expectations. Freshwater economists place emphasis on neo-classical models of economics, which assumes individuals seek to maximise utility and profit.
- Real business cycle. The real business cycle argues fluctuations in the economic cycle are due to supply-side factors rather than fluctuations in demand.
- Monetarism. Whilst they are more sceptical about the government’s ability to boost demand, they do believe in the control of inflation through the use of monetary policy.
- Milton Friedman was one of the most important figures in the Chicago School. His influence extended beyond economics to the political world.
- The Freshwater approach became important in the 1970s, when cost-push inflation and the stagflation of the mid-70s, appeared to hint at the breakdown of the post-war Keynesian consensus.
- Freshwater economists are more likely to be on the ‘right’ of the political spectrum.
Leading freshwater economists include
- Robert Lucas,
- Ed Prescott
- Thomas Sargent,
- John Cochrane,
- Larry Jones,
- Robert Barro
Speaking on how to summarise the Chicago School, Kaufman (2010) said
“A deep commitment to rigorous scholarship and open academic debate, an uncompromising belief in the usefulness and insight of neoclassical price theory, and a normative position that favors and promotes economic liberalism and free markets.”
Limitations of the dichotomy
In recent years, economists have attempted to downplay the simplistic divide arguing that new research and a new generation of economists don’t get stuck in different camps but try to incorporate the best of both worlds.