Animal spirits and the ‘missing-variable’ problem in standard macroeconomic models. Is a paradigm shift possible?

A number of distinguished economists advocate a paradigm shift in macroeconomics to remedy what many regard as a major flaw in standard models as a result of the Great Recession: namely the fact that animal spirits are either completely neglected or treated as a simple ‘add factor’, creating what Greenspan calls the ‘missing variable problem’ in such models. This paper evaluates the possibility of this shift by focusing on Farmer’s ‘neo-paleo-Keynesian’ (NPK) approach, which seeks to introduce animal spirits within the hard core of the neo-Walrasian research program underlying standard macroeconomics. Based on a ‘structural’ test aimed at establishing the validity of the NPK approach, this paper draws the conclusion that the approach fails both to solve Greenspan’s problem and to represent an alternative to standard macroeconomics due to a form of internal inconsistency, which – to use the term coined by Leontief (1937) in his critique of Keynes’s General Theory – can be labelled as ‘implicit theorizing’.