Simon Wren-Lewis's asks whether New Keynesians have made a Faustian pact with the New Classicals. Paul Krugman responds invoking Tobin's general equilibrium approach to monetary theory (but see Ramanan's comments), which in turn prompts Stephen Williamson to chime in.
Even if he generally tends to end up defending the mainstream, Wren-Lewis is at least prepared to address some heterodox concerns, perhaps indicating some nagging doubts that maybe he has indeed entered into a Faustian pact. Williamson has no such reservations. To him, we don't need Tobin any more because we've moved on.
"Why did Tobin's work disappear from discussion? It was superceded. We now have better models, that are much richer in their implications. Tobin was fine for his time, but why drive on the freeway in a golfcart, when you can drive a Ferrari (as one of my friends once said)?"
Williamson's "better models" involve deriving macro results from their micro-foundations, by making various assumptions about how individual agents might behave and deducing the consequences. Heterodox economists can be a bit dismissive about this approach, but I find it very useful. For me, it is not sufficient to rely on the stylized facts; I want to understand what the underlying behaviour is. That is not to say I think that the assumptions micro-founders typically make are really the best ones and I like it when I see work that explores the consequences of different micro assumptions. But I would say it is true that investigating what micro behaviour lies behind the macro outcomes adds richness to our understanding.
However, to incorporate everything that is relevant into a micro-founded approach is a massive task, even more so if you want to be sure that your results are not overly contingent on your assumptions. Even Williamson recognises that his own work in this area is only a "piece of the puzzle", as it focuses specifically on pledgability of collateral. Each bit of research may give some insight into one particular issue, but I'm less convinced that they can be relied upon in isolation. I don't think we're near having a complete micro-founded picture. And even if we did, I would be wary about how much we were relying on our particular behavourial assumptions.
Tobin's approach may be crude, but it provides a useful way of capturing the overall picture. We need to think carefully about whether the assumed behaviour is realistic given what we believe about how individuals behave, but so far I see no reason to reject it.
So this Ferrari may sound very exciting, but I think it's not even half built yet. We've got some very skilfully designed components, but whether we'll be able to use them, we'll have to see. I'm interested in how it goes, but for the time being, if I want to get from A to B, I'm going to be driving Tobin's golfcart.