Must-Read: Solow back in 1979 sets out three possibilities: (1) that the New Classicals are right (although he really does not think so); (2) that changing economic structure means that — even though the New Classicals are wrong — there is next to nothing to be salvaged from the Neoclassical synthesis project; or (3) that only minor tweaks — adaptive expectations in the Phillips Curve, supply shocks — are needed to existing approaches.

And, of course, it is important to register that Solow’s (3) was right. With minor tweaks, the models continued to track in useful ways. The next substantial miss in the models after the 1970s came after 2009, when inflation expectations failed to fall…

Robert Solow (1979): Summary and Evaluation: “I have to confess that I haven’t had any blinding revelations in the last two mornings…

…but I have learned some useful things. What really brings us here is Steve McNees’ picture of the 1960s and the 1970s…. McNees documented the radical break between the 1960s and 1970s. The question is: what are the possible responses that economists and economics can make to those events?
One possible response is that of Professors Lucas and Sargent. They describe what happened in the 1970s in a very strong way with a polemical vocabulary reminiscent of Spiro Agnew. Let me quote some phrases that I culled from their paper: “wildly incorrect,” “fundamentally flawed,” “wreckage,” “failure,” “fatal,” “of no value,” “dire implications,” “failure on a grand scale,” “spectacular recent failure,” “no hope.” Now if they were doing that just to attract attention, for effect, so that people don’t say “yes, dear, yes, dear,” then I would really be on their side. Every orthodoxy, including my own, needs to have a kick in the pants frequently, to prevent it from getting self-indulgent, and applying very lax standards ds to itself.
But I think that Professors Lucas and Sargent really seem to be serious in what they say, and in turn they have a proposal for constructive research that I find hard to talk about sympathetically. They call it equilibrium business cycle theory, and they say very firmly that it is based on two terribly important postulates — optimizing behavior and perpetual market clearing. When you read closely, they seem to regard the postulate of optimizing behavior as self-evident and the postulate of market-clearing behavior as essentially meaningless. I think they are too optimistic, since the one that they think is self-evident I regard as meaningless and the one that they think is meaningless, I regard as false.
The assumption that everyone optimizes implies only weak and uninteresting consistency conditions on their behavior. Anything useful has to come from knowing what they optimize, and what constraints they perceive. Lucas and Sargent’s casual assumptions have no special claim to attention. Even apart from all that, I share Franco Modigliani’s view that the alarmism, the very strong language that I read to you, simply doesn’t square with what in fact actually happened. If you give grades to all the standard models, some will get a B and some a B minus on occasion, especially for wage equations, but I don’t see anything in that record that suggests suicide….
A second possibility is not to go so far as Lucas and Sargent in crying catastrophe, but to suppose that the underlying socio-economic structure has changed. Of course it is always possible, and I believe that this is what Lucas and Sargent would do, to define the structure of the economy as what doesn’t change. I think that tactic is futile because it asks more of economics than economics can ever possibly deliver…. Another possible response to the events of the 1970s is to suppose that the doctrines of the 1960s were right for the 1960s, and that the situation has changed…. It is possible that what happened between the 1960s and the 1970s is a kind of loss of virginity with respect to inflationary expectations. That doesn’t mean that it cannot ever be regained. It may be that, if we could only get back to stable conditions for a while, the 1960s might come around again. Needless to say, I am not very confident about that. I also suspect that Lucas and Sargent have a good point about the game between the government and the private sector…. It is not a wholly unreasonable story to tell, that the theories and doctrines of the 1960s were right for the 1960s, only, as in the old television program, they were bound to self-destruct after some interval of time.
There is still another, even less cataclysmic, line of thought…. Macroeconomics had devoted almost all of its efforts to refining its understanding of the components of aggregate demand… [and] had utterly neglected to elaborate the supply side of the models. Not surprisingly, then, the sequence of supply shocks in the 1970s from the side of food, oil, nonfuel minerals, and the depreciation of the dollar caught the macroeconomics community by surprise…. It is possible to rebuild the supply side of macro-models so that they do tell a consistent story…. So fast does the economics profession move now that there are already text books that do the supply side quite adequately…. The fact that you can reconstruct macro models by paying a little more attention to the supply side… is certainly better news… than if that could not be done. But I do want to caution you that it is not very good news, because you can almost always patch up a model after the fact. The question really is whether it will hold up into the next decade when the next unexpected event comes along. I think it might…
http://paulromer.net/wp-content/uploads/2015/08/After-the-Phillips-Curve-entire-volume.pdf