Winner of the New Statesman SPERI Prize in Political Economy 2016

Friday 29 June 2012

What microeconomists think about macroeconomics

                There is a lot that is interesting in Diane Coyle’s 2012 Tanner lectures. What I want to respond to here is an associated post, where she expresses some of the frustrations that I know many microeconomists have with macroeconomics. These can be summed up rather crudely as: why do we disagree all the time, and yet appear so sure we are right, and don’t we realise we are bringing the whole discipline into disrepute? Diane says that “macroeconomists simply do not realise how low their stock has sunk in the eyes of their microeconomist colleagues”. This may be an exaggeration, but who knows what is said when we are out of earshot. Because I (and pretty well all macroeconomists) do have great respect for our microeconomic colleagues, we have some explaining to do. (Jonathan Portes has an excellent post responding to some of the more specific comments Diane makes in this post.)
                What I want to say in summary is this. Microeconomists are right in many of their criticisms, but what they often fail to see is the root cause of the problem. This is that macroeconomic policy is highly political, with strong ideological implications. Ideology and politics distort macroeconomics as a science. Yet despite this, there is – and for many years has been – a substantial body of analysis that most macroeconomics would sign up to, and which has sound empirical backing.
                What is this substantial body of analysis? It is what used to be called the new neoclassical synthesis (Goodfriend and King (1997) – see here for more background and references). For a closed economy, its details are well represented in Romer’s graduate textbook, for example. This body of analysis has important gaps and omissions, of course, such as a naive and simplistic view of the financial sector. However, as I argued recently, the financial crisis itself showed up this incompleteness, but did not invalidate most of what was in the synthesis. Indeed, events since the crisis have provided significant empirical support for the Keynesian elements of that synthesis. (Of course, there are caveats, some of which I have discussed in earlier posts, and which I will return to below.)
                So why the appearance of constant disagreement among macroeconomists? The first point to make is that the disagreement tends to focus on one part of the synthesis, which is short term macroeconomic fluctuations: their causes and cures. This is not the only part of the synthesis which has the potential for political and ideological controversy, but it is where there is constant popular and media interest. The second point, however, is that politics alone is not sufficient to explain controversy within a scientific discipline. Here I might give climate change is an example: despite strong pecuniary temptations, climate change science is pretty united, and typically dissenting views come from outside the discipline.
                The reason, I would suggest, why many macroeconomists do not sign up to the new neoclassical synthesis is that its Keynesian component conflicts with an ideological view which uses economics as part of its intellectual foundation. That view is that markets generally work well when left free from political interference and that government intervention is almost always bad. Now most microeconomists will immediately point out that microeconomic theory as a whole does not support this ideological view. Much microeconomic analysis is all about market imperfections. But that misses the point. Those attracted to this ideological position use a very partial take on economics for support, and are naturally attracted to that part of the discipline.
                Keynesian analysis is all about the consequences of one particular market imperfection. Conventionally this is seen as the externalities that arise from sticky prices. (I personally am increasing drawn to describe them as the consequences of the existence of money, but that is a different story.) It implies in general the need for constant involvement of one arm of the state – the central bank – in stabilising the economy, and in some circumstances the involvement of fiscal policy to do the same. I have argued that this analysis leaves those with the ideological view that free markets are good and government intervention bad feeling very uncomfortable, so they will try and find ways of avoiding and disputing this part of the synthesis.
                Now nothing I have said so far makes macroeconomics unique in attracting ideologically driven controversy. There are areas of microeconomics which are equally controversial for similar reasons. I would suggest the debate over minimum wages is an example. An outsider looking at this debate might well conclude that labour economists are as equally disputatious as macroeconomists on this issue. Another example from my youth I always like to use is the ‘Cambridge controversies’ over ‘reswitching’. This was a highly technical theoretical dispute, but its ideological implications were such that views on this technical debate were highly correlated with political beliefs.
                I think there is one factor that is peculiar to macroeconomics, and that is the role of ‘city’ economists. There are two elements here. One is that city economists work in an environment which has a strong vested interest in promoting the free market ideological view. The other is that part of the name of the game for these guys is to differentiate the product. These are of course tendencies: there are many excellent city economists who go with the evidence rather than with ideological conviction.
                Why is it important to say all this? First, because the influence of ideology on economics is not confined to macroeconomics. It is also not confined to the political right, so there is no simple bias, but recognition rather than denial is important. Second, the cure – if there is one – is evidence. As Jonathan points out, the recent evidence is clearly with those who accept Keynesian views, but I think there is an underlying problem. The way empirical evidence is marshalled in the microfoundations methodology associated with DSGE modelling makes it too easy for those who hold ideologically based priors to retain and defend those priors, which is one reason why I have tried to suggest that it should not be the only way serious macroeconomic analysis is done.


  1. Closed economies don't exist .....

  2. This account of the views of thse who offer an alternative to Vulgar Keynesian economics is fallacious & absurd in the degree of its falsity.

    Perhaps vukgar zkeynesian are in disrepute because they are incapable of engaging rival perspectives & the conceptual defects within their own project from a position of sincere & truthful scholarly engagement.

    1. The whole point about the last 4 years is that vulgar keynesians have been proven correct.

      Economic reality in a depression has a Keynesian bias.

    2. Interesting that people speak of "vulgar Keynesianism" now. A few years ago, the mere label "Keynesianism" was sufficient as an abuse. Now you need to add "vulgar" or "primitive" in order to indicate that intention.

  3. Simon, have you read much Wynne Godley, especially Godley and Cripps, Macroeconomics (182) and Godley and Lavoie (2007, 2nd ed. 2012)? Or did you see James K. Galbraith, "Who are these economists anyway?" I am afraid your comments reflect the ignorance of the profession about Post Keynesianism. OK, you are an Oxford prof, and Cambridge was the citadel of PKE, and Godley there. But to miss or dismiss major economists since Keynes, really now.

  4. Doesn't it also come down to the need by rightish economists to see the UK's mid-1970's domestic wage-price spiral as being driven by the 'rational consumers' of the 'aspirational class', and the continued fallacy kept up by many rightish economists that the early 1980s disinflation in the UK with huge and prolonged unemployment (MTFS) was identical to the Volcker disinflation in the US? Ultimately, there is the spectre of Old Labour and their desire to nationalise the banks which lurks in the minds of many public school and grammar school alumi/ae of this particular generation, an anxiety redoubled by the Wapping disputes of that generation's press. And so when up against the ZLB after a massive housing bubble, it's fingers-in-your-ears-time for many politicians, journalists, and sadly, economists with professorial tenure.

    1. Indeed. It comes down to politics and the left-right spectrum in the end.
      It's become very clear, that although more leftist, Keynesian solutions would and do help the economy at this time, right wing politicians and economists are unable to change their minds when the facts do.

      Thats not actually all that suprising given the psychology of the people involved. What I do find suprising, personally, is the unwillingness of Keynseian economists to point out , loudly, how wrong their opponents have been, and the ultimatelly political source of their errors.

      These things are much too important to be only discussed in quiet rooms. The economic profession badly let us down pre-crisi, now they're doing it again, by being too bloody about their Chicago School minded colleages.

  5. You refer to the ‘Cambridge controversies’ over ‘reswitching’ and say that "this was a highly technical theoretical dispute, but its ideological implications were such that views on this technical debate were highly correlated with political beliefs."
    I can add here an observation which shows to me that sometimes this correlation is missing (which is a good thing).
    I recently (in January) disproved the Barro-Ricardo equivalence thesis by means of an extremely simple example. Most economists who saw the piece, including the referees, remained unconvinced, although no one has detected any error in my example, the referees included.

    What is remarkable is that economists who are critical of the current austerity craze continued to believe in the equivalence thesis.
    From your statement I would have expected a correlation.
    Here is the link to the paper, including the referee reports:

  6. stakes:

    I think the key difference is that the stakes in getting macro right are very high, while the stakes for micro aren't: the worst micro advice might make a company or two lose a few millions, but the worst macro advice can ruin economies and the livelihoods of millions. I think Stan Fischer said something similar somewhere in a much less colorful language.

    In a nutshell, macroeconomists matter, microeconomists don't. They can snigger alright.

    The politics of it? I'm not so sure... Yes Barro, Becker, Cochrane are obviously card-carrying republicans, but as we have discovered Sargent and others aren't despite practicing a non-Keynesian kind of economics.

    No, I would say the greatest problem is this: the difficulty in communicating macro ideas to others. My finance and micro colleagues, for instance, feel comfortable with things like partial equilibrium, Ricardian equivalence, market-clearing, but can't follow a conversation that involves multipliers, etc.. You can't expect the general public to be a better listener than professional micro and finance economists!

    If the survival of the species were truly at stake, you'd find HUGE arguments over the "nonsense" that passes as respectable and deep thinking in ... Stephen Hawking's Grand Design: how many curled-up dimensions again?

    By "nonsense" I just mean that it's as crazy as Keynesian ideas. And maybe it's true...

  7. Ekkehart Schlicht: what does your note add to what was known to Tobin in the mid 1980s? Advice: your style is not very standard, you want to write more like an economist if you want to get published.

  8. Nearly every idea in 'Keynesian' macro of relevance to policy & leftist ideology was known & advocated by folks the Econ profession identified as cranks well before Keynes wrote a word of his _General Theory_.

    We call it Vulgar Keynes becauses it simple minded stuff, a vulgarizarion of even Keynes' own crude economics.

    And the term 'Vulgar Keynesianism" is an old one, decades old.

  9. Hi Simon.

    From someone new to your blog, could you perhaps say/link to a little more about your notion that the central market failure Keynesianism addresses is the existence of money? This seems to me a rather interesting and at least somewhat original way to phrase the idea.

    1. Yes this is quite tantalising! I'd also be interested to hear more on this. I've always thought that pice stickiness is a (useful) short-cut/reduced form for something deeper, though quite what I think Simon would have a better idea.

  10. Asking for clarification w.r.t. the word "macroeconomists" in this sentence:

    "The reason, I would suggest, why many macroeconomists do not sign up to the new neoclassical synthesis is that its Keynesian component conflicts with an ideological view which uses economics as part of its intellectual foundation."

    I would find it easier to interpret if the word was "microeconomists." Don't _most_ macroeconomists indeed subscribe to the new neoclassical synthesis, and there are not many who do not? Or am I wrong about this?


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