Winner of the New Statesman SPERI Prize in Political Economy 2016

Wednesday, 28 August 2013

Macro workers and macro wars

A long post I’m afraid, even with extensive use of footnotes. But I really think it is much more productive to try and understand someone’s opposing point of view than just be rude about it.

Most academic macroeconomists are just trying to advance the discipline by getting their papers published, and are certainly not consciously trying to defend some ideological viewpoint. As a result, there are lots of macroeconomists producing high quality work in a wide variety of diverse areas. There are many interesting new ideas being explored. Furthermore this work can be appreciated by most fellow researchers. Unlike the 60s and 70s, where members of different schools of thought talked across each other, we now have a shared language as a result of the microfoundation of macro. My own view is that as a result macro today is much more interesting than macro was back then. Furthermore, this work can be useful to policymakers, as Paul Krugman outlines in the case of monetary policy here.

Ahh - that may have made you pause for thought. Isn’t that the same Paul Krugman who says there is something “deeply wrong with economics”. Who talks about how ideology and politics distort the advice that economists - and perhaps particularly macroeconomists - give to policymakers. And who suggests that in many cases policymakers would be better off thinking about good old IS-LM than any of this more modern stuff.

One of the problems when Paul Krugman does this is that it gets on the nerves of many academic macroeconomists, who would much rather identify with the sentiments I express in my first paragraph. Economists like Tony Yates, for example. I suspect they see Paul Krugman’s attacks on the state of macroeconomics as akin to a personal attack on their own and colleagues work, and as a result they can go way over the top in reaction. I think this is understandable, but it is wrong.

As I see it both points of view are correct. As Stephen Williamson argues, in one sense macroeconomics is flourishing. Take the example of financial frictions. There is now a wealth of papers out there exploring different types of friction, in large part responding to events of just the last five years. This is hardly the response of a moribund, out of touch discipline. And as Krugman says, sometimes this work can be useful to policymakers. But that is not the acid test for the integrity of a supposedly scientific discipline. In days of old, policymakers made much use of astrology. The acid test is when the discipline tells policymakers something they do not want to hear, and unites behind this implication of its models and the data.

Nearly fifteen years ago I began working with DSGE models looking at monetary and fiscal interactions. [1] Doing this work taught me a lot about how fiscal policy worked in New Keynesian models. I understood more clearly why monetary policy was the stabilisation tool of choice in those models, but also why fiscal policy - appropriately designed - was also quite effective in that role if monetary policy was absent (individual countries in the Eurozone) or impaired (the ZLB). Why New Keynesian models? Because if you were interested in business cycle stabilisation, that is the framework that most involved in that area (academics and policymakers) were using. So when we hit the ZLB, the reaction of policymakers in using fiscal stimulus seemed logical, entirely appropriate and fully in line with current theory.

I also found that in these models the basics of Barro’s tax smoothing hypothesis continues to apply, so if you needed to reduce debt, you should do so as gradually as possible. This also seemed like as robust a result as one can get in macro.

The acid test for macro came in 2010. Policymakers, for a variety of reasons, went into reverse with fiscal policy. Austerity replaced stimulus around the world. If academic macroeconomists had been true to their discipline, they would have been united in saying that our standard models tell us this will reduce output and raise unemployment. They would have said that if markets allow, the time to reduce debt is when the ZLB comes to an end, and then it should be done gradually. Many did say that, but many did not. This division at least encouraged policymakers to continue with austerity.

So macroeconomists as a collective failed this test, repeating errors made in the 1930s. But unlike the 1930s, it did not have ignorance as an excuse. 

This is a crucial point that many on both sides tend to ignore. In 2010, the standard business cycle model was the New Keynesian model, and the implications of that model for the efficacy of appropriately designed fiscal policy are clear. So to blame the failure of 2010 on the current dominant macro model is just wrong. You may not like that model, but it cannot be blamed for the widespread adoption of austerity, or the ambivalent attitude of many macroeconomists towards that policy change.

So in my view macroeconomists, not the dominant macroeconomic model, failed. Why? The easy answer is to say that macroeconomists were too influenced by ideology, but I think for most (not all) it is the wrong answer, as I said in my opening paragraph. I think for most (not all) it is not simple politics, so in that respect I agree with Stephen Williamson. [2] So what is it?

Here is one possible answer. First I have to appeal to macroeconomists who learnt their trade after the New Classical revolution to consider where the now dominant methodology in macro came from. If you start your history of macro thought in 1980, then everything can seem nicely progressive. First there were RBC models, applying basic micro to macro. The data showed that this framework could not explain how monetary policy appeared to work, so to resolve this puzzle New Keynesian theory was developed.

But it was not like that at all. [3]

Macro started well before 1980. Its theoretical basis may have been shaky, but it was a scientific discipline in the Popperian sense. The New Classical revolution attempted to kill off Keynesian ideas, and deny the importance of aggregate demand. In that respect it now seems clear, because of the dominance of New Keynesian theory, that this was regressive rather than progressive. 
Yet in many who were part of the New Classical revolution, or who were taught by its leaders, there remains a deep antagonism to Keynesian ideas. This was not enough to prevent the emergence of New Keynesian theory, but the NK model built upon rather than challenged the RBC framework, and it could always be dismissed with an assertion about price flexibility. As a result, in certain places NK theory was tolerated rather than embraced, or was quietly marginalised.

This attitude was facilitated by another aspect of the revolution. Although it failed to kill Keynesian economics, it did succeed in changing how macro was done. Microfoundations macro did not just become an important way of explaining the economy, it became the only acceptable way. Now we can debate the wisdom of that. But I think it is very difficult to deny that this methodological revolution reduced the discipline that data can provide on model proliferation. It becomes far too easy to say ‘but in this model something different happens’, even if there is compelling empirical evidence that said model is not applicable. [4] [5]

I think this may help explain why a good proportion of macroeconomists failed to advocate fiscal stimulus in 2009 and call the consequences of subsequent austerity. [6] Now you may disagree with my view that this represented a failure for macroeconomists as a whole. What I want to convince you of here is that my view that it did, and perhaps similar views of others, does not amount to an assertion that modern macro is fundamentally flawed, and that those working within it are wasting their time. While the New Classical revolution may have moved macro many steps forward, in condemning Keynesian ideas it took one large step backwards, and the consequences of that mistake are still with us.

[1] In part this was a reaction to a different policy decision. The work of various economists before the formation of the Euro had suggested that countercyclical fiscal policy should be a key stabilisation tool for individual Eurozone members. That work was ignored by policymakers, and they were backed up by a significant number of macroeconomists, in part using other models that focused on free rider problems and fiscal dominance. How this all turned out is another story, but once again the collective of academic macroeconomists hardly covered itself in glory.

[2] Personally, I do not think the actions of some eminent economists who ignore their economics when batting for their favoured politicians is critical here, regrettable though it is. Nor on its own were the comments of other eminent macroeconomists who appeared not to have kept up with the literature, although as I suggest here I think this was indicative. Both could have been isolated examples, quickly brushed aside. More revealing is this survey, where although 46% of economists agreed that the US stimulus was a good policy, a large 40% were uncertain or did not answer. That is just one survey, but it reflects a similar division amongst the macroeconomists I know, and the views you find on the web. See, for example, the quote from Tom Sargent in Stephen Williamson’s post. Now I think some of this 40% are equivocal about fiscal stimulus (and therefore not too worried about austerity) because of a deep distrust of government intervention or the state. Whatever the merits of this mistrust, this is exactly the ideology and politics that Paul Krugman and I complain about. I think some others of this 40% take a view that monetary policy is still up to the job, even at the ZLB. I have talked about this most recently here. This post provides a third possible explanation, although I am sure there are others. (I tried to be comprehensive here.) 

[3] Getting the history of macro thought right is important for other reasons as well. As I suggested here, the structure of NK models may owe as much to the need to work with rather than against the then dominant RBC paradigm, as to any intrinsic empirical merits of that structure.

[4] I have tried to argue that economists working in central banks take more notice of the data, which helps explain why the NK model is dominant there, but Stephen Williamson disagrees.

[5] Another arguable consequence is that modelbuilding became too conformist. The charge that some element of a model is ad hoc and lacks microfoundations hangs like a Sword of Damocles over modelbuilders. Probably too much intolerance of alternative methodologies came with this revolution as well. I think this is part of any explanation of why so little work was done on financial frictions before 2008, as Mark Thoma suggests. Again I am not arguing that the methodology is wrong, but instead that it may have certain perhaps unintended and unfortunate consequences. In my own experience if you talk to many microeconomists about DSGE in macro they can be quite critical: for example about how narrow the micro used is, or how obsessed with technicalities the analysis can become. Sometimes they can be downright dismissive

[6] You could argue that ideology lay behind the New Classical revolution’s attempt to kill off Keynesian economics, and I do not really know enough to agree or disagree. What I do think is that most of those involved in the revolution thought that they were just exposing deficient theory, which in many cases they were.



  1. Karl Popper said this in a lecture in Seville March 1992:

    “Thanks to technology, the world is wealthy enough, at least potentially, to eliminate poverty, and also to reduce unemployment to a tolerable minimum. Economists have found this very difficult – as no doubt it is; and they have ceased, rather suddenly (about 1965), to regard it as their main aim, as it was before. It seems a problem that has suddenly become unfashionable, and any economists behave as if there were a proof that it was insoluble. But on the contrary, there exists more than one proof that the problem is soluble, even though it may be very difficult to avoid some interference with the free market. But we interfere constantly with the free market, probably much more than necessary. The solution to this problem is urgent, and its being out of fashion is scandalous. If economists cannot come up with better methods, we must simply use necessary public works, especially privatized public works such as road-building, school-building, teacher-training, etc., and intensify them in periods of increasing unemployment for the purpose of a counter-cyclical policy” (page 137, 'All Life is Problem Solving', 1999).

    Milton Friedman, according the letter written by Freidman and quoted in Lanny Ebenstein's biography of Freidman (2007, page 68), swapped his previous philosophical reliance on Karl Popper for 'Jimmie' Savage and his rational expectations theory in 1979.

  2. I would say there are at least two, not necessarily mutually exclusive, types of ideologues:

    1. Economists who make claims that they themselves know to be incorrect. (eg John Taylor, Greg Mankiw, Glenn Hubbard).

    2. Economists who are convinced they are correct, though many others would say that they are not.

    Being passionately convinced of your correctness, is by itself, not necessarily ideological, nor are ideologues always deliberately and consciously being ideological.

    But an honest researcher should always be open to empirical evidence. I would say that economists who go out of their way to adopt a methodology that denigrates out-of-sample performance and external validation or critically depends on unobservables, are by definition ideologues and not serious scholars.

    Now, as you say, most economists are interested in getting their papers published and so have to work in the existing paradigm, and this hardly makes them ideologues. True. But there are many economists, including one you link to, who insist on everybody using a methodology that denigrates out-of-sample performance, external validation, and empirical evidence generally. Such people are by definition ideologues, whether they realize it or not.

  3. The New Classical Economics was developed as an alternative to Keynesian policies that are still considered unacceptable by many political factions. The rejection of Keynes is a feature, not a bug. Many of the criticisms of Keynesian economics made in the 1970s have not stood the test of time. Much of the New Classical economics rejects regulatory policy as an economic tool, or prefers to use changes to the tax code to direct policy rather than regulation. The overemphasis on monetary policy and neglect of important and powerful regulatory and fiscal tools is a problem for the New Classical economists. A healthy injection of fiscal tools and regulatory tools would make it more robust, but that misses the point which was to develop policy tools that don't require regulatory or fiscal interventions.

    The New Classical POV is politically powerful and is backed by wealthy special interests who insure that their voices are not only heard but dominant. A reflection on why the New Keynesian models did not dominate the policy discussions in 2010 needs to look at the influence of powerful monied special interest in hijacking the conversation. The same forces that operated to discredit Marx have successfully attacked Keynes and the New Keynesian models.

    -jonny bakho

  4. Simon, a valiant defence of macro but you have failed to slay the spectre of perceived political bias.

    Comments like:
    "The New Classical revolution attempted to kill off Keynesian ideas, and deny the importance of aggregate demand."

    "Yet in many who were part of the New Classical revolution, or who were taught by its leaders, there remains a deep antagonism to Keynesian ideas."
    don't help.

    You may believe that:
    "Most academic macroeconomists are just trying to advance the discipline by getting their papers published, and are certainly not consciously trying to defend some ideological viewpoint."

    Except that the starting point for most of these theories seems to be a set of assumptions that are controversial at best.
    e.g. Ricardian equivalence, general equilibrium, perfect markets, rational expectations, RBC.
    Aren't these ideological viewpoints?

    The real question is what is the point of macro policy? Is it to maximize GDP? Or is it to attain full employment? Or reduce inequality? Or maintain stability and the status quo? Or to just predict an already predetermined future outcome? It can't be all of them. The answer you choose is inherently political as it will determine the policy mix that governments choose. That is why Duncan Weldon recently said that political economy should always trump macroeconomics.

    Yet within macro are ideas like rational expectations and Ricardian equivalence that are effectively designed to tell politicians, "Don't do that because it will have no effect." But these are unproven ideas, politically loaded and designed to limit the scope of both political policy and academic study.

    The problem is that too many macroeconomists are mechanists. They seem to believe that their is only one optimal outcome and they use GE theory to try and prove it. Where is the non-linearity in your DSGE models?

    Finally, I'm curious to know where in your micro-founded models does the impact of inequality and class appear? For example, wealthy consumers will spend their money differently to poor ones. Similarly, taxes on rich and poor are not equivalent. Therefore as inequality rises the behaviour of consumers in aggregate will change, and so will your model. Do macroeconomists factor this in to their models, or ignore it and then wonder why those models didn't predict the Great Recession?

    1. +1 from me Cantab83

      It shouldn't surprise the rejection of fiscal stimulus. Let's examine the background. For instance, I'd like to know more about how the univ. used to pick their phds and their academic staff the last 3-4 decades. Thacher and Friedman were alive, the cold war was in process, neoliberalism was at its pick, was it really possible for a Keynesian to be recruited in a university and compete with Monetarists or New Classicals? (I won't even mention Marxists or other heterodox - they're almost completely vanished from economics departments)

      Since this generation of macroeconomists are still here, would that explain the massive rejection of fiscal policy?

      By the way, condemning Keynesian ideas is one thing but I'm afraid there are other useful concepts that are condemned as well (ironically, part of them are being rediscovered through the NK framework 40 years later) .
      The whole concept of DSGE models, New Keynesian economics, NC, etc (thus the macroeconomist as a mechanist) is an ideological one (since researchers choose to adopt methodological individualism and marginalism, among others. Is this adoption based on highly scientific criteria?- I doubt. It seems to me more like an ideological distortion).

    2. I was not trying to defend macro, but any critique needs to be soundly based. If rational expectations is ideological, the mechanism must be quite subtle. Likewise with linearity. On the other hand starting with a model where there are no distortions (i.e. RBC) and being very reluctant to accept the modelling of distortions ('not properly microfounded') will clearly lead to conclusions that match a particular ideology.

      There is a quite large literature trying to link the crisis to inequality. Paul Krugman is not convinced by it, and I can see why. But its not as if at least some macroeconomists have not tried to make the connection.

  5. Macro has missed the point in this crisis in several ways.

    The economy and the crisis have become more and more a public iso of a government and academic issue.
    This simply means that the decisionmaking process is likely completely different.
    Roughly and a bit over the top:
    Academic studies, transferred by technically competent civil servants or CBs, into policies while decisionmaking was at political elite level.
    The process moves much more in the other direction. Popular demands (as confidence in politics is at an all time low (and imho not without reasons. And as populist parties put pressure on the political system). The economy is at the centre of the public's attention and on top of the agenda and people are highly sceptical about the overborrowing, overpromising governments (and a lot of other things). Politics looking for economic theories arguments that get them reelected. Hardly any vision how to tackle all unbalances that have come up only focussed to fight another electionday.

    This change has completely turned things upside down. Might even not have been so bad if the present political class had been able to transform science into political slogans. They were however not. Modern day financial and economic cabinet members are career politicians (likely having to look young and dynamic in the voter's eye as most important characteristic)and even if they are not they are more managers, spokespersons than technically competent guys. Which might not be a problem if the civil service had not lost o lot of its qualiuty an dthey have to depend for a big part on what are effectively lobbyists.

    Macro as said has completely missed this development. Except for a few guys like Krugman. And this might change again the next decades (back to the old ways). You will however need a complete and clear failure of the present ways for that imho. In other words that both the jokers running the show now as well as the likely next generation (populists most likely) are clearly exposed as equal or even bigger disasters than resp. the earlier and present ones.
    So for the next decade at least we are stuck with this new set up.
    With basically the choice between being relatively unimportant or become more relevant again but have to change your modus operandi.

    Another important characteristic of this is that like the part of the human anatomy that is used to get rid of of residu food stuff everybody has an opinion. Which is as such great as they can get things off their livers. However what is clearly not great especially in Europe but also in the West in general all opinions are seen as more or less equal.
    Plus the fact that the thing is 'medianised', info is passed by usually pretty incompetent media and summarised according to newsvalue and not via the former academic channels. Well at least for a large part of the decisionmaking process.

    In that respect what somebody like Krugman is doing is rather refreshing for the field.
    As said before he however is not playing that game very well. He completely has missed the point that it is about getting policies approved. He is great in keeping the attention of his own part of the audience and keep them in his camp.
    However he missed (assuming that he wants to get his ideas put in practice) the fact that in order to get things operational he needs to work on a platform for that (be it political or popular depending on the issue). He further misses the point that the way in which he adresses the homecrowd irritates the other side. As well as in Europe at least his camop looks to be eroding.

  6. Part2
    Anyway a bit more practical.
    The model that is used for decisionmaking has changed. Before it was mainly a macro model. Now it has become a much more political one. With also a lot of non Macro issues involved. If macro would (the coming one or two decades at least) like to keep its relevance it has to move further into this world.
    And in order to remain a science it imho will have to do in a way that is as little as politicised as possible. Politics is moving in a more and more polarised direction at the moment (from a move to the centre started by guys like Blair, Schroder and Kok). Going for one side means that likely after the next election you are seen as one of the enemy otherwise.
    But as I see it more into a way where all also non-Macro (import ones politically at least) are mentioned but where you can clearly work to a certain conclusion.

    Now we have seen that main stream economists have had as if not their main discussion point at least one of them, if Greece and Co would not have been better off with a wide stimulus plan. While it was completely clear that no one was going to give them the money (for legal or political reasons). Making the field look like a bunch of completely idiots out of focus with reality. Hardly the kind of image you like to have to promote a next idea.

  7. Krugman is hardly the first or only orthodox economist to accuse New Classicals of turning macro into ideological propaganda. Their selective use of highly simplified versions of General Equilibrium Theory, with the default assumption of the FWT holding, has been strongly criticised by many GE theorists including Frank Fisher, Alan Kirman, Frank Hahn, Kenneth Arrow, Gerard Debreu, Herbert Scarf.

    Frank Hahn:
    “Although I never believed it when I was young and held scholars in great respect, it does seem to be the case that ideology plays a large role in economics. How else to explain Chicago’s acceptance of not only general equilibrium but a particularly simplified version of it as ‘true’ or as a good enough approximation to the truth? Or how to explain the belief that the only correct models are linear and that the von Neuman prices are those to which actual prices converge pretty smartly? This belief unites Chicago and the Classicals; both think that the ‘long-run’ is the appropriate period in which to carry out analysis. There is no empirical or theoretical proof of the correctness of this. But both camps want to make an ideological point. To my mind that is a pity since clearly it reduces the credibility of the subject and its practitioners.”

    [from the introduction to
    General Equilibrium: Problems and prospects
    edited by Fabio Petri and Frank Hahn ]

    1. Yes, that is a nice quote I have not seen before. Thanks.

  8. Here's what I see: on a weekly basis, in my department the Macro seminars, by scholars at top departments, are almost always garbage. You get a guy from Yale/NYU/Stanford who knows little about a topic presenting two misleading data slides and then 85 minutes of model. To make model tractable, 10-15 salient features of topic are totally ignored. Some of these features could easily reverse central conclusion of paper. Never does this feel anything like a science.

    Second point: Cut back to 2009, when the US had deflation and the Federal Reserve was shrinking its balance sheet. How many macroeconomists stepped up to criticize the Fed in the spring of 2009 for tight policy? Answer: Scott Sumner and that's it. When Bernanke raised the discount rate in 2010, obvious bad move, and I heard no criticism from the profession for raising interest rates with the Core CPI below 2 percent and mass unemployment. Again, there were no more than 2-3 macroeconomists criticizing the Fed for raising rates at this point. Much more common were a load of Macroeconomists warning about hyperinflation (Stephen Williamson) and the necessity of fiscal consolidation (SW again, for example).

  9. Ideology will always play a large part in economics: one side has too much to lose and the other too much to gain. The result is largely a self-interested oscillation around an agreed stasis which favours those with too much to lose. The upshot of this is that it deprives economics, scholarship, politics and humanity of an opportunity to advance. Instead, we are left with an endless cycle where history repeats itself as faux shock. It's fatuous as your example attests: "So macroeconomists as a collective failed this test, repeating errors made in the 1930s. But unlike the 1930s, it did not have ignorance as an excuse." So, why did they do it? They aren't interested in the alternatives. Also, we err, and, for the most part, do a lot of umming.

  10. I agree that "it is much more productive to try and understand someone’s opposing point of view than just be rude about it." and so my comment should end here. But I really honestly can't resist (I have tried).

    Your view does not amount to an assertion that modern macro is fundamentally flawed, and that those working within it are wasting their time. However this post does not contain the hint of any evidence that modern macro isn't fundamentally flawed. You note useful implications of new Keynesian macro. They are also implications of old Keynesian macro. You have made no hint of a case that new Keynesian macro is scientifically superior to old Keynesian macro.

    There may be an a priori preference for models with optimizing agents "Its theoretical basis may have been shaky" only makes sense if one thinks that science rests on theory and not on data. Also "the New Classical revolution may have moved macro many steps forward" but it also may have moved macro no steps forward at all, being entirely a mistake.

    [rudeness deleted]. It is clear that models of intertemporal optimization are not everything models should be yet. But if I, or another skeptic, were to demand evidence that they are in any way an improvement over earlier models, what evidence would you present. Trying not to be rude, I note only that I consider the challenge open.

    1. Robert

      As you know, your question is a very good one, because the New Classical revolution was not data based. Instead it was an attempt to make macro more consistent with simple micro. You can therefore have two views about this:

      (1) Pre-NC revolution macro was theoretically sloppy, and needed straightening out.

      (2) Pre-NC revolution macro was theoretically 'shaky' because simple micro is too simple to be usefully applied to macro data

      I happen to think both are true, depending on what part of NC macro you are talking about. So, as I said in a recent post, when it comes to the labour market over the business cycle (2) is nearer the truth. But when it comes to expectations, (1) is closer the the truth.

      So I think for this discussion to make progress, we need to be specific. Only when we have gone through the specifics can you aggregate to some general conclusion.

  11. "the New Classical revolution may have moved macro many steps forward"

    I too question this. If we are seeking strong mathematical barriers to entry to the priesthood - sorry, profession - then NC was definitely a step forward. And of course there is something to be said for nice internally consistent stories. But if we are seeking an EXTERNALLY consistent story (ie one that lets us describe the world as a prelude to changing it) then I think it is quite hard to see how NC has brought us forward, at least to date.

    And it's a framework whose whole starting point is that things will tend to find their optimum left to themselves, so that interfering with "nature" always tends to be bad. You don't have to be Foucault to see how that guides the narrative towards a particular ideological direction - one that favours established power.

    Krugman is right that the travails of macro theory are at root sociological, but it's much more subtle than just the commercial and political prejudices of rich old white men (not that these don't also exist of course).

    1. Amen. It seems that in much of macro, theories are judged not by their ability to explain the real world but by the mathematical virtuosity they demonstrate. If you want a priesthood, that's a reasonable criterion. If you want to actually explain the world, it's not.

      Macro accepts as given a number of assumptions that are laughable in other fields of economics--especially in light of recent innovations in behavioral econ (hyperbolic discounting with discount rates strongly neg correlated with the income distribution, etc). I love macro questions, but only a small segment of macro research seems to make any attempt at actually explaining data from the real world. Of course every model is wrong in some sense, but that does not imply that every simplifying assumption is right. Between the ridiculous models of shopping costs for monetary policy and the inexplicable (apart from "ooh shiny math!" effect) over-broad applications of Markov assumptions--plus the central identification problems of running DSGE models over only 1-2 business cycles (much potential for omitted variable bias?)--it's very hard to take large segments of modern macro seriously. I love macro questions, but I've chosen to specialize in fields where I can respect much larger proportions of the literature currently in vogue. Too many macro seminars feel like particularly rigorous soliloquies about angels dancing on pinheads.

      Also, I've spent a lot of time thinking about how the assumption that (apart from assumed, explicit externalities) every observed outcome is optimal biases the profession, and also concluded that it creates a strong bias towards the status quo. But it's not the sort of thing one can say out loud until one no longer has to worry about tenure...

  12. Macro-economics is not about studying the economy. It is about the application of a uniform methodology irrespective of time, place, or context. It makes assumptions (eg. people have unlimited wants) about humans and humanity which, while not necessarily wrong, are considered controversial in other disciplines - ie they are debated (and disputed by, for example, philosophers since at least the Enlightenment). Such assumptions have become the micro-foundations of macro-economics, which, although posed as "science" and "objective", are in fact assertions based at the end of it on disputable beliefs with highly political implications. It is not the poor state of the maths in the dismal science that disturbs many - it is more the poor state of its normative aspects and the lack of critical enquiry. Your observations are pause for thought Simon, but the problem is not so much one of macroeconomists working towards an ideological agenda, it is the pretensions of trying to present this as politically neutral and totally objectively based scientific work.

  13. This is a good post. A couple of quibbles:

    1. "First there were RBC models, applying basic micro to macro. The data showed that this framework could not explain how monetary policy appeared to work, so to resolve this puzzle New Keynesian theory was developed."

    That's not how I see it. I think that gives RBC models too much credit in the development of NK theory. I see NK theory as a steady development from the Phelps volume, which predates RBC by a decade, as the methodological insights from Lucas 72, plus the formalisation of Friedman's permanent income hypothesis, plus monopolistic competition, were slowly added. In other words, NK theory would have been much the same even if RBC theory had never existed. (When I first read RBC, I thought it was just intended as a clever and provocative joke, and mostly still do.)

    2. I wonder how much of it is that most politicians were trained as lawyers, or similar, and just don't get economics, especially macro?? Canadian fiscal policy was relatively sensible during the recession. Is it just a coincidence that our PM has an MA economics? Because he is certainly not a big government lefty. Sample of one, of course.

    3. Or is it just that some countries started out with a better fiscal position so running a temporary deficit was less of a worry?? After all, there is some sort of limit out there somewhere, and if you think a shock might be at least partly permanent one would be a lot less sanguine about a temporary deficit which might not be so temporary.

    (Reading some of the comments here reminds me of why I am fearful of some lefties getting too much political power. Self-righteousness is not just an irritating sin; when you ascribe evil motives to anyone who disagrees with you, it makes it harder to spot your own mistakes, and creates a totalitarian mindset where you want to put anyone who disagrees with you in the gulag where evil people belong.)

    1. Ascribing evil motives to anyone who disagrees with you, is of course also the hallmark of a lot off the Austrian Economics/Libertarian bunch, in particular the set roundabouting the von Mises Institute.

    2. When you talk about evil you are talking about morals, and moral choices. If lefties appear "evil" to you perhaps it is because they see macro in moral terms, not just financial ones, and so judge its success not on aggregate measures of GDP and growth, but in moral terms measured on the scale of real life consequences for real people such as unemployment, poverty and inequality.

      Personally, I am no economic ideologue, despite being a "leftie". I favour no particular economic model based on prejudice, only on its track record of proven results. But then I am a physicist. Maybe if more economists were (first) trained as physicists, they would have a better intuitive understanding of disciplines like thermodynamics, non-linear systems, and feedback theory that would aid their model construction. Then maybe they would be better economists.

      This is the problem with macroeconomics. Those that practice it have yet to define its purpose. If its sole purpose is to predict a future that they believe is already predetermined (or explain a past that cannot be changed) then it is nothing more than economic weather forecasting. It is of no relevance to anyone outside the macro community. If it wants to be relevant then it needs to show that it can change the future for the better. But as all economic agents are different that means there will always be winners and losers. The question is Nick, who do you want to be the winners?

    3. On (1), I hope it was clear from my post that I did not see it that way either! My point was rather that given how the subject is typically taught at graduate level, that is how it may appear to those who did not live through this.

      But I'm not sure I agree that NK macro would have ended up like it is without the NC guys. In particular, I'm not sure there would be so much interest in labour supply (that is my labour market post).

      On (3), I'm sure this is partly true. That is why I can forgive the 2010 panic. What is less easy to forgive is why the obsession with austerity did not melt away outside Europe as interest rates on debt stayed low.

    4. Simon: "On (1), I hope it was clear from my post that I did not see it that way either!"

      Aha! I misread you. (Maybe not perfectly clear, or maybe just me.)

      Cantab83: " If lefties appear "evil" to you..."

      They don't. You misread what I said. "Attribution bias"?

      "Maybe if more economists were (first) trained as physicists,..."

      From my personal observations, the vast majority of economists were strong in physics, or something similar like engineering, in school or at undergrad. And over the years an increasing number of those entering graduate economics programs came straight from undergrads in physics or math or similar. And that is why so many of them have terrible intuitive understandings in economics. All they (or too many of them, anyway) understand is the damned math. We have too many ex-physicists, and not enough (say) ex-philosophers. Personal note: physics was by far my best A-level subject (like so many economists), and I did BA philosophy (very rare for economists), then switched to econ.

      "The question is Nick, who do you want to be the winners?"

      Would you ask a referee that question?

    5. @Nick_Rowe : You are right. My apologies. My original phraseology was clumsy and muddled. What I meant to write was
      "If some lefties appear self-righteous to you..."
      Can we agree that that was your inference?
      If so then I stand by the remainder of my comment above (30 August 2013 10:55). The correction does not, I think, alter the thrust or meaning of the remainder of what I said.

      Personally I don't believe lefties are self-righteous. I think they are idealists. But is that so bad, to want to make the world a better place? And why shouldn't economics be part of that solution? That question though brings us back to the main point in my comment that you ignored. What is the point of economics? Is it to merely explain the past or is it to change and improve the future?

      "Would you ask a referee that question?"
      Economists aren't referees. If they were that would require some impartiality from all of them.

    6. @Nick_Rowe On the question of physicist...

      My point was that to have an intuitive understanding of economics it is better to have an intuitive understanding of physics first. You would then be able to identify examples of analogously behaving systems in each discipline and cross-fertilize ideas and solutions. That is where intuition comes in.

      An A-level in physics does not make you a physicist. There are just as many undergraduate physicists who lack an intuition for their subject and see only the maths as there are economists. Intuition comes with time and experience and the application of ideas learnt in the class-room to real-world problems encountered outside the class-room.

      My point is that economists would be better trained if they had strong maths AND significant experience in practical real-world empirical disciplines like physics and engineering (where much of a similar type of maths is used) rather than coming from abstract backgrounds like maths, statistics or philosophy. You may think there are already too many physicists in economics grad-schools, but I see no evidence that they are incorporating any physics knowledge into an advancement of economics thinking. In which case they are having no impact. Moreover I would suggest that most are not there to become economists but are merely en-route to jobs as traders in financial institutions in the City and Wall Street.

      Personally, I don't think anyone should be allowed to train as an economist until they are at least 30 and have a couple of good degrees in physical sciences behind them. Otherwise they just don't know enough. And if economics wants to become a science, then its practitioners need to be thought to think like scientists first.

  14. An anecdote: at the beginning of the recession, the Canadian PM held a meeting with a couple of dozen Canadian macroeconomists. We each got 5 minutes to give him advice. Some of us said: "Don't try to balance the budget in a recession, it's OK to run a deficit". He came out of that meeting and immediately gave a short speech where he said he has listened to all us wise people and had decided he would not try to balance the budget in a recession. I'm damned sure he had already decided that, knew what we would say, and just wanted a bit of extra backup.

  15. A point I've made before here, which I haven't seen echoed since: it's not about market-clearing versus waste, it's not about an ideological divide -- it's about elegance.

    What has made RBC much more attractive than DSGE is the elegance of it, and the clarity that follows from the elegance.

    If RBC had worked, we would have felt we understood it. But if a Woodford model works, do we feel that way? I certainly don't. It's not so easy to read, not so clear ...

    It is for the same reasons that Krugman's and Romer's applications of Dixit-Stiglitz have been so popular. Not because of their empirical validity. So Krugman's trade models have "some" empirical relevance while Romer's relevance is disputed? So what? Both have done wonderfully well in the classroom, because they are elegant and clear.

    Take Krugman's "target zones": foundered empirically very early on, generated a huge following all the same. Why did we learn the "art" of smooth-pasting? Because it was relevant? No, it wasn't. Because it was elegant.

    I don't think you can understand the attraction of RBC if you are not sensitive to its mathematical elegance.

    Option-pricing formulae, are they correct? They're elegant!

    The ideologues are not those who refuse to work with ugly disequilibrium rationing inequalities, they are those who insist on doing so!

    1. Your general point has some force, but in this particular case? I think the NK model with Calvo contracts is pretty elegant! And that, of course, is why NK models typically use Calvo contracts. What is more, I think you can get a lot more out of NK models analytically that you can out of RBC models. But then maybe we all love what we know best!

  16. Macro models are useful as they let you propose specific policies in order to achieve specific goals but. Moreover, assumptions of a model determine the proposed policies. For example, in RBC models, unemployment is always voluntary(!!!!!!). A serious (or Sirius) macroeconomist who uses RBC models and who believes that this kind of macro is science, should suggest that there is never a real problem with unemployment; therefore there is never need for measures against unemployment. Another example, in NC theory, since we suppose rational expectations, we will instantly conclude that monetary policy is ineffective. Moreover, if Walras law occurs, then again, labour market, real estate markets, etc, MUST be in equilibrium constantly. There's no room for any bubbles, or long term imbalances.
    Some of these unrealistic conclusions are outreached in NK (through sticky prices mostly), but still, you can't build castles in the sun.There's need to change your framework.

  17. "Microfoundations macro did not just become an important way of explaining the economy, it became the only acceptable way." This is the key point. In response to a couple of key objections--the Lucas critique, the failure of the Phillips curve without expectations, etc.--macroeconomics picked up an entirely different methodology that severely limited the type of thinking that was possible within the framework.

    In one fell swoop, economists banished the possibility of making a model that allowed for reflexivity, for most reasonable interpretations of strategic decisions over time (beyond Euler weighting), or for a realistic view of complexity theory (aggregating from diverse economic actors).

    This decision naturally set up a collective action problem. As you say, "Most academic macroeconomists are just trying to advance the discipline by getting their papers published, and are certainly not consciously trying to defend some ideological viewpoint." With an unrealistic framework that blocks out huge areas of thought, only certain types of papers fit this description. Keynesian ideas were given credit for their ability to fit into New Keynesian models that precluded any possibility of realistic decisions over time or true uncertainty (both features of Keynes's original thinking). Ideas that challenge the assumptions of the dominant theory are not strong ways to get papers publish or advance the discipline. It was in the economist's individual interest to stick with the program, even if the profession overall was ripe for critique.

    If an economist were to push any of these ideas, he would face the reality that he is likely to remain unread and underappreciated, as Hyman Minsky remained until his death in 1996. As Paul Krugman said, this is an issue of the sociology of macroeconomics.

    Now more than ever, macroeconomists need to step back and take a real careful evaluation of the strengths and weaknesses of the methodology. I am deeply concerned that successes of the Keynesian method are wrongly being attributed as successes of the New Keynesian method without any serious reconsideration of whether the numerous additional assumptions that separate the two methodologies are necessary and beneficial. As you conclude, it is true that even under the New Keynesian models, many macroeconomists failed the test by advocating austerity, but there is a deeper divide that deserves consideration between the relative weaknesses of broadly Keynesian methodologies.

    Thank you for your post and your always insightful commentary.

  18. It's actually much worse than simply "wasting their time", it's actively harmful to actual people, their lives, their families, their countries, when so-called macroeconomists are so blinkered that they are only interested in whatever model they've accepted intellectually, that they feel justified in ignoring empirical data for years upon years on end that PROVE that model is not applicable. That's not "doing good work", that's dancing on people's graves. And the response is, well getting published is really really important?!? Bah!


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