For economists, and those interested in macroeconomics as a
discipline
Eric Lonergan has a short little post
that is well worth reading. Not because it is particularly deep or
profound, but because it makes an important point in a clear and
simple way that cuts through a lot of the nonsense written on
macroeconomics nowadays. The big models/schools of thought are not
right or wrong, they are just more or less applicable to different
situations. You need New Keynesian models in recessions, but Real
Business Cycle models may describe some inflation free booms. You
need Minsky in a financial crisis, and in order to prevent the next
one. As Dani Rodrik says,
there are many models, and the key questions are about their
applicability.
If we take that as given, the question I want to ask is whether
current mainstream academic macroeconomics is also eclectic. (My
original title for this post was can DSGE models be eclectic, but
that got sidetracked into definitional issues, but from the way I
tend to define things it is the same question.) My answer is yes and
no.
Let’s take the five ‘schools’ that Eric talks about. We clearly
already have three: New Keynesian, Classical, and Rational
Expectations. (Rational Expectations is not normally thought of in
the same terms, but I understand why Eric wanted to single it out.)
There is currently a huge research programme which aims to
incorporate the financial sector, and (sometimes) the potential for
financial crises, into DSGE analysis, so soon we may have Minsky too.
Indeed the variety of models that academic macro currently uses is
far wider than this.
Does this mean academic macroeconomics is fragmented into lots of
cliques, some big and some small? Not really, in the following
important sense. I think that any of this huge range of models could
be presented at an academic seminar, and the audience would have some
idea of what was going on, and be able raise issues and make
criticisms about the model on its own terms. This is because these
models (unlike those of 40+ years ago) use a common language. The
idea that the academic ranking of economists like Lucas should
reflect events like the financial crisis seems misconceived from this
point of view.
It means that the range of assumptions that models (DSGE models if
you like) can make is huge. There is nothing formally that says every
model must contain perfectly competitive labour markets where the
simple marginal product theory of distribution holds, or even where
there is no involuntary unemployment, as some heterodox economists
sometimes assert. Most of the time individuals in these models are
optimising, but I know of papers in the top journals that incorporate
some non-optimising agents into DSGE models. So there is no reason in
principle why behavioural economics could not be incorporated. If too
many academic models do appear otherwise, I think this reflects the
sociology of macroeconomics and the history of macroeconomic thought
more than anything (see below).
It also means that the range of issues that models (DSGE models) can
address is also huge. To take just one example: the idea that the
financial crisis was caused by growing inequality which led to too
much borrowing by less wealthy individuals. This is the theme of a
2013 paper
by Michael Kumhof and colleagues. Yet the model they use to address
this issue is a standard DSGE model with some twists. There is
nothing fundamentally non-mainstream about it.
So why is the popular perception so different? Why do people talk
about schools of thought? I think there are two reasons. First, while
the above is true in the realm of academic understanding and
discourse, it does not carry over into policy. When it comes to
policy, we get to learn which models academic think are applicable to
particular policy problems, and here divisions can be sharp. Second,
there are plenty of people outside academia who have a public voice
about economics (and generally a policy orientation), and they often
do see themselves as school followers.
In terms of working practice rather than the hot end of macro policy
decisions, most academic macroeconomists would regard themselves as
eclectic in terms of the kind of work they are prepared to spend an
hour or two seeing presented. But this view, and the common language
that mainstream academics use, leads me to the No part of the answer
to my original question. The common theme of the work I have talked
about so far is that it is microfounded. Models are built up from
individual behaviour.
You may have noted that I have so far missed out one of Eric’s
schools: Marxian theory. What Eric want to point out here is clear in
his first sentence. “Although economists are notorious for
modelling individuals as self-interested, most macroeconomists ignore
the likelihood that groups also act in their self-interest.” Here I
think we do have to say that mainstream macro is not eclectic.
Microfoundations is all about grounding macro behaviour in the
aggregate of individual behaviour.
I have many posts where I argue that this non-eclecticism in terms of
excluding non-microfounded work is deeply problematic. Not so much
for an inability to handle Marxian theory (I plead agnosticism on
that), but in excluding the investigation of other parts of the real
macroeconomic world. (Start here,
or type microfoundations into this blog’s search box and work
backwards in time.) But for me at least this as a methodological
point, rather than anything associated with any school of thought.
Attempts to link the two, which I think many people including myself
have been guilty of, just confuses.
The confusion goes right back, as I will argue in a forthcoming
paper, to the New Classical Counter Revolution of the 1970s and
1980s. That revolution, like most revolutions, was not eclectic! It
was primarily a revolution about methodology, about arguing that all
models should be microfounded, and in terms of mainstream macro it
was completely successful. It also tried to link this to a revolution
about policy, about overthrowing Keynesian economics, and this
ultimately failed. But perhaps as a result, methodology and policy
get confused. Mainstream academic macro is very eclectic in the range
of policy questions it can address, and conclusions it can arrive at,
but in terms of methodology it is quite the opposite.
