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Saturday, December 29, 2012

Woj on When the State of Macro Will Be Good Again

     He has a post in answer to the skirmishing over macro going on between Stephen Williamson, Krugman, et. al. I’ve had a few posts on it myself.

    I find if anything, Glasner-as is often the case-had as penetrating analysis as anyone; Woj also indicated he feels the same about this. Ok, let’s see Woj’s take:

    “Responding to a debate between Krugman and Steve  Williamson on the current state of macroeconomics, Noah Smith asks, Macro, what have you done for me lately? The entire post is definitely worth reading, including the updates and comments. With apologies, I have copied several paragraphs here:

So if collegiality and similarity of technique are measures of a field’s health,
then macro is doing quite well. But I feel like there’s a larger question: What
has macro done for the human race in the last 40 years? How are we better off as
a result of all this macro research effort?

          So macro has not yet discovered what causes recessions, nor come anywhere close to reaching a      consensus on how (or even if) we should fight them.

Given this state of affairs, can we conclude that the state of macro is good? Is a
field successful as long as its members aren’t divided into warring camps? Or
should we require a science to give us actual answers? And if we conclude that a
science isn’t giving us actual answers, what do we, the people outside the
field, do? Do we demand that the people currently working in the field start
producing results pronto, threatening to replace them with people who are
currently relegated to the fringe? Do we keep supporting the field with money
and acclaim, in the hope that we’re currently only in an interim stage, and that
real answers will emerge soon enough? Do we simply conclude that the field isn’t
as fruitful an area of inquiry as we thought, and quietly defund

And who do we call in to evaluate the health of a science? If we only rely on
insiders to evaluate their own field, we are certain to run afoul of vested
interest (If someone asked you “How valuable is the work you do”, what would you say?). But outsiders often lack the relevant expertise to judge someone else’s

It’s a thorny problem. And (warning: ominous, vague brooding ahead!) it seems to be
cropping up in a number of fields these days, from string theory in physics to
“critical theory” in literature departments. Are we hitting the limits of Big
Science? Dum dum DUMMMM…But no, this question leads us too far


      “In general my views on the matter are well represented by Smith. My early
frustrations with economics were largely because I thought pursuits within macro
had gone far afield from trying to understand business cycles in a modern
economy. Since that time, I have been inspired by a group of competing theories
that incorporate money and the financial system into macroeconomic models. My
hope and belief is that these currently heterodox methods will, in time, be able
to largely explain what causes recessions and how to fight them. If, and when,
that occurs, the state of macro will be good.”

      I guess if Woj is apologizing for quoting Smith at length, I should be apologizing for quoting at length his quoting of Smith at length…. LOL.

      Smith in many ways is a good person to talk to about heterodox ideas and remaking macro. The reason I say this is because of his background in physics. He has often mentioned that this background in physics gives him a different perspective for issues econ than your typical graduate student. In addition, a lot of the heterodox guys like Steve Keen swear by the importance that physics can bring to bear for macro, making it an “honest woman” as it were: ie, a real science.

     By the way, if you’re are really interested in heterodox econ, you really got to start with Keen; I’m reading his “Debunking Economics” right now and it gives you the kind of weapons you need if you’re like me: an interested layman who has some skepticism about Neoclassical econ but get a little intimidated when the establishment guys show off all their pretty little models. Often when I read someone like Sumner I don’t buy what he’s saying but I don’t necessarily have the best arguments at hand to show why-to fight him on his own turf: not that he’s the worst guy in the world, there are far worst and in some sense his ideas are now considered “heterodox.”

    At the present that’s where we are: the real “heterodox” ideas as featured in a piece by the Economist about a year ago, is Internet Austrianism, Sumner’s Market Monetarism, and the MMTers-a kind of post-Keynesian school; Keen is close to it. Woj himself takes a bit from each of these schools or at least both MMT and the Austrians; I’m not sure so much from the MMers. I’m never really sure what the Austrians really have to offer me, however, It seems they’re most about telling us we must never do any fiscal policy whereas MMT is about how we should.

    True, the also talk about misallocation of resources-but you can be a post-Keynesian and get that. What is uniquely Austrian in that?

    In any case, while I agree with Woj about the need to change macro and that the heterodox ideas are the way to do it, it’s much easier said than done. You have to think about what Thomas Kuehn  said about the shape of scientific revolutions. Paradigm shifts don’t happen too often. In econ, we’ve seen basically two since the rise of the Neoclassical school back in the 1870s-this was lead by Walras, Menger, and Jevons.

   We had Keynes in the 30s and we had Lucas in the 70s. Arguably-and I will argue-that Lucas was basically an anti-Keynesian counterrevolution. Recall that Keynes himself literally invented macro. Lucas was really about making macro more and more about micro-and requiring it to have foundations in micro-ie, “microfoundations.”

   In any case, any new paradigm shift won’t be easy. However, I do think you can certainly see what could be the building blocks for this paradigm shift. You have the various heterodox schools named above. Then you have younger economists like Smith who bring a different sensibility even if they’re schooled in the Neoclassical tradition.

   Smith in particular because of his physics background has an affinity for the idea that what’s needed in economics-to make it even a dismal science-are natural experiments. This lack is why economics as much as it wants to is no hard science, but a squishy, soft science. What really divides “hard” and “soft” sciences is the ability to perform controlled experiments. This lack is why Marxists can continue to talk about a “falling rate of profit” as if this hasn’t been entirely repudiated by history or Neoclassicals can continue to claim the economy is in stable equilibrium after the Great Depression or the recent Lesser Depression.

   More generally, I understand that many of the younger economists and students are less interested in theory and more in empirical work. These tendencies may abet such a paradigm shift. What seems unlikely is that we’ll see this led by a return to IS-LM as Krugman wants to urge.


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3 Responses

  1. Nice post.

    "Arguably-and I will argue-that Lucas was basically an anti-Keynesian counterrevolution."


    "What seems unlikely is that we'll see this led by a return to IS-LM as Krugman wants to urge."

    What annoys me about this is that Krugman is just unaware of, or doesn't care about, the devastating criticisms of IS/LM put forward by its own creator. Keen documents this in DE so you're either aware of it, or have it to look forward to.

    Btw, Woj is against market monetarism as you can see in his posts on NGDP targeting:

  2. mikesax says:

    TK for checking in Unlearning. I do think that Krugman has some blindspot about this. I like him a lot as, well, for years here inthe U.S. at least he was the only really articulate voie that consistently spoke up for liberalism and Keynesianism.

    On the policy level he is mostly right. HOweer, I do agree with Skidelsky that the position of Krugman's New Keynesians is untenable: basically right on policy but only by ignoring/obsucring their own theory.

    In a word, the freshwater guys sacrifice reality for theory and the saltwater guys sacrifice theory for reality. While the saltwater approach is preferrable it's still untenable in the long term. We need a coherent theory of the economy.

    I think Krugman's very good at what he does but he has this limitation on theory. HE seems to kind of know as he's ben talking about somehow getting debt into his theory. However, I think Keen is probabaly right that the Neoclassical baby has to be thrown out with the bathwater, and even IS-LM is limited and far from a panacea. At this point according to Keen IS-LM is what they learn in undergratuate econ and DSGE is graduate.

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