Gobsmacking macroeconomics apologetics
29 December, 2012 at 18:12 | Posted in Economics | 15 CommentsIs academic (mainstream neoclassical) macroeconomics flourishing? “New Keynesian” macroeconomist Simon Wren-Lewis has a post up today on his blog answering the question affirmatively:
Consider monetary policy. I would argue that we have made great progress in both the analysis and practice of monetary policy over the last forty years … However, it has to be acknowledged that policymakers who look at the evidence day in and day out believe that New Keynesian theory is the most useful framework currently around. I have no problem with academics saying ‘I know this is the consensus, but I think it is wrong’. However to say ‘the jury is still out’ on whether prices are sticky is wrong. The relevant jury came to a verdict long ago …
It is obvious that when it comes to using fiscal policy in short term macroeconomic stabilisation there can be no equivalent claim to progress or consensus. The policy debates we have today do not seem to have advanced much since when Keynes was alive …
What has been missing with fiscal policy has been the equivalent of central bank economists whose job depends on taking an objective view of the evidence and doing the best they can with the ideas that academic macroeconomics provides…
The contrast between monetary and fiscal policy tells us that this failure is not an inevitable result of the paucity of evidence in macroeconomics. I think it has a lot more to do with the influence of ideology …
Hmm. This doesn’t seem convincing at all.
1 So, according to Wren-Lewis, macroeconomics has really made progress on monetary issues thanks to central bank economists and since we have been able to definitely conclude that wages are “sticky”. Wow! That’s really impressive! (And the earth still isn’t flat?) Keynes argued that conclusively more than 75 years ago …
2 And are central bank economists really “taking an objective view”? How is it even possible to think that thought today, when the “relevant jury” for at least four years has known that these guys to a large extent were the culprits of the latest financial and economic crisis. Devoted Ayn Randian Alan Greenspan “taking an objective view”? I’ll be dipped!
3 Is ideology only playing a role when it comes to fiscal policies? Hard to believe. As already Gunnar Myrdal argued 80 years go, ideology is all over all economists. Whether they are into monetary or fiscal policies is immaterial.
Here – again – we see a rather unbecoming self-congratulatory attitude, according to which all macroeconomists (allegedly) share the same basic mainstream neoclassical theory, so when we discuss and argue it’s only about which policy and model to choose. All the more or less licensed and shared models and policies are already there on the shelf and we just have to decide which one to pick for today’s monetary or fiscal problem solving. This is of course nothing but pure nonsense. Today’s macroeconomic debates are about so much more than selecting models for policy advice. And I think this is obvious for all that look further than the seminar room at the economics department at Oxford University.
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I think Keynes’ main insight was that recessions are caused by excess demand for money and he was adamant that infinitely flexible wages/prices would NOT fix the problem. So how does it matter that prices are sticky? If they weren’t, Keynes’ insight would be totally intact.
MMT and state theories of money explain this too: unemployment is possible only in monetary economies, because the authority that imposes taxes payable only in money it issues may fail to issue sufficient amount to allow the population to pay taxes. It has nothing to do with flexible wages. If taxes are X>0 and the population has zero currency, flexible wages don’t change the outcome: everybody is looking for jobs paying state money and failing, unemployment is 100%.
Comment by PeterP— 29 December, 2012 #
If wages were flexible (extremely flexible) a recession would cause a drop in the money wage which would cause a rise in the real value of the monetary base (and national debt). That additional stock of “state money” in the hands of the private sector would induce extra spending which would solve the problem. That’s what is known as the “Pigou effect”, which I’m pretty sure was what Keynes had in mind when he said flexible wages would cure recessions.
Comment by Ralph Musgrave— 31 December, 2012 #
Ralph, sorry to say, but I think you’re wrong.
Here’s my argumentation: http://larspsyll.wordpress.com/2012/07/22/sticky-wages-and-transmogrification-of-truth/
Comment by Lars P Syll— 31 December, 2012 #
I agree with you on this one.
Comment by Sophette50— 29 December, 2012 #
Noahopinion take
“It’s surely a worry that most economic theory papers merely build a model then examine its implications, often with no reference to evidence.”
Comment by Sophette50— 29 December, 2012 #
Maria Olivella Rizza
Gunnar Myrdals’s Critiques of Utility Theory.
http://www.unisa.it/uploads/1720/3.197.pdf
Gunnar Myrdal-The Political Element in the Development of Economic Theory http://books.google.se/books?id=O2IwO28IyTUC&printsec=frontcover&hl=sv&source=gbs_ge_summary_r&cad=0#v=onepage&q&f=false
Comment by Jan Milch— 30 December, 2012 #
Thanks for your paper. Look forward to reading it; however, I still like economic models. Hence this poem.
To the beauty of economic modeling – (THE INEFFICIENT MARKETS HYPOTHESIS: WHY FINANCIAL MARKETS DO NOT WORK WELL IN THE REAL WORLD)
Je n’ai pas la compétence de faire les commentaire sur le fond, mais je trouve neamoins votre Model très profond. Vous avez donne le temps au temps, et ce faisant, vous avez apporte a Debreu-Arrow, un peu du beau temps. Votre perspective ensoleillée n’a pas enraye l’ergocdicité. Quel audace de garder l’agent rationelle a sa place.
Comment by Sophette50— 30 December, 2012 #
My favorite line from the new Farmer paper: “Although individuals in our model are rational; markets are not”. That some economists destroy the castle from the inside has some Keynesian aspects. But the paper is still full of flaws à la Simon Wren-Lewis. Good conclusion, bad argument.
Comment by Aston Lockheed— 30 December, 2012 #
I’m looking forward to reading your take on the paper. I see you have sometthing on your blog about it.
Comment by Dwayne Woods— 30 December, 2012 #
I think within the context of accepting certain assumptions that their argument is quite good. So, I would say, good argument, interesting conclusion. I read what was on the post when I click on your name; however, you do not show what the flaws are.
Comment by Dwayne Woods— 30 December, 2012 #
So, yep, Farmer’s paper is there : http://www.rogerfarmer.com/NewWeb/PdfFiles/FNV-Inefficient-Markets.pdf
The flaws i’m thinking about are the hypothesis of rational expectations, the distinction between effective value and fundamental value, the presence of a representative agent (it’s hard to make born and die a representative agent, but they do it)… I’m a Keen-Minsky lover, so i’m not convinced that this is the best way to understand financial instability. That being said, i stay very interested by all this literature and i keep tabs on the work of Farmer (i discovered him with his work on qualitative easing).
Comment by Aston Lockheed— 30 December, 2012 #
It’s precisely because they bring time into the equation that I find it great. Varoufakis et al in their great book Modern Political Economy deal with this topic. Hey, I would like a more critical read from you on the Bates democracy and revenue paper.
Comment by Dw— 31 December, 2012 #
sorry Dw!i lack time (and skills) to go further… happy new year
Comment by Aston Lockheed— 2 January, 2013 #
a limerick to close the discussion:
I prefer Newton’s figs
to Euler’s digs
because life has too much elasticity
to be trapped by its ergodicity
and time is too temporal to be rigged – you dig!
Comment by Dwayne Woods— 31 December, 2012 #
Lars, I agree with your criticisms of Wren-Lewis. He is verging on being typical of academia at it’s worst: sitting in universities counting the number of fiscal and monetary angels that dance on a pin head. But as a saving grace, he did do a post pointing out that economics academics are more interested in the beauty of their models than whether such models are of any relevance to the real world. See:
http://mainlymacro.blogspot.co.uk/2012/04/microfoundations-and-evidence-2.html
Comment by Ralph Musgrave— 31 December, 2012 #