Mainstream macroeconomics – a complete shambles

23 Nov, 2012 at 16:01 | Posted in Economics | 1 Comment

Simon Wren-Lewis has a piece on his blog on how teaching macroeconomics after the crisis looks:

I was asked the other day how macroeconomics teaching at Oxford had changed as a result of the Great Recession of 2008-9 … [A]lthough the crisis has added material, nothing has really been thrown away as a consequence of what has happened. We have not, either individually or collectively, decided that the Great Recession implies that some chunk of what we used to teach is clearly wrong and should be jettisoned as a result … As Paul Krugman has pointed out many times, recent developments have in many ways been a vindication of the basic Keynesian model that lies at the heart of any undergraduate macro course … The mess we are currently in is due in part to policy makers ignoring this basic macroeconomic analysis.

This is really gobsmacking.

First of all because I find this rather self-congratulatory and complacent attitude unwarranted.

But also – re Krugman – because it, at least to my reading, seems to be in bad accordance with what Krugman has repeatedly said after the finance crisis, e. g. in his speach at the Eastern Economic Association:

One can make excuses for the failure of the economics profession to foresee that the 2008 financial crisis would happen. It’s much harder to make such excuses for much of the profession’s failure to realize that such a thing could happen …

[T]o argue, or even to think about, the possibility that the old evils could manifest themselves in new forms would have been to question the whole basis of decades of policy, not to mention the foundations of a very lucrative industry.

We’ve entered a Dark Age of macroeconomics, in which much of the profession has lost its former knowledge, just as barbarian Europe had lost the knowledge of the Greeks and Romans.

How did all this knowledge get lost? … First, success in academic economics came from publishing “hard” papers — meaning papers that used rigorous and preferably difficult mathematics … Successive cohorts of students were trained only in the newly rigorous version of macro, which had lost touch with the field’s previous intellectual achievements …

Some economists are pushing forward with new macroeconomic models … But as I’ve said, our big problem was not lack of models … The biggest problem we had as a profession wasn’t failure to keep up with a changing world, it was failure to remember what our fathers learned.

And re the policymakers ignorance, I would rather say like Keynes:

Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist.

As an appendage I can’t restrain myself (having a Ph. D. in both economics and economic history) from citing Brad DeLong‘s complaint about economists obviously not being able – or wanting – to learn from history:

We economists who are steeped in economic and financial history – and aware of the history of economic thought concerning financial crises and their effects – have reason to be proud of our analyses over the past five years. We understood where we were heading, because we knew where we had been …

Those who said that there would be no downturn, or that recovery would be rapid, or that the economy’s real problems were structural, or that supporting the economy would produce inflation (or high short-term interest rates), or that immediate fiscal austerity would be expansionary were wrong. Not just a little wrong. Completely wrong.

Of course, we historically-minded economists are not surprised that they were wrong. We are, however, surprised at how few of them have marked their beliefs to market in any sense. On the contrary, many of them, their reputations under water, have doubled down on those beliefs, apparently in the hope that events will, for once, break their way, and that people might thus be induced to forget their abysmal forecasting track record.

Occasional links has some similar thoughts on the subject:

It is extraordinary to sit here in the midst of the crisis and read the self-satisfied pronouncements of economists about the state of the discipline …

At the level of teaching, where is the history of the theories and debates that have taken place in macroeconomics since at least the publication of John Maynard Keynes’s General Theory? And what about the theories other than the neoclassical and Keynesian versions of IS/LM—where do they fit into the curriculum?

As far as the theory is concerned, what role does uncertainty play in their models? And how do crises occur endogenously, rather than as the result of some exogenous disturbance in either the real or financial side? And what about the role of inequality in determining the level and rates of growth of prices, output, and employment (not to mention the external sector)? And, finally, what’s the explanation of how alternative economic policies are adopted and implemented, other than as irrational mistakes?

[N]either macroeconomics nor microeconomics is in good shape. They weren’t before the crisis began and they’re not now, in the midst of the Second Great Depression. Both areas need to be fundamentally rethought.

Economics in the crisis remains in crisis.

The line of repentant mainstream neoclassical economists ought to be long, and it’s abolutely outrageous that we haven’t seen even one single prominent economist who has had the courage and integrity to admit that he or she got things completely wrong.

1 Comment

  1. “How the Economists Got It Wrong”


    “The American Economic Association (AEA) met January 7-9 in Boston, for a millennial program distinguished by its attention to international policy issues, most particularly financial crises (as in Asia) and the failure of the so-called “economic transition” (as in Russia).

    And yet, in this odd rush to relevance, something was curiously awry. Apart from a panel including former World Bank chief economist Joseph Stiglitz, the meetings featured almost no one with a record of criticizing the institutions that gave us the Asian crisis or the transition failure. Instead, they were dominated–in session after session–by the architects of the present world order, including Yeltsin advisers Andrei Shleifer and Anders Aslund, the International Monetary Fund’s Stanley Fischer, and U.S. Treasury Secretary Lawrence Summers. Even the arch-speculator Myron Scholes appeared. Never, perhaps, has such a luminous crowd gathered to discuss so disastrous a set of its own failings.

    Why is this so? The reason is fairly clear. Leading active members of today’s economics profession, the generation presently in their 40s and 50s, have joined together into a kind of politburo for correct economic thinking. As a general rule–as one might expect from a gentleman’s club–this has placed them on the wrong side of every important policy issue, and not just recently but for decades. They predict disaster where none occurs. They deny the possibility of events that then happen. They offer a “rape is like the weather” fatalism about an “inevitable” problem (pay inequality) that then starts to recede. They oppose the most basic, decent, and sensible reforms, while offering placebos instead. They are always surprised when something untoward (like a recession) actually occurs.

    Equally striking, from the larger intellectual standpoint, was the lack of retrospective in this year 2000 program of the AEA. The great issues of economic policy–inflation and unemployment, economic growth and stabilization, the government’s budget, inequalities of income and wealth–were missing. The central themes of economic theory, including markets and market structure, competition and monopoly, efficiency and equity, and the business cycle, were to be found only in sessions devoted to narrowly defined applied cases. Reading through paper titles, one finds no mention of John Maynard Keynes, Adam Smith, or Karl Marx, or even of Paul Samuelson or Milton Friedman. Samuelson himself appeared once, to give a brilliant short lecture on “The Golden Virtue of Eclecticism”–but to the institutionalists rather than the mainstream…

    The reduction of many of today’s leading economists to footnote status is overdue. But would those economists recognize a theoretical revolution if one were to occur? One is entitled to doubt it. Being right doesn’t count for much in this club.”

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