Modern macroeconomics — too much micro and not enough macro

16 Feb, 2017 at 18:24 | Posted in Economics | 1 Comment

unknownThis paper … looks back into the pre-crisis (pre-2007) intellectual history of macroeconomic theory and argues that modern macro neglects the basic sources of both impulses and propagation mechanisms of business cycles. The basic problem is that modern macro consists of too much micro and not enough macro. Focus on individual preferences and production functions misses the essence of macro fluctuations — the coordination failures and macro externalities that convert interactions among individual choices into constraints that prevent workers from optimizing hours of work and firms from optimizing sales, production, and utilization. Also modern business-cycle macro has too narrow a view of the range of aggregate demand shocks that in the presence of sticky prices constrain the choices of workers and firms. Shocks that have little or nothing to do with technology, preferences, or monetary policy can interact and impose constraints on individual choices …

Modern business cycle macro is littered with contradictions resulting from its attempts to combine market clearing and utility maximization at the level of the individual household with a form of price rigidity or friction. Once the baby of full price flexibility has been thrown out, the bathwater must be changed because price rigidity is logically incompatible with market clearing … The contradictions come when modern macroeconomists attempt to explain non-market-clearing outcomes with market‐clearing language, or in Blanchard’s (2008) words “movements take place along a labor supply curve … this may give a misleading description of fluctuations.”

Robert J. Gordon

1 Comment

  1. In fact micro- and macro- economics are very different subjects and these apparent attempts to mix them will only result in confusion. Such confusion is often deliberately created because many universities are funded by organizations who do not want us to know the truth about how they operate and what they are doing to most of the population.

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