Modern macroeconomics — a walk down a blind alley

12 March, 2017 at 20:46 | Posted in Economics | Leave a comment

I would say that macroeconomic theory has gone down a blind alley in the sense that we have locked onto a particular model: general equilibrium. blindalleyBut it is not really general equilibrium, I mean, it is a one-man model! In particular, it has become mathematically sophisticated without representing the fundamental features of the macro-economy.

So I would say that people like Kydland and Prescott, and so forth, people like that … changed the way that people do macroeconomics. But in my view it was not a positive change … One predominant idea is that of external shocks—and in particular the idea that the shocks that happen to the economy should essentially be the technological shocks. As Joe Stiglitz said, what could we mean by a negative technological shock? That people forget what they could do before?

So we have this idea that we have a system which is in equilibrium and that every now and then it gets knocked off the equilibrium by ‘a shock’. But shocks are part of the system! We have gone down a track that actually does not allow us to say much about the real, major movements in the macro-economy … We should be studying non-normal periods, instead of normal ones, because that is what causes real problems. And we do not do that.

unemployed-thumbSo my vision of the state of macroeconomics is that it somehow has the wrong view: an equilibrium view and a stationary state view. But what is important and interesting about macroeconomics is precisely when those two things do not hold. How can you talk of equilibrium when we move from 5% unemployment to 10% unemployment? If you are in Chicago, you say “Well, those extra 5% have made the calculation that it was better for them to be out of work”. But look at the reality; that is not what happens. People do not want to be out of work … Millions of people are out of work, and we are not worried about that?

That is the major failure in macroeconomics. It does not address the serious problems that we face when we get out of equilibrium. And we are out of equilibrium most of the time.

Alan Kirman

Yours truly is extremely fond of economists like Alan Kirman. With razor-sharp intellects they immediately go for the essentials. They have no time for bullshit. And neither should we.


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