The (failed) state of macroeconomics

Monkish? Economists have to be celibate? Truly the dismal science.

I don’t think ‘parallel universes’ is an apt metaphor. It implies two similar things going in the same direction. Peter Senge wrote about the mental models that people rely on to make sense of the world; we live in an age of utterly incompatible mental models. Far from being parallel, they had different notional origins and they are diverging in discontinuous fashion at a rapid rate.

“As things turned out, some fairly mediocre economists get to make the calls instead.”

And they say there’s no such thing as progress.

On parallel universes/mental models – isn’t this effectively summed up by the way the freshwater economists concentrate on measures like the stock market, or naive GDP measures, whilst others wonder about measures like unemployment and output gaps, etc.

Now I don’t think it’s an accident that the “freshwater measures” are those that disguise distribution in the economy, whilst the others are more broad based. But then we get beyond the debate to motivations, which might be a thread derail.

Another important way of looking at it is that the freshwater types are always bound up in algorithmic/rule based thinking. They want models where no judgement is involved.

Alan has it right. It is all about ideology. Economists have a dangerous tendency to develop “one size fits all” theories consistent with their prior beliefs. We all do it, at various levels. I spend a good deal of my first class warning my students against “truth sellers”, including sometimes me.
But the fact of being all guilty at some level, does not prevent from ranking views.
Few Keynesians, as liberals as they may be, would argue for stimulus always and everywhere. Too many freshwater economists, on the other hand, advocate today the same policies they advocated in 2006 (or 2000, or 2004). This makes them ex ante wrong, in my opinion.
And I don’t even mention the fact that these policies contained the seeds for the current situation. That is a whole different subject…

Noah Smith @13: I don’t follow developments in Physics to any great extent, but kudos to the hegemonic string theorists if they aren’t simply hiring more of their own kind but are genuinely seeking to identify and hire people who are trying to push knowledge and understanding forward through quite different approaches. Somehow this doesn’t sound much like the way economists generally behave…

Is macro really too important to be downgraded? When you see modern macro debated on the internet it almost always boils down to the usefulness (or lack thereof) of the DSGE approach. And it’s true that if you want to study graduate macroeconomics, you will end up studying almost nothing except DSGE.

But DSGE is nowhere near as important as it is made out to be. Literally *nobody* in the private sector has ever bothered using a DSGE model – for anything! And almost nobody in the public sector bothers with DSGE models – sure, every central bank has some sort of DSGE model in its toolbox, but the importance that they attach to them is extremely small due to their well-recognized hopelessness at forecasting. Anybody who’s ever tried to use a DSGE for a real-world application knows that it’s a joke.

So – who does use DSGE models? Pretty much nobody outside of academia – and here the models are only ‘used’ for the purposes of getting published in macro journals (or at least, getting a good job-market paper). They aren’t used by anyone else, for anything else. So we have this peculiar’ scientific’ (Williamson’s favorite word) discipline which is totally disconnected from the actual subject of its inquiry, producing ‘theories’ based on inductive reasoning, the validity of which is determined not by empirical evidence but by the historical prestige of the journals in which they are published. Which wouldn’t be so bad except that the macroeconomy is something of immediate practical interest to people, firms and governments all over the world – who would probably stand to benefit from an evidence-based approach to the subject.

If this whole branch of academia were to be downgraded – what would be lost? From the perspective of the private and public sectors, nothing – since it is a total irrelevance anyway. But a lot might be gained if it gave space to those with an actual interest in how the macreconomy works.

Not to derail, but I don’t really understand the idea that microeconomics is all rosy. Briefly, here are a number of issues with it off the top of my head:

– Demand. It is reasonable to suggest demand curves slope down for a ‘normal’ commodity (though different analysis is needed for labour and assets). Having said that, the way in which they are ‘rigorously’ derived runs into a number of aggregation problems which demonstrate the limits of the reductionist approach.

– Supply. As Krugman acknowledged recently, there are few examples of supply curves sloping upwards in the real world. Generally they are roughly constant or downward sloping.

– Utility. At its worse, unfalsifiable and at its best falsified (time inconsistency, multiple selves, regret, cognitive biases, yada yada). Yet commonly – and this is true in DSGE too – households ‘solve’ so-called utility problems.

– Capital. As Sraffa demonstrated, the use of money to measure capital cannot be independent of distribution. This creates problems with production functions, marginal productivity theory etc. (not that they didn’t have enough problems anyway).

– Marginal productivity theory. If two labourers are carrying a box, what is each of their marginal productivities? What is the marginal productivity of a taxi or its driver, taken separately? What about an entire team of people/their computers, pens etc.?

Obviously, given the emphasis on microfoundations, many of these problems are carried over to macro. I wonder if people like Williamson are aware of these criticisms, and have a response other than ‘oh, economics is just an abstraction, it’s just a theory’ and other hand waving.

I know that Noah is sceptical but market monetarism does look like a genuine development, with a relatively parsimonious account that can explain the recent recession, how to pull out of it and how to avoid these kinds of recessions of the future.

If the British government is persuaded to change the BoE’s inflation target to a nominal GDP level target, or even an NGDP growth target, which doesn’t look impossible, then it might even be tested in practice. If it worked, that would cut across the current left-right divide, as its intellectual origins are Chicago monetarist while its short-term policy implications are much closer to New Keynsianism.

I am not an economist. As I understand it, economists paint pictures based on assumptions. If the assumption is wrong (‘housing prices have never fallen, therefore they will never fall’), the model is useless.

The 2008 crisis is not really a crisis of economics. It is a crisis of capitalism – on a global scale. We live in a world where our financial sector has been de-coupled from any sense of ethics, morality or even business sustainability. Led by Goldman Sachs, our financial sector creates “instruments” so oblique that no one understands them – and then the sector creates “hedges” they can sell to others that pay out big when their own instruments blow up. Debt is the pillar on which this sector stands. It is a morally and financially corrupt business model that no politician seems willing to address… let alone our economists.

I don’t see how a discussion of macroeconomics really matters much in a world where our banks are voracious for this idea of “we kill what we eat” – client be damned. The financial sector has done a fine job of killing the American economy. And without the unbelievably generous support of the US government, our banks would also be dead. But hey, please feel free to prove me wrong. As I said, I am not an economist, just someone watching the collapse of our economy with horror.

[Scroll down to the end of this Thomas Frank article on “The Price of Admission” where he concludes with this depressing idea: “Consider the remarks of Nicholas Mirzoeff, a professor of media at New York University, who sums up the diminishing returns of the profession on his blog: ‘I used to say that in academia one at least did very little harm. Now I feel like a pimp for loan sharks.'” http://bit.ly/Vx8xFZ

I don’t think Adam Smith ever envisioned a world where “pimping” for large, federally supported usurers was a key business model for so many disparate sectors. Until economists figure out a way to incorporate the financial sector’s unchecked greed into their models, their role is purely academic, and largely reactionary, not proactive.]

Yes, macro is too important to be downgraded. Who will run our central banks? Who will staff them? Who will give sound advice on the macro effects of fiscal policy? You don’t punish a field that missed the boat on some key assumptions, you demand that they work harder. Also, instead of parallel universes, I worry about multiple equilibria in the discipline (in addition to the paths mentioned above that includes micro folks disowning macro folks.) While I was not happy with Wiliiamson’s “traquil” terminology, I don’t want us to lose too much time on navel gazing and hand wringing.  The bigger problem is the economy, not economists. It has evolved in ways that were a shock to many (if they are being honest).  Economic policy could have been worse (there are some success stories), but it and the economy sure could have been better. 

Why does a disgruntled layman like myself still think we need economists? The simple answer is that I lived in Santa Barbara, CA for thirty-five years, and from about 1980 on, kept asking myself who can afford these house prices? The house I owned there was built in 1963 and sold originally for $23,500. In 1977. My wife and I bought it for $76,000. (Incidentally, getting a mortgage loan as first-time buyers was like being interrogated by the KGB.) We sold the place in 1983 for $160,000. Shortly before I left SB in the early 2000’s, it was on the market for $1.2 million.

In the early part of this period I assumed that houses were being sold to people bringing bags of money from elsewhere because they wanted to live on the so-called American Riviera. Then again, I asked myself, why would such people want to live in a three-bedroom tract house built in the 60’s or 70’s? It never, ever occurred to me to think that ordinary people of limited means had in fact fallen into the hands of drug dealers like Angelo Mozilo. I don’t think at the time that I could even have imagined how an entire industry could have been taken over by practices so cynical, or so destructive as the securitization scam turned out to be.

Economists should probably have known better, and should have told someone, even if it wasn’t me they told. The fact that they didn’t doesn’t seem to me to be sufficient cause to do away with them all, but I do wish sometimes that they’d pay more attention to things that actually matter.

” for theoretical physics all of the competing frameworks seem to be less fully realized and equally unfalsifiable (String theory might get associative membership of the dismal sciences club soon)”

It’s worthwhile pointing out (since we are on a rare CT front page in which economics and Noam Chomsky are being discussed) that one of Chomsky’s lesser known ideas is that there are fundamental cognitive limits to “what we can think (and, therefore, know)” , that these limits are genetic and unbreachable, and that there is, therefore, no particular reason to think that (e.g.) theoretical physics can simply go on “expanding” forever. It is even less well known that Chomsky has intimated at times that we may be approaching some of these limits now or (in some fields) have actually reached them.

Certainly it is remarkable to compare the progress made in theoretical physics between (say) 1900 and 1932 to the lack of progress made between (say) 1980 and now.

Perhaps something similar is happening in economics. Just a thought.

If your nosology doesn’t cover what the patient has, you have to hallucinate your prescriptions.

This seems to be what ails the freshwater economists, that their theory can’t encompass the malady the economy has right now, so that malady has to be classified as some sort of lusus naturae, to either be ignored, or given some off-the-wall treatment.

It follows that, once you’ve launched into off-the-wall territory, that one characteristic the treatment that you hallucinate has to have, is that it has to be painful to be credible. If you believe you’re dealing with an economy, or a human body, that has gotten off the rails and into some freakish state of imbalance that you theories can’t account for because it’s unnatural, it follows that you re-establish order by applying counter violence in the opposite direction to the departure from the healthy. You settle on bleeding, cutting, branding, purging or some other form of austerity to destroy the evil humors. Anything less would not be taken seriously by the patient or the malady, not that there’s much difference between those two when we’re talking about cases of demonic possession severe enough to spin a Lesser Depression out of the Food Stamp program.

Look, if you want to understand professional intellectual pathology, we have this whole rich vein of experience with the world’s second oldest profession to draw on. Don’t reinvent the wheel. Look instead to the many models of quackery that the history of medicine provides us if you want to understand quackery in other fields.

Robert

If macroeconomics were a science, would you expect the saltwater-freshwater distinction to easily map into political positions?

I’m not sure what conclusion we can confidently make from this correlation.

Consider:

If evolutionary biology were a science, would you expect the evolution-creationism distinction to easily map into political positions?

Or, perhaps more apt,

If climatology were a science, would you expect the warmist-denialist distinction to easily map into political positions?

Not that I’m trying to equate the state of modern macroeconomics to that of evolutionary biology or climate science, but that I don’t believe we can conclude much about the field as a whole based merely on political affinities.

To Hidari @29.

God help us if we’ve reached the “fundamental cognitive limits to ‘what we can think (and, therefore, know)'” in economics.

I would hope we could reach a bit higher than the morass we find ourselves in today….

@35

“I would hope we could reach a bit higher than the morass we find ourselves in today….”

Er…..yes. That would be depressing. But from an outsider’s perspective….disregarding the complexity of the math….is there really much, fundamentally about today’s debates that an avarage economist from, say, 1937 would not have understood? It seems to me (as I say, as an outsider) that in ’37 you had the Orthodox versus the Keynesians with the Austrians siding to all intents and purposes with the orthodoxy and the Marxists sorta out on the borderlands being ignored….is that really different from what is going on now?

I’m not sure I would describe what existed in 2008 before the GFC as a “consensus” — it seemed more like the kind of silent truce that develops among people, who find each other incomprehensible. Despite the fact that the New Keynesians, New Classicals and Real Business Cycle theorists were all using, basically, the same mathematical apparatus and laboring away on intertemporal optimization within a rational expectations framework, to legitimize (in a sociological sense) their models as having “microfoundations”, they were not conversing either with each other, or with the actual economy. They could not have been conversing with the actual economy and miss the housing bubble or the financial sector metastasizing into a cancer.

Macroeconomics as defined — as the analysis and study of aggregates — may have proven itself unworkable. That the field has not been able to move beyond the kludge of IS/LM in over 70 years is telling. When you try to explain the behavior of aggregates, you end up with black-box explanators, like “sticky prices” or “frictions”, which are profoundly unsatisfying, and the deus-ex-machina “shocks” of the RBC folks.

I know a lot of economists have always instinctively wanted to do “macro” as general equilibrium analysis. (Walras lives!) That doesn’t work either, for good analytic reasons that have been exhaustively demonstrated.

I’m sure Quiggin is right, that, for practical reasons, policy economics is too important, to consider simply abandoning the problems. But, if the problems revolve around money and financial institutions, then, maybe, it is time to redefine macroeconomics as the study of money and financial institutions.

Nibi@33: Well, in the examples you bring up, the conservative side is basically not doing science and is seen as such in the relevant academic departments. Creationists and denialists have no to very little traction in the relevant scientific departments and owe their public visibility to their congeniality to the right-wing (and to the buckets of money that right-wing funders shovel at them, at least in the case of the denialists).

So if the analogy holds good, it suggests that freshwater economists aren’t practicing science but right-wing propaganda. And if they’re respected and accepted in economics departments, then the analogy suggests that economics isn’t a science, or at least that the scientists have a lot of housecleaning to do to take the discipline back (over?) from the right-wing propagandists. Except that it’s worse than that, because freshwater folk like Mankiw and Hubbard are also willing to put out shoddy work for Team Republican.

Apologies if I’ve misunderstood you, but I’m still not seeing the case for a science to be divided along political lines.

Even if we could get macroeconomics to work as a science, that would not change the nature of political economy, as a conflict of interests. So, even in a “science” of macroeconomics, supporting a cadre of technocrats, there’d still be a division, I would think, that mapped to that inherent conflict of interests. There’s no conceivable policy, which simply transcends conflicting interests, in a political economy, which is, by its nature, conflict and cooperation.

Maybe, you could hope for a shared understanding that made the nature of the conflict more transparent. Even that seems dubious to me, as long as there’s strategic advantage to obscuring goals and means.

matt w: ” freshwater folk like Mankiw and Hubbard”

Mankiw is “salt water”, being one of the most prominent New Keynesians. I don’t know how Hubbard would be classed — he may not be that engaged with macro theory; he’s a pretty conventional supply-sider in his policy pronouncements.

from OP:
Clearly there was a consensus as of early 2008. The differences between “saltwater” (former New Keynesian) and “freshwater” (former New Classical/Real Business Cycle) economists had blurred to the point of invisibility. Everyone agreed that the core business of macroeconomic management should be handled by central banks using interest rate adjustments to meet inflation targets. … There was no role for active fiscal policy such as stimulus to counter recessions, but it was generally assumed that, with stable policy settings, fiscal policy would have some automatic stabilizing effects (for example, by paying out more in unemployment insurance, and taking less in taxes, during recessions).

I’m not an economist (which will not, I’m sure, surprise anyone who has occasionally read my comments). So an ignorant question: When did Keynesians (or whatever their successors were called) abandon the belief in “active fiscal policy such as stimulus to counter recessions”?

Also: JQ says that the debate betw him/Krugman and others is not really a debate *within* macroeconomics, b.c the opponents aren’t macro specialists; but this really matters only to people concerned w/ disciplinary issues. For the rest of us, if economist Dr. X expresses an opinion about macro policy and people listen to him/her, it doesn’t much matter whether he/she is a “macro specialist” or not… his/her views are having an impact.

@49

“My sole objection (if not perhaps trivial) is that it is not enough to dismiss economics as a science simply because the disagreements tend to fall on partisan lines.”

Economics isn’t a science because it can’t make accurate predictions.

ponce: “Economics isn’t a science because it can’t make accurate predictions.”

can’t or won’t?

Knowing that you cannot predict some specific thing, and why, can be quite “scientific”. Predicting things you cannot predict accurately is astrology. Predicting things inaccurately, which you can predict accurately is political punditry.

There are lots of things in business and economics, which are predictable enough, for businesses and governments to plan successfully. When policymakers and businessmen make colossal errors, in retrospect, you don’t ask if science failed, you follow the money.

John Quiggin @ 52

I am aware of the integrity issues, which Mankiw and Hubbard exhibit. But, that’s about our public political discourse, not particularly about “the state of macroeconomics” as an academic discipline. As you pointed out in the OP, many of the most prominent voices in the political discourse discussing broad macro policy issues are not macro specialists, in any case. And, most of the important macro theorists do not very often venture into the political discourse. What you did not say — and you might be saving it for a later post; I am not finding fault with its omission in this one — you did not make the observation that when prominent macro theorists do come down from Olympus to pontificate authoritatively, the result has frequently been severe embarassment.

Lucas, Prescott, Barro, Sargent — these guys are not trying to dissemble as Mankiw and Hubbard habitually do. Lucas’ Milliman lecture a couple of years ago attracted ridicule from Ygelsias, it was that bad! ;-) Kocherlakota, who is a Fed President and gets to discuss policy behind closed doors, followed some esoteric math into a lethal error in front of some Chamber of Commerce group a few years ago, and came to unfavorable notice from Nick Rowe and Rajiv Sethi; Steve Williamson had some ridiculous apology for him.

What Ji @ 51 mentions applies even to the top.

Looking for more background on this (and other) debates, can anyone recommend a good intellectual history of economics?

Micro has successes in a handful of theoretical and practical applications; more if you consider game theory to be a subset of it. Everyone loves auction design.

As far as intellectual frameworks go, we talk increasingly in terms of public goods and neighborhood effects than in other ways of conceiving the microeconomy. It’s hard to deny the influence.

When the Fed (as it did under Alan Greenspan) chooses to ignore its regulatory function, no macro model in the world can suffice.

As Hayek said, capitalism requires a bit of regulation. Even the titans said as much in those early hearings after the economy went belly up in 2008 – as I recall, they noted that self-regulation wasn’t working.

If it is true what John Quiggen says in the OP – that there is no debate in academic circles about the role of macro – that is an enormous failure on the part of academic economists. Stunning in its implications.

A number of Mankiw’s students walked out of his class last year in an organized protest. Here’s what they said (according to the Harvard Crimson):

“Ec 10 is a symbol of the larger economic ideology that created the 2008 collapse. Professor Mankiw worked in the Bush administration, and he clearly has a conservative ideology,” Bayard said. “His conservative views are the kind that created the collapse of 2008. This easy money focus on enriching the wealthiest Americans—he really operates with that ideology.” (http://bit.ly/TFuqUH)

Apparently, some Harvard econ students see the need to take a look at the theories at play in the collapse of the economy. But economists, not so much? Really?

In the Casey Mulligan NY Times op-ed, he says this: “In my new book, I explain how, in the matter of a few quarters of 2008 and 2009, new federal and state laws greatly enhanced the help given to the poor and unemployed — from expansion of food-stamp eligibility to enlargement of food-stamp benefits to payment of unemployment bonuses — sharply eroding (and, in some cases, fully eliminating) the incentives for workers to seek and retain jobs, and for employers to create jobs or avoid layoffs.”

To ignore the reality of the events and policies that led to those new federal & state laws is beyond ignorant. Mulligan is a propagandist, not an economist. Shame on him.

Maybe Jonathan Schlefer’s The Assumptions Economists Make would answer Stephen Frug’s query. It is a popular account, not a history. But it does explain DSGE models, RBC models, microfoundations, etc.

Isn’t the GFC a major challenge for micro as well as macro? I don’t know of any micro models that treat mass delusion, mass professional criminality and lemming-like financial behaviour as more than exceptions to generally rational behaviour. But when it happens on the scale it has (bankers deliberately creating and selling – and buying – toxic securities, mortgage lenders knowingly making shoddy loans and systematically ignoring the legal rights that underpin their business, home-buyers signing up to commitments they could not possibly meet), to treat it as a set of exceptions is to class a pandemic as a hangnail.

$64: Robert, thanks for the answer, and I’ll look into that book. I really am interested in an actual history however, if anyone can recommend one.

Looking for more background on this (and other) debates, can anyone recommend a good intellectual history of economics?

Mark Blaug’s Economic Theory in Retrospect is very good, but it stops in the mid-20ths century, so really before all these debates begin. For the more recent stuff, I’d recommend Snowden and Vane: their Macroeconomics Reader has a good selection of the key articles from the 1960s through the early 1990s, most of which are quite readable; Modern Macroeconomics is more current.

@ponce
Let’s say that the parts of economics that consistently makes accurate predictions is a real science and the rest of it is a social science.

(1) Since when is prediction the sole test of a ‘real science’? As doubtless more than one person has observed (though I forget exactly whom I’m quoting here), geology doesn’t predict much of anything (apologies to geologists if this is wrong). OTOH, my impression is that the people who study elections, at least in the U.S., are not too bad at predicting their outcomes — far from perfect, but not bad.

(2) I guess there are no social scientists on this thread who can be bothered to engage on this point or defend what they do as science. But in any case the division into ‘real science’ and ‘social science’ appears deliberately calculated to needle some people, though for various reasons it doesn’t upset me nearly as much as it would some others.

(3) In my field, some people (not me) have thought a lot about these issues: see, just to take one recent example, here.

#70: J. W. Mason: Thanks.

#71: Good idea, I should ask him. I should note, though, the inquiry was a book not about economic history, but about the intellectual history of economics — two very different topics.

72 — geology predicts heaps of stuff all the time, like the presence of oil in certain places, to take an obvious example. (Not that I love prediction as a test for science or anything, but.)

As someone who is neither economist nor American, this debate feels remarkably US-centric.Either one set of clubby American universities is right, or the other, or none. Going on little more than internet debates, it appears that the option that someone somewhere else (let alone a non-anglophone) is interesting, is mostly too silly to consider.

Perhaps this just an accurate description of the state of worldwide macro economics. But that seems to require two conflicting assumptions:

A. the academic world of economics is fairly capable of recognizing and promoting the best minds in the field, without much prejudice. Turns out they are mostly american or american oriented
B half or potentially all of those best minds are lying, clueless hacks who only made it because of the connections of their department. The relevant discusion is which half.

Am I missing something here? Is most of the world really so irrelevant?

So, there is virtually no debate going on in academic macroeconomics, or in the circles where policy is actually being made. What debate is happening largely involves people like Krugman (and, much less notably, me) arguing against his Chicago opponents (Cochrane, Fama, Mulligan) who are mostly not macro specialists and therefore (as Williamson points out in his piece) “not really up on what is going on in macroeconomic research” but who do have something to say about macro-economic policy. Although most of the participants are academics, and both sides can boast Nobel prizewinners[4], this argument is, just like most things in the US today, part of the general war between parallel left and right universes, encompassing issues like climate change, tobacco, gun control and so on.

I think this is kind of amazing. The “Cochrane, Fama, Mulligan” thing seems hardly worth mentioning – not much of a debate, just a few strange and unintelligible statements on the one side, and in any case hard to connect with the rejection of fiscal stimulus in the “circles where [fiscal] policy made” in both the US and (especially) Europe. Meanwhile in “circles where [monetary] policy is made” you’ve got Svensson on the Riksbank, England hiring Carney and Evans vs. Fisher on the FOMC. There’s no debate worth mentioning there? Of course there are conservatives (“market monetarists” like Sumner and Rowe vs. “hard money” types) on both sides and liberals all over the place too, which is obviously unfortunate, but hardly a sufficient reason to ignore it entirely.

13 Noah: yep, maybe should we break down economics into two distinct sciences, let’s say krapostics and gloupnology, each in its own building, like we heaved off agricultural economics to the ag sciences.
It remains that micro has somehow obtained the status Keynes wished for the profession: as boringly competent as dentists. But devising a better pricing model for coal-carrying coastal vessels has few implications for the general welfare,about the same as a new cavity-fighting toothpaste.
While getting a nation GDP down by 20% and unemployment up to 50% has immense consequences. It is not an esoteric subject. It maybe why it attracts the ideologues. And why we should take care and pride at getting it right. Which include cleaning our ranks.

I’m thinking better of my earlier recommendation of Schlefer.

Screpanti & Zamagni is as comprehensive as Blaug and also good on 20th century work. They still do not bring the story up-to-date enough for this thread. Philip Mirowski (More Heat than Light and, especially, Machine Dreams) is academically rigorous, great fun to read (if you like a maximalist style), but idiosyncratic and more focused on microeconomics. On the other hand, neoclassical General Equilibrium theory is necessary background for this thread.

LFC @72

I think there are some geologists in Italy who wish they could agree with you.

Though I wonder, a little sourly perhaps, how prison sentences for incorrect economic predictions would “incentive” the field.

Hidari @ 30

Certainly it is remarkable to compare the progress made in theoretical physics between (say) 1900 and 1932 to the lack of progress made between (say) 1980 and now.

By theoretical physics I assume you mean particle physics. In which case surely a large reason for the slowdown is that it takes a long time to build a new particle accelerator to discover new phenomena and test new ideas.

It might help to distinguish between forecasts and predictions, at least for a little while.

A prediction is something done in an academic, model-specific context. An if-then cause-and-effect statement of the form “In my stripped down model of reality, if variable goes this way, variable y goes that way.”

A forecast is a statement of the form “I expect the following to happen next Tuesday.”

Economic forecasters, like weather forecasters (and geologists/seismologists), have to be able to move from abstract model predictions to practical forecasts to be at all useful. But forecasting will always be a somewhat-to-terribly inexact science, and macroeconomics as a discipline shouldn’t be expected to forecast everything about next Tuesday, or 25 Tuesdays from now, with incredible accuracy.

What macroeconomists should be able to do is:

1. identify when serious pressures are building up in the macroeconomy such that a possible crisis is growing in likelihood (here’s one esoteric theorist making a point about debt buildup perhaps a decade early). This would be like an ecologist telling you that the probability of an ecosystem collapse is increasing, even if they can’t say with certainty how soon, or how bad it will be. (Or like the Australian agricultural economist who said of the wool reserve price scheme, “the probability of collapse was approaching one”, after some changes were made to the way it operated.)

2. identify actions that might ameliorate those pressures in order to prevent collapse or at least reduce its expected impact.

3. identify actions that should reduce its actual impact if the worst happens and a collapse occurs.

I stress these three points because John’s opening list:
–Is there a consensus ?
–If not, what are the main points of disagreement ?
–What, if anything, has macroeconomics achieved in the last 40 years
–Where should we go next?
give a bit too much ground to the academic profession. It sets up the debate in Williamsonian terms, because to describe a consensus involves setting out who gets to decide whose opinion should be considered in the consensus/disagreement calculus. Williamson said something in response to me in Noah’s thread, to the effect of “Krugman is making stuff up”, which is to say, Krugman doesn’t count.

Shorter Williamson: “Those of us whose opinions on academic macroeconomics matter think there isn’t a problem, ergo there isn’t a problem.”

Shorter Wren-Lewis in response (more British tact and reserve in longer version): “Williamson is being a bit of a twit here.”

Forget whether there’s a consensus or not. Williamson just creates outliers in his head and ignores them, and he’s not the only one. Just jump to the 3rd point, and be appropriately modest. Can macroeconomics (whether of the ’30s, ’60s, ’90s or ’00s) help us do reasonable ex ante risk assessments? Can it help us reduce collapse risk? Can it help guide us as to what tools should be used to restore performance after a collapse?

On the first, it seems to me that the profession failed in large part. I’m not completely sure it lacked the tools, but I think as a whole it should have seen some things coming better than it did.

On the second, I think the tools might be there, but maybe not as developed as they ought to be. (And maybe this is where NGDP debates come in, for example.)

On the 3rd, this is where Krugman would, I think, make the point that we have the basic toolkit, from Keynes and Hicks and others of decades past, and the profession has in large part ignored that and turned to the equivalent of applying leeches where antibiotics might help. This is the part where the indictment of the profession is least technical and most political/ideological.

Michael Harris @ 90

I’m more than willing to believe that macroeconomists could — and in some cases did — do all the things that you say they should be able to do. What I can’t believe is that the political constraints on what they do can be left out of any structural assessment of their failures. This is where Marx makes more sense to me than Keynes. Even the smartest liberal economists (in the U.S. sense of liberal) seem to regard the forces at work in the economy which reject sensible analysis, and proceed to meltdown regardless of any rational intervention, as forces of nature, which can’t be understood, let alone overcome.

The left, what remains of it, speaks with great eloquence of the bad faith of plutocrats, but in my view has in general lost Marx’s capacity for analyzing the forces which underlie that bad faith. Marx’s theories per se may not be sufficient to explain the 21st century, but we’d still do well to take his methodology and make something more suitable out of it. Otherwise, we seem doomed to have John Quiggin or Paul Krugman on one side, and Bruce Wilder on the other, and a not very helpful silence in the middle.

“In which case surely a large reason for the slowdown is that it takes a long time to build a new particle accelerator to discover new phenomena and test new ideas.”

But that situation is not going to change any time soon is it? Indeed the problem is likely to get worse over time, yes?

@94 No ıt’s completely not Chomsky’s point you are right but it might not make any difference in terms of effects. In theoretical physics (and, arguably, other sciences) perhaps you need more and more complex (and therefore expensive) technology to make the big breakthroughs. Therefore, over time, our ability to make these breakthroughs might decrease over time rather than decrease.

JWM @ 69 MMT?

MMT could be part of the package, for sure.

Sebastian H @101 “The problem is that economics (or at least macroeconomics) […] is trying to be a science but it isn’t there yet”

The definitive early researcher in the field is Keynes. Time to stop twittering over how the first workable theory in the field turns out to produce unexpected results and start studying those results.

The Raven @ 87
Michael Harris @ 90
William Timberman @ 92

Back in the 1980s, there was some interest in what was called, meso-economics, sometimes bumperstickered as a bridge between macro and micro. The idea seemed to be to break out of the abstraction of aggregates and try to describe in more concrete terms the kinds of collective choices that were being made and structures being built, above the foundational level of “markets”.

Jamie Galbraith tells a story of being at some large gathering of economics worthies, called to consider in retrospect the causes of the GFC, and in a plenary session, after the many seminars and presentations, he stood up, and asked, why no one had considered the role of financial fraud? And, silence gripped the room. (Probably I’m fracturing the story; my google skillz couldn’t locate an original report.) I’ve seen other economists twist themselves into knots over the metaphysics of “a bubble”, and whether it is possible to see a bubble in the process of one forming, etc.

In 2006-7, in the run-up to the GFC, one of the geekier obsessions was the slope of the yield curve. This may be of interest to those, who think economics cannot predict anything. For those, who do not know, the yield curve is formed by the rates of return on financial securities of various terms, with cash money (nominal rate of return = zero) as the leftmost fulcrum of the curve, and various 1-month, 3-month, 1-year, 5-year, 10-year, etc. securities arrayed to the right. Usually, “yield-curve” refers to the returns to Treasury securities. And, usually, returns are higher, the longer the term. This is a normally-sloped yield curve. When returns are higher on shorter-term securities, the yield curve is said to be inverted.

Since much of the financial sector is engaged in borrowing short and lending long — that is, borrowing money at lower short-term rates and lending at higher, long-term rates, the yield curve is directly relevant to the viability of such operations. An inversion of the yield curve will set off a round of de-leveraging in the financial sector, and a recession. Inversions of the yield curve in the post-WWII era have a near-perfect record in “predicting” recessions, for what ought to be the obvious reason that inversions of the yield curve do not “predict” recessions, they “cause” recessions. Some economists consider this an anomalous curiosity, which should tell you a lot about how little some economists know about the economy.

I tell this little tale of the yield curve to prepare the ground for making a point about how detached in disembodied abstraction macro theory is. The mild, anodyne way of saying this, is to say that macro doesn’t pay sufficient heed to the evidence. That’s what the New Keynesians habitually say to the New Classicals, to no apparent effect; in the New Keynesian narrative, Lucas and the New Classicals were proven wrong in 1984 by the shape of the Reagan recessions and recovery, end of story. But, I think the New Keynesians, with their DSGE models, are just as lost in abstraction, and the Keynesians before them were very nearly as lost. Analytic theories do not map cleanly onto reality — that’s not how it works. In between theory and test, you need an operational model, and in social science, those operational models are models of institutional mechanisms.

For a while, Krugman was framing his disagreement with certain respectable conservatives (not Cochrane & company of the OP) over the need for stimulus as a difference of opinion over whether high unemployment was better attributed to “cyclical” or “structural” factors. For a conventional Keynesian — famously for Keynes himself — stimulus spending should be effective in reflating a deflated economy, regardless of what money is spent on. Keynes indulged in the suggestion that money could be buried in abandoned mine shafts, where people could be employed digging it up. So, the abstraction at issue has a long and honorable pedigree, no doubt dear to the heart of a dedicated abstract thinker like Krugman. Still, the distinction between “cyclical” and “structural” is idiotic. These are not opposed concepts, nor are they exclusive. They are simply different points of view on the same reality. The existence of a business cycle means that the economy is always in that cycle, so the aggregate rate of employment can always be explained by cyclical factors. And, the economy always has a structure, and employment can always be explained by structural factors. Krugman was arguing, as he often is, as if he could prove his own point of view “right” and someone else’s point of view “wrong” — that’s a fault in his character. My point is that it is a fault in the character of macro to be so abstract, that the cyclical can not be reconciled with the structural. Keynes was wrong: in particular circumstances, it should be possible to identify public goods on which it makes sense to spend stimulus money, to improve the structure of the economy; ordinary people are not stupid for expecting that part of the argument to be forthcoming.

Macro, in its determined abstraction, lacks a sense of mechanism. There’s a lot of hoo-haw about “microfoundations”, which is understood in a highly abstract sense, without any mechanisms to accomplish the assumed miracles of rational expectations and intertemporal optimization. In the actual world, the extent to which expectations become, or are constrained to become, “rational”, depends in large part on the efficient functioning of financial institutions and markets. “Intertemporal optimization” is accomplished through the arbitrage of the carry trade — that borrowing short and lending long, which feeds on the normally sloped yield curve. These mechanisms are notoriously inefficient in a technical sense, and prone not just to error, but malfunction. The practical problems of macro are coping with, containing, regulating the malfunctions. But, you cannot do that, unless you know something about the mechanisms to begin with.

The housing bubble was not possible without “relaxed” (aka fraudulent) lending standards at major mortgage banks and at the institutions that securitized those mortgages. One might suppose that the assignment of bank supervision responsibilities to the central bank reflects a long-standing appreciation of the problem. But, it is no part of modern macro to guide central banks in the strategic exercise of their bank supervision powers.

I’ve run out of steam and that’s probably more stream-of-consciousness and less coherent than when I thought it was, when I was singing it in the shower, but it is only a blog comment.

I only link to my business with the patent in my name to show that I am not a total idiot and now I am going to act like one in most of your eyes.

I studied macroeconomics back in the early 70’s and left in disgust because it was obvious to me then that the field of economics is a mythological cover for the class based social organization that exists with the rich having all the money and deciding where REAL investment of capitol went. Until and unless the folks in the field throw off their “paid” blinders and include the externalities of public/private monetary systems , the implications of having a class based elite that continue in place based on inheritance and ongoing accumulation of private property, none of what you postulate will have anything to do with the real world.

Please tell me again how science has any connection to this field of myth.

But the rich will continue to pay you for providing cover for the sick social organization of “Western” societies.

Economists should be monastic so they remove themselves from the gene pool, IMO.

SusanC @ 106

Quite profound, potentially, for identifying what constitutes knowledge: the little crutches that gets us past our ‘biologic’ cognitive limits — I’m thinking particularly of systems of notation — loom larger in some respects than, say, learning particular “facts” of nature or nature’s systems, because the crutches enable and shape the knowing of the “facts”.

Could you have chemistry without the table of the elements? Could you have biology without the system of classification? What does Newton’s calculus add to Galileo’s observations or to Copernicus’s gambit that gave it such a profound influence? Could any modern science exist without math?

The tyranny of modeling with math has a lot to do with how economics goes off the rails, as well as how difficult it becomes for economists to talk to either each other, or to ordinary people, seeking to reconcile what they are told by authorities with their intuitions.

BW @ 104:

” Keynes indulged in the suggestion that money could be buried in abandoned mine shafts, where people could be employed digging it up.”

Wasn’t that supposed to be a joke at the expense of the gold standard?

Re: Noah Smith @13 — yes, Quiggin is quite right here that macroeconomics proves far too important to be relegated to an obscure basement of academia. When the economy goes our and a bubble bursts and a massive recession sets in, macro provides the policy recommendations that the treasury secretary and the Fed and congress listen to (or should listen to, in a functional gov’t).

Moreover, it seems to me that Noah’s article is way off base about the current state of macroeconomics. There’s a history of predictions since 2008: Krugman and DeLong and the other classical Keynesians made a series of predictions and their predictions were largely correct. Viz., the Fed lowering interest rates and increasing the money supply wouldn’t lead to massive inflation. Keynes explained this in 1936 as “the paradox of thrift” in a balance sheet recession. Various other economists made absurd predictions of runaway Zimbabwe inflation as a result of the stimulus &c.

Krugman & DeLong et al. were correct. Lucas et al. were wrong.

As Larry Summer pointed out, the state of macroeconomics circa 1873 (Bagehot’s Lombard Street) suffices to explain the 2008-9 collapse and its aftermath. Add in Keynes’ General Theory of 1936 and you’ve got a solid explanation of the trajectory of an economy sans sufficient government stimulus.

Summers pointed out that Walter Bagehot’s Lombard Street provided a lot more useful prescriptions for macroeconomic policy than DSGE models. There is no “crisis” in macroeconomics. What’s happened is simply that large number of economists have foolishly and ignorant abandoned Bagehot’s and Keynes’ insights. Call this the “the Great Endarkenment” if you like, in analogy to the Great Enlightenment, but it’s not a crisis in basic knowledge or the fundamental theory of macroeconomics. The knowledge is there, the fundamental theory is sound. A number of high-profile (I’m looking at you, Treasury Secretary “stimulus is a sugar high” Geithner) practitioners of economics have forgotten it or ignored it ideological reasons.

Re: Hidari @36 — Er…..yes. That would be depressing. But from an outsider’s perspective….disregarding the complexity of the math….is there really much, fundamentally about today’s debates that an avarage economist from, say, 1937 would not have understood?

1937? Try 1873!

This is what makes comments like SusanC’s @106 so irritating. There’s no evidence that we have reached “fundamental cognitive limits” in macroeconomic theories. “It might just be too complicated for our mental processing abilities” fails for macroeconomics for several important reasons. First, the situation in molecular genetics differs entirely from macroeconomics because evolution doesn’t “design” anything in a conventional sense, so it’s understandably difficult for humans to figure out a system that evolved via various kludges no human would ever stick together, as opposed to a rational design. (Consider by way of example the giraffe’s 15-foot-long vagus nerve.) But all our economic systems were designed by human beings, so there’s no question that they have a rationale behind them. If it was designed by a human, it can be analyzed by a human.

Second, SusanC’s epistemological pessimism here runs directly counter to the elemental principle of reductionism which has served homo sapiens well for well on three thousand years now. No matter how complex system gets, it tends to exhibit broad general properties which can be understood and predicted. Ever since the Babylonians invented trigonometry and misnamed Pythagorean theorem, we’ve recognized that even the most complex systems can be analyzed in general terms using relatively simple mathematics. We’ve seen this with the universal theory of gravitation, with the periodic table of elements, with population genetics, and with medicine ever since the discovery of the function of the heart.

Moreover, it’s clear that broad general properties of macroeconomics have been identified and codified. There’s no issue of “cognitive limits” here. This knowledge is well known and has been verified. For example, it is well established that in the aftermath of a major recession, it’s bad policy to try to reduce deficits and balance budgets rather than provide government stimulus. Anyone who has any doubts about this need only look at Britain’s horrible counterexample to America’s stimulus program.

Likewise, Say’s Law has been comprehensively debunked. Once again, this is not a baffling cognitive puzzle that no one is smart enough to solve. John Stuart Mill explained why and how general gluts could occur in 1820 (Principles of Political Economy). He also explained how to deal with them, as Bagehot did in 1873 (“lend freely but at a penalty rate” — Bernanke lent freely, all right, but not at a penalty rate, which was a big mistake) and as Keynes elaborated upon in 1936 with his General Theory (it’s crucial to put the financial criminals in jail and reform the system, which Obama’s DOJ has not done).

Right now, Obama and congress’ economic policies are halfway there. We got a massive stimulus to kickstart the American economy’s heart but trying to deal with the deficit at this point, and refusing to put Wall Street financial crime lords like Dick Fuld and Jamie Dimon in prison, are foolish and destructive policies that are currently preventing a full economic recovery.

@106

The biggest obstacle to becoming a real scientist is lacking the ability to admit when you’re wrong.

The biggest obstacle to becoming a real scientist is lacking the ability to admit when you’re wrong.

And the biggest obstacle to becoming a real economist is the ability to admit when the economic system is wrong. This is why Western economists discuss micro vs. macro and freshwater vs. saltwater: to avoid discussing a global system devised for capital to flow from poor countries to rich, global inequality to grow, and Western supremacy to endure.

Bruce @ 104, love your work, at least sometimes, when I think I can understand it. But right now I think I’m with Barry @ 115. Perhaps you could expand.

My understanding of cyclical-vs-structural is the extent to which the appropriate response calls for targetting aggregate demand (and then arguing about fiscal vs monetary approaches), as opposed for targetting a less “macro” approach.

If you engage in aggregate demand stimulus, you get a mix of impacts on quantities and on prices. As in, you get some amount of real growth (reduced unemployment) and some amount of inflationary pressure. Krugman’s campaign (in which he’s far from alone) is to push the line that we’re at the ZLB, we have an aggregate demand deficiency, and stimulus will help and will not be inflationary.

By contrast, Mulligan and others argue that it’s all about structural mismatches in the labour market and disincentives created by welfare policies, so that using policy to increase aggregate demand simply creates inflationary pressure with minimal effect on employment.

I admit, and you recognise, I’ve super-simplified for brevity. But this distinction makes some sense to me, and I’m not sure what it is you’re getting at. Have I presented Krugman’s argument reasonably, and if so, what is wrong with it?

Barry @ 114:
Umm… no. As a long-time reader of B.W. ‘s diatribes, he’s thinking about “structural” mal-investment/disinvestment in ways that the likes of Krugman are effectively refusing to think about.

Michael, yes, that is my point, more or less. DeLong’s much-repeated gasp of surprise (largely rhetorical, I suspect) that we know what to do and yet nobody, it seems, can or will do it, is emblematic. Politics in this case is the queen of battles, no matter what we know or don’t know.

The problem with macroeconomists isn’t that they’re stupid, it’s that they’ve allowed themselves to be constrained by what the status quo tells them is possible, and thus have become its apologists. Lord knows, they’re not alone in this, and I’m not at all mistaking prudence for cowardice when I criticize them. Nevertheless, short of waiting for the human race to evolve, we need some approach which realistically balances the risks of accepting our present status quo as a state of nature, versus those of (metaphor alert) calling for the tumbrils. Lots of people will get hurt either way. The only difference is that more radical approaches, justified or not, will transfer more of the risk to points higher up the food chain — and we can’t have that, can we…..

William, OK then.

Worth noting — and this is also apropos the comments about the US-centric approach to discussing “macroeconomics” (discipline and profession) in this thread — the Australian experience.

We had a quite substantial stimulus package when the GFC hit, and have weathered the recessionary storm better than most. The then-Treasury secretary, Ken Henry, was said to have offered the advice “Go early, go hard and go households,” when proposing stimulus measures. Now, there’s a bit of semi-austerity budget-surplus fetishism at work, but it’s hard to see any sign of that emanating from the economics profession, where academic or econocracy. Recently, a former head of the Reserve Bank came out and opined that the focus on achieving a surplus in a slowing economy was “crazy.”

Are Australian economists smarter/better than their American counterparts? If so, why? What could American economists learn from them?

” where academic or econocracy” should be “whether …”

John, I completely agree. I also think it may be the case that our institutional/governance arrangements are a bit more sympathetic to technocratic approaches than the US, although that may be worth debating.

But I was asking the question in regards to my exchanges with William Timberman, who argued that economists’ policy solutions needed to be political as much as technical, and that “failures in macroeconomics” was broad enough to cover “we knew what policies to implement but we couldn’t get them implemented.”

(As opposed to my questions upthread at 90, about whether economists knew what policies to implement in the first place.)

So my point just above was that apparently macroeconomists in Australia not only “knew” (in consensus terms) what policies to implement, but were able to get them implemented. I’m trying to get William’s take on that.

Oz also has a very distinguished Post Keynesian tradition.

Just to add to the intellectual-history book discussion upthread, Phyllis Deane’s _Evolution of Economic Ideas_ is a nice short intro, if dated. Sheila Dow’s _The Methodology of Macroeconomic Thought: A Conceptual Analysis of Schools of Thought in Economics_ is a little more recent and quite relevant to this thread. Among the more comprehensive histories, Karl Pribram’s _History of Economic Reasoning_ is quite good.

All that said, at least some eminently credentialled economists are getting a tad bolshie.

The State of exception is a valid epithet, in the sense that you can say a certain policy is “fascist” even if it doesn`t fit into a fascist whole of governmental activity. Strictly speaking, you`d need the central banks to act against the constitutional law under the justification that Order needs to be preserved (or altered) for the good of the Nation. But there is a good deal of discussion over the power of central banks today constituting a certain institutionalization of the exception rule to halt democratic “excesses” over the market order.

It`s a complicated discussion, to say the least. When the emerging markets crisis hit Brazil in late 98, there was a constitutional rule that forbade real interest rates above 12%, simple and clear. That rule was ignored by the central bank, and retroactively the supreme court ruled that it was ok because the very, very naughty congress should have made things differently so that this whole situation didn`t come to the point it did. That was a more or less obvious case. But some argue that a lot of the authority and stabilisation effects CBs have now around the globe is based on the assumption that it can do pretty much anything despite of what elected governments may wish, since the costs of confronting them would bring economic chaos, possibly a change of government and a restoration of the CB original decision.

ajay, see what I said above about “predictions” vs “forecasts”, if you care.

Michael Harris @ 133

Yes, I admit that I was astonished by the crudity of Stephen Williamsons’s attack on JQ, and reacted fairly strongly myself against that attack on the post where it occurred. That SW, of all people, should consider himself privileged to attack someone for being provincial, struck me as a stunning case of obtuseness.

That said, aren’t the conditions for being recognized as fit for prime time among academic economists pretty much the same as they are for everyone else? And isn’t that a symptom of exactly the kind of elite driven, bass-ackwards political valuation that I was complaining about above? I’m tempted to do a little poking myself here, as in welcome to the working class, mate.

No, it isn’t the economists’ job to sort all this out and make everything better again, but at least the SW’s of the profession could make an effort to look at the origins of the mess they can’t seem to get a grip on, and begin, for once with an appreciation of the consequences of economic malfeasance. That might, at least, convince them just exactly how urgent it is that they put their own house in order. In any event, we certainly need better from them than we’ve been getting.

Michael Harris @90 distinguishes between forecasts and predictions. Ajay @139 makes the sweeping statement that “all areas of science deal in testable predictions.”

My point on this, which has nothing directly to do with macroeconomics and thus perhaps doesn’t belong on this thread, is that there are non-crazy definitions of ‘science’ which do not include forecasting or prediction as a criterion of ‘science’. (I linked to a book @72 whose definition of ‘science’ does not include forecasting or prediction. I can say this b.c I am familiar w the author’s views even though I haven’t actually read the bk in question.)

Bianca:
I’m sorry I mentioned geology. That just muddied the waters. Plus I don’t know anything to speak of about geology, which is another reason I shouldn’t have mentioned it. I think I’ll leave it at that, standing by what I said in the second paragraph of 144.

I’ll just add that the actual stimulus package we got here in the U.S.A. wasn’t simply way too small, (less than half what was needed), but very poorly structured, (cash for clunkers, home buyers credit, middle class tax cuts which we just a campaign promise anyway, negotiating down the aid to state gov.’s, etc.).

Yeah, god forbid science tell us something about happiness.

Saying “stimulus spending” of no particular character (tax breaks, bridges, birth control, you choose!), nevermind the rest, which we don’t have to bother our beautiful minds with, because it will take care of itself, just doesn’t cut it.

Um, perhaps this was already getting away from criticisms of Krugman, but if I recall correctly, he was one of those who disapproved of the actual stimulus package because of its composition, not just its size. My understanding of “multipliers” is that they do in fact attempt to characterize particular types of government spending. Hence, income tax cuts (which have apparently become the only permissible sort of stimulus) generally have a low multiplier, while food stamps (which have been gutted, and then gutted some more, and have blocked passage of a farm bill for the first time in decades because House Republicans demand that yet more poor children go hungry, in the name of JAYSUS) have a high multiplier. So there have been some practical policy prescriptions (e.g., give poor people more direct government assistance rather than less); they’ve simply been ignored by the elite consensus and rejected by deranged Randian Christianists. And as was mentioned above, even if Australian economists have the “right” policy prescriptions, politicians can still simply ignore them, lest hackish newspapers run by rich sociopaths criticize the government as fiscally irresponsible.

William: thanks, and yes, largely in agreement. (Williamson is in denial that there’s any problem with macro to begin with, so getting him to mend his ways is unlikely.)

Bruce: thanks also, that helps clarify. You do need to write a book, you know, or start your own blog (and maybe have it lead to a book).

——————————

LFC/Bianca: Let me pick up again on the “science” thing if I may. And I have no great feelings on the question of whether economics is a “science” or not. It seems to me that the answer to that is dependent on whether one uses the term “social science” and what is meant by it. (Shorter: I don’t care too much, and don’t get hot under the collar either way.)

On predictions vs forecasts: forecasts are about events (“I think a thing is about to happen”); predictions concern implications (“according to my theory, if this then this”). I chose the latter word because of John Q’s sidenote that Williamson states that “economic theory has no implications, and that this is a good thing”. (Somewhere on SW’s blog that I don’t want to dig back through is his statement, in comments, about what he did think was a property of a good theory or model but I don’t remember what he said. It was one of his standard glib one-liners that struck me at the time as having little substance.)

To make the distinction stark, Einstein’s relativity posits that time and space are connected and that this has implications for how time passes, relative to physical movement. That’s an implication that leads to testable predictions, but Einstein didn’t forecast the event that someone would put an atomic clock on a superfast plane and compare it to a clock on the ground.

Of course, in economics and elsewhere, implications of a theory are good (useful) at least in part to the extent they allow better forecasting, because some forecasting power and accuracy is important, even allowing for the fact that all forecasts are imperfect.

So, anyway, a useful “science” should give you implications that can be used over time to assess the explanatory power of your theory or paradigm. There’s another term — “explanatory power”, which is a bit vague but has a bit of know-it-when-I-see-it utility.

I don’t have the material to hand but my recollection is that in the early days of biology, it was regarded as non-scientific compared to physics and chemistry. It was comparatively taxonomic and inductive, with less of a theoretical basis than physics and less scope for experimental approaches than chemistry. Even allowing that, would we agree that modern biology would be regarded as having considerable explanatory power?

Like I said way up above, I don’t think economics should be judged on forecasting per se, and I feel the same about biology and ecology. But economics should have enough explanatory power to do the things I highlighted way upthread:
– raise clear red flags that pressures are building that could cause a system collapse;
– identify anticipatory actions to deal with those building pressures;
– identify the appropriate responses should the worst happen ( system collapse) to ameliorate its effects and hasten recovery.

Economics can do at least some of these things already, as Barry and mclaren and others have argued, but it has been subject to a considerable internal failing of the profession, to society’s considerable detriment.

(And again, the rhetoric downunder is considerably different. Once more, this morning on a TV news show, an academic economist was shrugging and shaking his head bemusedly at the surplus fixation of the government. There’s really no credible authority figure saying “The surplus is crucial! We can’t go into deficit!”)

Thanks, Bruce – that clarified things a lot.

@154

Nice attempt to lower the bar, though I don’t think anyone outside the field expects economics to produce anything of value.

Perhaps economics is still waiting for its Einstein.

I suppose calling people you disagree with “troll” is a tactic.

Here’s the ponce theory of emploment:

All workers try to do two things:
1. Increase the amount of money they get paid for their work.
2. Decrease the amount of money they have to do to get that pay.

Saying economits don’t need to make predictions to earn their pay falls into (2)

I gotta ask, though. If you don’t think economists need to make predictions to have any value, what do you think they should do?

Gathering data, making charts and coming up with untestable speculations can be done by just about anyone.

You said it, not me :)

Bruce,
re Structure and the 1920s – I’m not sure I agree, while I appreciate the detail in your exposition.

My aversion to the “Austrian” economic story is largely that it tends to give too much importance to “mal-investment” – where I suspect that mal-investment is always with us. The same applies to structural change. It is very easy to see them as the primary cause of problems after the event. It makes a good narrative – but is it really getting to heart of “what is different this time”. I think household balance sheets are one enormous obvious hole in most macro models – and I think it is the really big story post World War II. If you spread wealth widely, it makes for a vital and resiliant grass roots economy – and that effect lasts for a considerable time.

I do tend to agree with you though – and disagree with McClaren (whose other contribution I thought were good) that mechanism is often missing from macro-economics. (In fact Krugman has said as much – see his oft repeated story about “immaculate transfer”.) I would want to see a much more dynamic macro-economics – one that rejects path independence and embraces the importance of history.

Keynesian economics was the original macroeconomics, created precisely because classical economics failed to deal with the Great Depression. (And I believe it is profoundly wrong and useless in other ways too.) But then true Keynesian economics, which has deep social democratic implications, got twisted more and more back into the classical tradition, which exists to create continuing rationale for capitalist greed and exploitation, and his little validity otherwise. So it’s certainly no surprise that the purest successors to the Classical tradition missed the Great Recession like their forbears, and my successive twisting explanation may explain many of the New Keynesians. The failure to see a place for fiscal policy is one example. Those who retained more real Keynesian views were more likely to be among those who saw it coming.

But important parts of what Keynes suggested have not been explored, and better approaches to non-equilibrium ways of modeling economics exist. Perhaps if we can’t simply dump the plutocrat shills, we can make the study of macroeconomics more heterdox. Since they’ve been systematically excluded for so long, one need would be for more left economists, including Marxists and marxians.