Twitter alerted me to an amusing exchange between Chris Auld, posting a list of “18 signs you’re reading bad criticism of economics and Unlearning Economics, responding with 18 Signs Economists Haven’t the Foggiest. UL suggests that Stephen Williamson manages an impressive 9 out of 18 in his review of Zombie Economics (my response here with more from Noah Smith.
Scoring myself against Chris Auld’s list, I’d say I’m in the clear. But quite a few commenters on Zombie Economics have made complaints along the lines of his point 1, that I focus too much on macroeconomics (and finance). The implication is that, even if macro is totally wrong, only a minority of economists do it, and microeconomists are in the clear.
This defense doesn’t work, at least not in general.
The basic problem is that standard neoclassical microeconomics is itself a macroeconomic theory in the sense that it’s derived from a general equilibrium model as a whole. The standard GE model takes full employment (in an appropriate technical sense) as given, and derives a whole series of fundamental results from this. Conversely, if the economy can exhibit sustained high unemployment, there must be something badly wrong with standard neoclassical microeconomics.
Most notably, in a competitive GE with full information, no externalities and so on, prices of goods reflect the social opportunity cost of producing them. This means, that, other than redistributing the initial endowments of property rights, governments can’t do anything to improve on the competitive market allocation of resources.
Once you have involuntary unemployment, all of this fails. Keynes’ famous thought experiment of burying pound notes in coal mines made the point that an intervention that would be totally absurd in terms of standard microeconomic reasoning might nonetheless help to alleviate a recession and therefore make society better off.
The point can be made in more detail with respect to labour economics, finance theory, public economics and industrial organization. None of the standard conclusions of these fields of microeconomics can be assumed to be valid under conditions of sustained high unemployment.
Keynes specifically presented his macroeconomic ideas as making the world safe for neoclassical micro. If governments could stabilise the aggregate economy with fiscal policy, there was no need for comprehensive economic planning of the kind being practised, with apparent success, in the Soviet Union, or for ad hoc interventions like the price-fixing elements of the New Deal.
In summary, the failure of macroeconomists and finance economists to provide either a warning of the Global Financial Crisis or any consistent advice on how to deal with the ensuing Great Recession it isn’t just a problem for them. It undermines the whole economics profession. The sooner we realise that the entire discipline is in a state of scientific crisis the sooner we might start to do something about it.