The (failed) state of macroeconomics

by John Quiggin on January 1, 2013

When econbloggers aren’t arguing about cyborgs, they spend a fair bit of time arguing about the state of (mainstream) macroeconomics[1], that is, the analysis of aggregate employment and unemployment, inflation and economic growth. Noah Smith has a summary of what’s been said, which I won’t recapitulate. Instead, I’ll give my take on some of the issues that have been raised (what follows is inevitably monkish wonkish)

The main issues at stake are
* Is there a consensus ? [1a]
* 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?

I’ll post today on the first of these, then come back for more later

Is there a consensus?

– 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. In the background, central banks were assumed to use a Taylor rule to keep both inflation rates and the growth rate of output near their target levels[2]. 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). It was generally agreed that this approach to macroeconomic policy, combined with financial deregulation had produced a ‘Great Moderation’ in the volatility of economic activity, as well as sustainably low and stable inflation. In the academic macro literature, this convergence was represented by Dynamic Stochastic General Equilibrium models, constructed with all the rigor and elegance of a haiku as Olivier Blanchard observed at the time

– This broad consensus was destroyed by the Global Financial Crisis and the Great Recession, but it wasn’t replaced by anything resembling a real debate. Rather, different groups have gone off in different directions

Academic macro went on more or less as before, except that the inclusion of financial sector shocks in DSGE models has now become a hot topic. So, from the viewpoint of someone like Stephen Williamson, everything in the garden is rosy.

This is actually a relatively tranquil time in the field of macroeconomics. Most of us now speak the same language, and communication is good. I don’t see the kind of animosity in the profession that existed, for example, between James Tobin and Milton Friedman in the 1960s, or between the Minnesota school and everyone else in the 1970s and early 1980s. People disagree about issues and science, of course, and they spend their time in seminar rooms and at conferences getting pretty heated about economics. But I think the level of mutual respect is actually relatively high.

As you might expect from someone who thinks that economic theory has no implications, and that this is a good thing, Williamson doesn’t even raise the issue of whether this internal tranquillity is problematic given the chaos in the actual macroeconomy and the absence of any agreement on how to respond to it.

Central banks have, in effect, treated the entire period since 2008 as a Schmittian “state of exception”[3], during which normal rules cease to apply. They have used the crisis to push governments to adopt “reforms” favored by the financial sector, such as cutting welfare benefits and other areas of public expenditure. But their central concern has been to restore the status quo ante, and the exclusive primacy of monetary policy, as soon as possible. From the central bank viewpoint, the restoration of low and stable inflation after the shocks of the 1970s is their crowning achievement and one to be maintained at any cost.

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. There’s no way in which New Classical or RBC models can explain a sustained depression occurring in many countries at once, and they don’t even try. Instead we get absurdities like Casey Mulligan’s claim that the Great Recession is caused by easier access to food stamps in the US (or, as one commenter put it, “Soup kitchens caused the Great Depression”). Note that Mulligan doesn’t even attempt to explain how food stamps in the US could cause a deep depression in, for example, the UK, where welfare benefits have been sliced by the Tories.

fn1. Broadly speaking, there’s a generally positive view among mainstream economists about the state of microeconomics. The general view is that the inadequacies of the Econ 101 model of competitive markets are being addressed by developments in behavioral economics, theory of asymmetric information, game theory and so on.

fn1a I thought it was obvious from the context but I’ll add that I’m referring to mainstream economists in this post, and that the 2008 consensus I describe was shared by policymakers and mainstream academic macroeconomists but not by all economists, or even all mainstream economists. In particular, I didn’t agree with it, and was writing about Minsky and asset bubbles in 2006, but that kind of work did not (and does not) get into mainstream macro journals.

fn2. The underlying assumption was that low and stable inflation is consistent with broadly stable output growth. Because it was presented first as a description of actual central bank behavior and then as a rule of thumb, it was acceptable to both saltwater and freshwater economists, and helped to blur the differences Saltwater types interpreted the Taylor rule as a mandate to pursue both objectives. In the freshwater view, central banks were supposed to focus only on price stability, but output fluctuations might provide information about future inflation, and could therefore be taken into account in setting policy.

fn3. I get this terminology at second-hand, so apologies if I’m misusing it, but it seems apposite to me.

fn4. Yes, yes, I know.



The Raven 01.01.13 at 6:01 am

Noah Smith chronicled quite a bit of discussion among academic economists on this (and Krugman linked me, whoo-hoo!) I haven’t read it all yet, though I do note that Prof. Williamson continues the freshwater tradition of contempt for critics from the saltwater school by calling Prof. Krugman deranged.

Having glanced at some of Smith’s links, my impression is that academic macroeconomics is creeping up on its Wile E. Coyote moment. It’s just to the point where it is standing on air and is starting to look down…

Happy New Year!



Dr. Hilarius 01.01.13 at 6:38 am

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


Hidari 01.01.13 at 7:04 am

From Noah Smith’s article.

“It’s a thorny problem. And (warning: ominous, vague brooding ahead!) it seems to be cropping up in a number of fields these days, from string theory in physics to “critical theory” in literature departments. Are we hitting the limits of Big Science? Dum dum DUMMMM…”

Now there’s an interesting idea.


Ken_L 01.01.13 at 7:25 am

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.


Robert 01.01.13 at 8:14 am

It is a weird argument where Greg Mankiw is a leading representative of the left. For Quiggin, Paul Davidson, for example, does not exist. I’ll also mention this article by an Australian economist:
Graham White (2004). “Capital, distribution and macroeconomics: ‘core’ beliefs and
theoretical foundations”
And here’s a book by an Australian economist:
J. E. King (2012). The Microfoundations Delusion
How many of the theoretical problems brought up against DSGE are not decades old?

David Glasner has an interesting take on the series of blog posts being discussed:


John Quiggin 01.01.13 at 8:50 am

@Robert You manage to make an impressive number of errors/false implications in a short comment

“For Quiggin, Paul Davidson, for example, does not exist. ”

Doubtless explaining why I discuss him in my book as a leading Post-Keynesian.

And the implication that I’m unaware of work being done in Australia is equally off the mark. For example, I had an interesting interchange with King about the book.

And although his past theoretical positions imply that Mankiw should be on the Krugman side of this, they are trumped by his tribal allegiances, so the weirdness to which you refer doesn’t actually exist.

But to be clear, this is a post about the current state of mainstream academic macroeconomics, along with the debate about macroeconomic policy. As I said in the post, the question of “Where to from here” will be addressed later (assuming I get around to it).


ponce 01.01.13 at 8:50 am

Well, if things had gone against us, some of the worst economists in the world would have been making the big decisions for America’s economy for the next four years.

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


Hidari 01.01.13 at 8:52 am

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

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


Alan 01.01.13 at 8:55 am

Macroeconomics is the attempt to find a mathematical justification for pre-existing preferences about what governments ought to do. Those preferences are usually the result of the economist’s childhood experiences and Minnesota Multiphasic Personality Inventory score.


Metatone 01.01.13 at 9:13 am

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.


Robert 01.01.13 at 9:19 am


How can this academic consensus that “clearly” existed in 2008 exist, given, for example, Paul Davidson’s existence? My point is not addressed by saying that you are aware of him in other contexts, and I do not think your post clearly stated your point was restricted to the mainstream. But thanks for the clarification.

I did not intend to suggest you were ignorant of these particular Australian economists, but thought it nice to give you a chance to talk about Australian academics, if you choose.

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

I still find it difficult to locate arguments for adopting the modeling norms of DSGE. Part of the point of King’s book is macroeconomics went off on its path without such argumentation.


Francesco 01.01.13 at 9:57 am

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 01.01.13 at 9:58 am

I think it’s time to think about the possibility of de-emphasizing macro within econ departments. Right now we have a “big science” approach, with legions of macro profs churning out papers, mostly DSGE models and time-series estimation. I think a better approach might be to have macro be a small, esoteric field, researched by a small number of eccentric geniuses…in other words, what it basically was before WW2. In other words, “back to the drawing board”…

This would mean changing undergrad macro from a requirement to an elective, and maybe also changing first-year grad macro to a one-semester elective. Instead of putting macro on an equal footing with micro, basically make “micro” synonymous with “economics”. Then macro can be an esoteric field where a few (micro)economists can try to apply their techniques to macroeconomic problems, but maybe also where people from other departments like applied math and statistics can contribute.

Also, it would mean that academic departments would hire far fewer “macroeconomics” professors.

This sort of “de-emphasis” approach is essentially what is happening to string theory right now, as a result of the physics world’s revelation that that field isn’t going anywhere. String theorists still dominate theory groups at universities, but almost no new string theorists are being hired these days…


John Quiggin 01.01.13 at 10:03 am

Robert @11 For that matter, the consensus didn’t include me. But it did encompass the vast majority of academic macroeconomists and policymakers, which was what I meant to convey.

Noah @13 Macro is too important to be downgraded in the way you suggest. But the kind of macro we need is unlikely to secure journal article publications in the profession as it is currently structured


Curmudgeon 01.01.13 at 10:10 am

As I see it, the saltwater camp is at least trying to practice something resembling evidence-based social science–note how Krugman’s views have evolved, in the face of new evidence, since he started writing for the NYT–while the freshwater camp is engaged in a fact-free exercise that is almost entirely predicated upon inventing “scientific” justifications for pre-existing policy preferences. In as much as there is an argument between economically-oriented public intellectuals, it is an argument between people who have some willingness to follow the scientific method and people who are practicing religion.


Neville Morley 01.01.13 at 11:32 am

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…


Keir 01.01.13 at 11:46 am

If you said to most laypeople: we didn’t see the crash coming, and don’t really know what to do now, so let’s de-emphasise research into that kind of stuff, I do not think it would fill them with great confidence in the courage and value of economists.


Ji 01.01.13 at 11:49 am

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.


ponce 01.01.13 at 12:14 pm


“I think it’s time to think about the possibility of de-emphasizing macro within econ departments.’

Doesn’t student demand determine which classes a school offers?

I think what’s doing in String Theory is that Physics students know it’s total b.s.


UnlearningEcon 01.01.13 at 12:35 pm

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.


Asteele 01.01.13 at 12:40 pm

I think astronomers should give up on figuring out if it’s a heliocentric or geocentric view that is the right model, or at least that should be only a small department. That way the real meat of the program can get back to casting horoscopes, or perhaps exactly dating eclipses.


Nick 01.01.13 at 1:11 pm

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.


Shay Begorrah 01.01.13 at 2:07 pm


I think what’s doing in String Theory is that Physics students know it’s total b.s.

The last time I talked with a string theory researcher his evaluation of the field was that it “was producing some interesting mathematics but is basically useless.”, unfortunately 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).

Speaking of which, it does seem that Quiggan, Krugman et al. (different as their outlooks and backgrounds might be) are worthily but hopelessly expending their efforts trying to fight the damage caused by policies that the much more numerous (and far less honest/introspective) right leaning economic herd are spending all their efforts trying to justify.

If the mainstream of modern macroeconomics has essentially become the theoretical branch of modern conservatism, and if it does serve as the “scientific” foundation for market liberalism why not just blow up the whole edifice?

We will lose some damn fine people but far, far more bad ones.


Main Street Muse 01.01.13 at 2:40 pm

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.'”

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.]


bjk 01.01.13 at 3:00 pm

What about turning macro into history and calling it, History of Economic Cycles, based on what little data we have, plus a few hypotheses and postulated regularities.


Claudia 01.01.13 at 3:02 pm

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. 


edward hadas 01.01.13 at 3:38 pm

I appreciate the theoretical quandary. As an observer, what is striking is the policy impasse. The theories are totally inadequate to the problems at hand, and claims to the contrary become, as earlier comments point out, no more than expressions of heartfelt but unsubstantiated ideology. What is left is a series of basic questions without persuasive answers. My take:


William Timberman 01.01.13 at 3:46 pm

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.


matt w 01.01.13 at 3:51 pm

ponce@19: “Doesn’t student demand determine which classes a school offers?”

I can’t speak to economics or physics specifically, but in general I think this is true to a limited extent at the undergraduate level and barely at all at the graduate level. Student demand is driven by departmental policy — if you make a course required for the majors, your majors will sign up. Then there’s the question of how many people decide to major in your subject/attend grad school, but that’s likely to be driven more by job prospects in the field than by the specific courses offered.


Hidari 01.01.13 at 4:14 pm

” 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.


Shelley 01.01.13 at 4:23 pm

Sigh. We need more writers who can translate this stuff to laypeople.


Glen Tomkins 01.01.13 at 4:26 pm

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.


UnlearningEcon 01.01.13 at 4:40 pm

@ Shelley

I try to do that on my blog (though recent posts are unavoidably technical). I’ll try to give a simple overview, hope it helps and manages not to be either patronising or too complicated.

What Quiggin is talking about are Real Business Cycle models, endorsed generally by right wingers. These paint the economy as a smooth machine, buffeted only by random ‘shocks’ that come from nowhere. The main argument between Krugman and the right, vitriolic as it may get, basically only centres around which ‘frictions’ to add to these modcels, the main one being ‘sticky’ wages and prices. This is where prices are slow to move due to real world costs such as changing menus, and it opens up scope for government or central bank intervention to help the economy adjust. Naturally, right wingers are hostile to this despite the masses of empirical evidence suggesting prices and wages are indeed sticky.

Despite this, Krugman remains wedded to the basic economic concepts and is actually as hostile as the right when he is really challenged about the state of economics (see the Krugman-Keen debate in April). People like Stephen Williamson have a similar attitude, but like many he must satisfy his fetish for having a go at Krugman on a regular basis, so it seems otherwise. But most economists are not willing to ask really big questions.

My perception is that economics is obviously young. Like the real sciences used to, it relies on some strange concepts such as ‘capital’ (basically used as a name for anything that isn’t labour) and ‘utility’ (a measure of the satisfaction people get from consuming) which don’t really have any real world relevance. Similarly, a lot of the models are incredibly simplistic, with characteristics such as two agents, two goods, and everything running smoothly. Of course many advanced models are more complex than this but often they share similar characteristics and the simple models remain a major part of the curriculum.


Nibi 01.01.13 at 4:48 pm


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.


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.


The Raven 01.01.13 at 5:11 pm

Ooof! Repeated John’s link! That’s what I get for posting quickly on New Years Eve. Anyhow…

I am also reminded of Jamie Galbraith’s remarks, in the context of not recognizing the mortgage bubble: “It’s an enormous blot on the reputation of the profession. There are thousands of economists. Most of them teach. And most of them teach a theoretical framework that has been shown to be fundamentally useless. ”

I think Galbraith’s focus on corruption may be part of the solution; I don’t think one can do internet sociology without recognizing the existence and influence of trolls, and perhaps this is also true of economics.


Main Street Muse 01.01.13 at 5:28 pm

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….


Herman 01.01.13 at 5:51 pm

@Raven #1
“… my impression is that academic macroeconomics is creeping up on its Wile E. Coyote moment. It’s just to the point where it is standing on air and is starting to look down…”

Yes. Looks like that to me too.
The Journal of Macroeconomics recently asked the question “Has Macro Progressed?”.

Peter Howitt’s paper is worth reading:
<a href=";What have central bankers learned from modern macroeconomic theory?
► Modern macroeconomic theory has fallen behind the practice of central banking. ► The practice of inflation targeting did not arise from the literature on time inconsistency. ► Modern macro does not capture the role of central banks in promoting financial stability. ► The shortcomings of modern macro result from its preoccupation with states of equilibrium.

So Howitt’s answer to Quiggin’s question What, if anything, has macroeconomics achieved in the last 40 years is “Not Much”

The article by a Bank of Canada economist defending macro takes a line very different from that of Williamson and much closer to that of Ricardo Caballero in his pretense-of-knowledge JEP article

Macro has progressed
Sharon Kozicki
► Claims of convergence in macro take a narrow DSGE view. ► With this narrow view of state of the art, Fair questions that macro has progressed. ► Emphasis on DSGE models has led many to be less informed about other macro research. ► Many important contributions in macro have been made outside the DSGE core. ► Encouraging and appreciating diversity in approaches should enhance progress in research.


Hidari 01.01.13 at 5:56 pm


“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?


dr2chase 01.01.13 at 6:13 pm

@UnlearningEcon – “dependent utility functions” is a big problem for micro, because it means that a free market can fail to be welfare-maximizing (the proof fails). For example, buying a big heavy car to improve your momentum exchange in a (potential) crash with another car; pretty soon everyone’s driving big heavy cars, buying more gas, working harder to fit in a parking space, and no safer than they ever were. Dependent utility functions allow sustained economic discrimination despite a free market (understand I am talking about just a model here, I am well aware it is more complex in the real world); if bigots only discriminate both against “those people”, the market can correct it, but if they discriminate against “friends of those people” (i.e., a dependent choice) then discrimination can persist despite the free market.


Bruce Wilder 01.01.13 at 6:17 pm

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.


Bruce Wilder 01.01.13 at 6:52 pm

Hidari: “. . . is there really much, fundamentally about today’s debates that an average economist from, say, 1937 would not have understood?”

That time-travelling economist might wonder why the debate is even taking place.

The core issue is whether the economy is “naturally” self-equilibrating. The experience of the Great Depression meant that an “average economist” in 1937 thought it was not, and that events had settled the issue in the main.

I objected to the use of the term, “consensus” for the state of macro in 2008 before the GFC, in my comment above, because I think economists in the various “schools” of mainstream macro were not engaged in any kind of conversation on this core issue.

Naively, you might think it fairly obvious that the economy is not self-equilibrating, and, as far as I’m concerned, you’d be right, but it is still a knotty and crucially important intellectual problem, because the economy is decentralized and it (meaning millions of households and firms) does adjust and morph “on its own” independent of whatever the policy makers in charge of government spending, money printing, or various economic regulations may do. And, a sensible policymaker does not aspire to be a dictatorial central planner.

On this core issue, the various “schools” have views, but they do not engage with one another in critical assessment of their conflicting views. To some large extent, I’m not sure they could, even if they were willing, because they have framed their analyses in in-commensurable fashions. They literally could not find a measurement in common. In 2009?, Krugman and Barro had an exchange in newspaper op-eds over the “multiplier” which ought to be applied in estimating the effects of government fiscal stimulus spending. Their notions could not have been more different in character.


matt w 01.01.13 at 7:04 pm

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.


ponce 01.01.13 at 7:25 pm


“and the Marxists sorta out on the borderlands being ignored”

That’s a shame because I’ve never read an economist who had a better understanding of real world economics than Karl Marx.


Bruce Wilder 01.01.13 at 7:36 pm

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.


Noah Smith 01.01.13 at 7:54 pm

@John @14:

Sure, of course macro is important. But that doesn’t mean that pouring resources into it will result in predictable output. That’s the way “normal science” works, but we aren’t always in a region of knowledge where “normal science” can get much traction. Hiring macroeconomists of different kinds is not necessarily going to get us better insights into the true nature of reality. In fact, I suspect that if it could, it would have already been done, at least somewhere. But perhaps I am just too pessimistic…

@Neville @16:

Well, that’s the thing, basic theory is just being downgraded wholesale, within physics departments. It’s not a case of string theorists voluntarily surrendering budget share.


Bruce Wilder 01.01.13 at 7:55 pm

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.


matt w 01.01.13 at 9:41 pm

Bruce: You’re entirely correct, that was a mindo. I meant “saltwater.”


LFC 01.01.13 at 9:46 pm

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.


Nibi 01.01.13 at 9:57 pm

matt w @42:

Thanks for your reasoned response. I’m certainly not trying to make the case that it is normal for science to be divided along political lines. 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. Or, to paraphrase part of your response in the form of a question, is economics not a science, or is it a field with respectable evidence and reason based claims that needs to reject the unsupported hypotheses?


ponce 01.01.13 at 10:07 pm


“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.


Ji 01.01.13 at 10:11 pm

@26 Claudia – “Who will run our central banks? Who will staff them? Who will give sound advice on the macro effects of fiscal policy?”

The problem is that modern macro education doesn’t teach the relevant information. The Bank of England recently sponsored a conference on the topic of economics education and the problems seem quite well recognised: ” that new graduates had almost no contextual knowledge about recent events or economic history, and less interest; that the technical skills they have are strong but narrow, and rarely include practical experience in econometrics; that few have the capacity to adapt simplistic models to real problems; and above all that their ability to communicate to non-specialists is weak.”


John Quiggin 01.01.13 at 10:20 pm

@Bruce It isn’t really freshwater vs saltwater, but Repubs vs Dems/left-liberals. Mankiw was a New Keynesian, but has sided with the Repubs, and therefore been incoherent on stimulus – theoretically he should be pro, but politically he has to be anti

@LFC More soon on all this


Chris Mealy 01.01.13 at 10:37 pm

Noah, it’s great that you’ve figured out that macro stinks, but you know micro stinks too, right?


Bruce Wilder 01.01.13 at 11:06 pm

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.


Alex 01.01.13 at 11:13 pm

above all that their ability to communicate to non-specialists is weak

Did they ask how well they could communicate from non-specialists, i.e. listen to them?

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

I don’t think the idea that some of the control variables in the system are harder to change than others is unsatisfying, nor is it a black box. Even if it were, it would be one we observe in reality.


Bruce Wilder 01.01.13 at 11:52 pm

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.


Robert 01.02.13 at 12:08 am

As I recall, Kocherlakota’s error was something like the following:

Consider two equilibrium growth paths, alike except one has a lower inflation rate than the other. The (nominal) interest rate on the path with the lower inflation rate is lower. Thus, lowering interest rate is deflationary. Since we are currently concerned with deflation, we ought to raise interest rates now so as to re-inflate the economy.


Stephen Frug 01.02.13 at 12:36 am

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


ponce 01.02.13 at 12:37 am


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.


david 01.02.13 at 12:42 am

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.


Nibi 01.02.13 at 12:52 am


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

There are two points here – one concerning the ability to make predictions and the other the accuracy of the predictions. Now various prognosticators ca. 2005 were saying that there was a housing bubble due to burst, and others saying that there may be a decline or flattening of growth but at worst the overall financial system was not at risk because said risk was properly secured.

One of these turned out not to be the case. Now if the reasons given for the predicted collapse turned out to be supported by the evidence post mortem which, as I understand is broadly the case, then this can be incorporated into economic theory/models to improve the state of the discipline. Whether or not this actually happens seems to me to be an indictment of the field as practiced rather than evidence that economics is not a science or cannot be a science.

As to the point of accuracy, I think this is a bit trickier. Even if one could predict a probable financial collapse based on sound principles, given the various factors and complexities involved in a global economic system exactly when (or over what time span) this would occur and resulting economic impacts in terms of employment, GDP etc. may not be precise. I don’t believe this would be enough to discount economics as a science if such uncertainties were properly acknowledged and defined.

To venture into scary-analogy-land, it is indisputable that increasing CO2 concentrations in the environment due to human activities affect the energy budget with consequential warming in the atmosphere and oceans and shifts in climate regimes. There is, however, uncertainty as to the rate, magnitude, and distribution of the changes globally and the impact on our various ecosystems. None of this makes climatology, ecology, et al. unscientific.

In summary, I’m probably conflating/confusing a bit the question of whether economics is a science or can be a science. On the former, it seems to me[1] partially true, and on the latter most likely true.

[1] I am not an economist so, of course, I’m wary that the Dunning-Kruger spectre looms large


Main Street Muse 01.02.13 at 1:04 am

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.” (

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.


Man Kay 01.02.13 at 1:44 am

Robert Lucas set macro back thirty years by insisting that it be micro-founded before micro was properly micro-founded.

The consensus emerging here is that economics-the-academic-discipline doesn’t think that macro is important. Individual economists such as Quiggin @ 14 may think that macro is important for policy–or even that policy is macro’s raison d’êre–but the discipline doesn’t agree. Witness, the sanctions applied by their colleagues to academic economists who repeatedly got the basics wrong, in public, when it provided political cover for politicians to blight millions of lives. (What sanctions? Exactly.) Noah Smith @ 13 has the best course of action for this situation.

Central bankers can learn their macro from Carlin & Soskice (2006 OUP) and be done with it, spending the time freed up in ethics courses, for obvious reasons; in history courses, where they will learn both what has happened in the past, and how to write to be understood; and in practical econometric data acquisition, where they will learn scepticism and a little of the world.


Robert 01.02.13 at 1:55 am

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.


Sev 01.02.13 at 2:05 am

Opportunism cost- the market for economists does not prize intellectual honesty, but good lawyering.
#48 I seem to recall that Keynesian prescriptions really didn’t do well in responding to the oil shocks/stagflation of the 70s- perhaps nothing could- which created an opening for a campaign of intellectual bullying against fiscal stimulus, which was largely successful, and we hadn’t for decades faced Depression conditions in which it would be crucial to recovery anyway (fading communal memory).
Re: stickiness of wages: doesn’t it make sense that this is related to loss aversion as a psychic preference? As I’ve gotten older, I tend to see all human societies much less as attempts to create communities of common interest and purpose, and much more as analogous to the pecking order among chickens. Those at the lower levels in particular face frequent humiliations, to which they nurse a strong aversion, which they will express when they can. A loss of wages is an example, beside its practical challenges. Though even this has its limits:
in which the Spanish working class is living in something like a post- Soviet nightmare of uncompensated labor.


Peter T 01.02.13 at 2:18 am

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.


john c. halasz 01.02.13 at 2:22 am

Re: self-regulation, I can’t resist quoting a FT columnist,- (I can’t recall which one),- that self-regulation is to regulation, as self-importance is to importance.


Stephen Frug 01.02.13 at 2:32 am

$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.


JW Mason 01.02.13 at 2:57 am

For me, the interesting question is not, what is macroeconomics like? It is, what *should* macroeconomics be like?

Suppose we had a sufficient mass of scholars (academic economists or otherwise) prepared to construct our own positive macroeconomics. Pluralities in enough departments to train a steady stream of graduate students, a few good journals of our own, some funding, and the self-confidence to focus on the question of understanding the world regardless of what the majority in the profession is doing. What might it look like? Where would we start? What would we build on?

Speaking just for myself, my resolution for 2013 is: Less critique of the mainstream, more contributions to a positive alternative.


JW Mason 01.02.13 at 3:03 am

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.


JimV 01.02.13 at 3:11 am

The answer to the question, “Can someone recommend a book [or books] on the history of economics?” is yes, Brad Delong can. He has made many posts on economic history at his blog (“Grasping Reality with both Hands”) and I think he teaches a course on economic history.


LFC 01.02.13 at 3:32 am

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.


LFC 01.02.13 at 3:37 am

Economic history is not the same as the history of economics, though I’m certain B.DeLong knows something about the latter, not just the former (which he obvs. knows about).


Stephen Frug 01.02.13 at 3:37 am

#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.


Charles Hatten 01.02.13 at 3:43 am

Stephen Frug @ 68; there are a lot of histories of economic thought out there, which give the broad overview of the earlier history. Heilbroner’s The Worldly Philosophers (many editions) gives the broad outline in a popularized form, with a good non-technical discussion of Ricardo, Marx (long since written out of the economic canon by contemporary economists of course but still important) and Keynes. Sylvia Nasar’s Grand Pursuit: the Story of Economic Genius is engagingly written, but seems better on historical context than on actual economic theories. A less known but worthy contender is Economics Evolving by Agnar Sandmo. The problem is that these books are mostly on economic thought from the eighteenth and nineteenth centuries through roughly the aftermath of World War II. The debates this thread addresses largely arose in response to developments of the 1970s and after; for this, the suggestions of JW Mason@70 would be a good place to start, though they don’t sound like actual histories. I think the long view of economic history is worth knowing (so read Heilbroner and Sandmo), but I suspect that a genuine history of the more recent economic debates has not yet been written. Obviously, as this thread attests, there’s still a lot of discussion about what the debate all meant; Paul Krugman argues that macroeconomics has actually regressed into a “dark ages” from an earlier Keynsian heyday. No doubt economists of other camps would vigorously disagree. As a nonspecialist, I do think the history of economic thought is deeply interesting, but as I say the recent debates seem not to have found an effective historian.


Keir 01.02.13 at 3:44 am

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.)


LFC 01.02.13 at 3:51 am

There is some interesting historical perspective on the social sciences generally in this short book, which I had to read at one point. (Among other things, takes a skeptical, for lack of better word, view of the disciplines as they developed in the 19th-20th cents.)

On the more popular front re hist. of economics, there’s Nasar, Grand Pursuit, but I have no idea if it’s any good. Plus probably not what S. Frug is looking for.


Zamfir 01.02.13 at 3:53 am

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?


LFC 01.02.13 at 3:53 am

@75 geology predicts heaps of stuff all the time

Ok, I stand corrected on that


anon/portly 01.02.13 at 4:49 am

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.


JW Mason 01.02.13 at 5:17 am


Jacques René Giguère 01.02.13 at 5:25 am

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.


Hidari 01.02.13 at 8:10 am

“As someone who is neither economist nor American, this debate feels remarkably US-centric.”

Yes but America rules the world (euphemisms like “global policeman” or “the world’s only superpower” are usually used in polite conversation). So in terms of policy, what is discussed in American Universities really is the only conversation that matters.

If we go back to my hypothetical tıme-travelling economist, the thing that might really surprise him (sic) about current debates is that in his time the major debate of his era took place between and Englishman and an Austrian. It’s now inconceivable, literally, that that might be the case. It is now taken for granted that all economic debates worth having take place between white males at elite American Universities. Token Australians and Brits are allowed in the club (only if they are white and male, obviously!!) but there are quotas.


Robert 01.02.13 at 8:52 am

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.


Michael Harris 01.02.13 at 9:15 am

JW Mason @69,

Worth considering what happened with Yanis Varoufakis and his attempt to fashion a new PhD program in Greece. (Shorter: he’s now one of Jamie Galbraith’s UTexAust colleagues.)

Also: last time I spoke to John Q, I suggested his next blog adventure be a group blog on economics, featuring promising econo-bloggers as either team members or as guest bloggers writing essays that get critiqued, a bit like the book seminars here at CT. I figured that the best of this stuff could be edited and published as a book annually.

The intent was to move beyond the guerrilla warfare and character attacks of the blogosphere and really dig deeper, think harder, and move forward.

John looked at me like I was quaintly cute and utterly crazy, and quickly changed the subject. ;)


bourbaki 01.02.13 at 11:28 am

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.


The Raven 01.02.13 at 12:50 pm

Bruce Wilder @40: “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.”

I think what has been discovered is another version of the intractability of the calculation problem: it is not, so far, possible to predict economic behavior at the level of a whole society because human wants and needs, beyond some basics, are incalculable. It is like user interface design rather than software engineering: beyond some rules of thumb, there is no way of predicting how users will interact with an interface. Instead, interface designers design, test, and refine solutions.

Which suggests a different attitude towards macroeconomics: that it be treated as the study of the economic reaction to public and private organizations and mass consciousness, rather than as an attempt to predict economic behavior independent of these things. Look for responses, rather than assuming they can be predicted. It also suggests an inversion of the usual economic model of individual and society: rather than assuming that each individual solves the problems of economic decision making independently, assume that a major part of economic decision-making is undertaken by group and organizational processes and proceed from there.


bexley 01.02.13 at 1:26 pm

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.


LFC 01.02.13 at 2:06 pm

bourbaki @86:
see my #79


Michael Harris 01.02.13 at 2:21 pm

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.


SamChevre 01.02.13 at 2:32 pm

Stephen Frug @ 58

In my opinion, it is hard to find a better history of economics than J K Galbraith’s Economics in Perspective; A Critical History; it’s out of print but not hard to find (my local library has a copy.)


William Timberman 01.02.13 at 3:19 pm

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.


David Kaib 01.02.13 at 3:53 pm

If I remember correctly, in the 90s James Galbraith argued that micro had essentially taken over macro, but it would be better to reverse process this process – but he was obviously talking about a different version of macro.


Hidari 01.02.13 at 4:49 pm

“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?


bexley 01.02.13 at 5:32 pm

Hidari @ 94

Yes its going to get worse over time but my point is that this problem doesn’t have anything to do with any “fundamental cognitive limit” so I don’t see it as the same as Chomsky’s point at all.


Hidari 01.02.13 at 5:40 pm

@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.


Bruce Wilder 01.02.13 at 5:41 pm

Hidari @ 83

Of course, an American Ph.D. economist in 1937 would have a reading mastery of German — a reading knowledge of German was a requirement of doctoral programs through the 1950s. And, Swedish and Italian might have been useful as well.

Today, maybe Chinese?


Bruce Wilder 01.02.13 at 5:42 pm

JWM @ 69 MMT?


bexley 01.02.13 at 6:08 pm

@96 sure – although I don’t think economics can use that excuse yet.


JW Mason 01.02.13 at 6:18 pm

MMT could be part of the package, for sure.


Sebastian H 01.02.13 at 7:00 pm

The problem is that economics (or at least macroeconomics) is somewhere between the astrology and astronomy part of its development–it is trying to be a science but it isn’t there yet; but vast numbers of policy makers insist on pretending that we are at Newtonian physics-level certainty understanding how various parts interact. This ends up meaning that economics ends up more as a justification device for your own political programs (whatever they are) rather than a rational tool of analysis.

And while one side or the other may be slightly more dispassionate about trying to guide economics toward science, in practical effect current economic arguments proceed in precisely the way that religious arguments used to.


The Raven 01.02.13 at 7:29 pm

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 01.02.13 at 7:30 pm

um, make that “The founding theoretician of the field is Keynes.”


Bruce Wilder 01.02.13 at 8:03 pm

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.


Bruce Wilder 01.02.13 at 8:13 pm

JWM @ 100

I wasn’t endorsing MMT; I was pointing it out as an example, institutionally, of a group of scholars going off on their own island, and creating an alternative macro.


psychohistorian 01.02.13 at 8:34 pm

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 01.02.13 at 9:00 pm

A thought on the Chomsky connection, upthread… there are at least two ways in which a theory might be unknowable by human beings. Firstly, it might just be too complicated for our mental processing abilities. I’ve heard molecular biologists seriously suggest that this might be the case for organisms’ geneomes: we can know what the sequence of genes is, but how they all interact might just be too big and complex to be humanly knowable. Secondly, our minds might have evolved to actively prevent us from knowing some things. This is more likely the case for knowledge about ourselves (the social sciences). There seems little reason for us to have evolved for us to be specifically incapable of understanding (e.g.) quantum mechanics, but there might be very good evolutionary reasons for us to be incapable of understanding our own motives (hat tip to Lacan at this point).

But that’s talking about fundamental limitations of biological humans, whatever culture they might be brought up in. By a similar line of thinking, specific societies/cultures might have grown into a state where certain things are publicly unknowable (i.e. they cannot be widely known throughout the culture), even if they might be knowable to humans in other cultures, or even a few individuals within the culture. “Mental illnesses” might be in this category — i.e. the society cannot allow the true causes to be acknowledged.

I guess economics could also be in this category: permanently prevented from being publically knowable within this society, because the society’s defense mechanisms prevent it from being known. (e.g. no body of academics which holds such a theory will be permitted to continue to exist).


Bruce Wilder 01.02.13 at 9:36 pm

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.


William Timberman 01.02.13 at 9:40 pm

Bruce Wilder @ 104

When the Soviet economy failed, if your internal passport was in order, you could always go back to your ancestral village and help the babushka dig potatoes. Judging by what I’ve been reading, some Greeks are managing to do something very similar.

Since it’s doubtful Archer Daniels Midland or Monsanto would let us anywhere near the potatoes, so somehow we’ve got to make macroeconomics work.


john c. halasz 01.02.13 at 9:51 pm

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?


Bruce Wilder 01.02.13 at 9:57 pm

john c. halasz @ 109 Yes, I believe so.


mclaren 01.02.13 at 10:50 pm

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.


Barry 01.02.13 at 11:19 pm

“What’s happened is simply that large number of economists have foolishly and ignorant abandoned Bagehot’s and Keynes’ insights. ”

By now it’s clear that this isn’t mere foolishness; it’s active criminality. These ‘large number’ will be found on the right (e.g., Chicago en toto; people like Mankiw whose theory would support stimulus but are partisan hacks).


mclaren 01.02.13 at 11:23 pm

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).

No matter how complex our economy gets, no matter what exotic technologies we use (perhaps we’ll soon be making by selling quantum data crystals and selling puts on parallel universe futures courtesy of the Copenhagen Interpretation of quantum mechanics), the complexities of any economy tend to cancel each other out and boil down to some simple basic trends. Bubbles occur due to human irrationality. They’re inevitable. The best response to a recession caused by a bubble is large gov’t stimulus until the private sector recovers and debts gets deleveraged. The aftermath of bubble crashes tends to be prolonged, and the resultant recessions tend to be much longer and much deeper than usual. Restoring faith in the financial system is key, and to do this, it’s crucial to punish the malefactors of great wealth and put enough of ’em in jail to create an atmosphere of trust.

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.


Barry 01.02.13 at 11:26 pm

Bruce: ” 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. ”

No, it’s not. Please read what Krugman’s written on this.


ponce 01.02.13 at 11:29 pm


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


mclaren 01.02.13 at 11:44 pm

Re ponce @115: Refusing to believe in the cumulative power of human ingenuity over time also raises a formidable barrier to the scientific endeavour. SusanC would have been much better advised to use an example like the P vs NP problem, or perhaps Goldbach’s Conjecture, or Riemann’s zeta conjecture.

Trouble is, an equal number of seemingly intractable long-standing problem can be thrown right back as counterexamples because they were recently solved. C.f., the recent proof of the Poincare conjecture by Grigory Perelman or Andrew Wiles’ proof of Fermat’s last theorem.

I remain impressed by the power of human ingenuity over time to explain the universe. To paraphrase Arthur C. Clarke, people tend to greatly overestimate the power of the human mind in the short term, and greatly underestimate it in the long run.


lupita 01.02.13 at 11:53 pm

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.


James Wimberley 01.02.13 at 11:59 pm

mclaren in 113: John Stuart Mill was famously precocious, but he didn’t write Principles of Political Economyin 1820 at the age of 14. He waited until 1848, aged 42. Perhaps you are thinking of his father, James Mill, who published a work called Elements of Political Economy in 1821? I don’t know if this attacks Say’s law.


Michael Harris 01.03.13 at 12:47 am

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?


Michael Harris 01.03.13 at 1:05 am

William T @ 92,

I think I have seen you make this argument before. I’m not sure exactly what it is you’re asking macroeconomists to do (and, hence, exactly what you’re criticising them for).

Being extreme (and slightly facetious), it’s a bit like criticising biologists for the fact that some people still believe in a 6000 year old planet and that we couldn’t possibly have “descended from monkeys”, right? We can’t control what people will believe, and hence who they will vote for based on what platforms are put forth in accordance with what value systems.

I admit to facetiousness. Economists cannot not be mindful of the system in which they operate. But it’s one thing to have technocratic tools with which parts of the system can be modified or influenced; it’s another thing to have tools to enable the political system to allow those technocratic tools to be applied successfully. That’s a huuuuuuge ask. Maybe that’s your point.

I think it’s worse than that, anyway. Barry @113 hits the nail. It’s really more like, if the climate debate was being shanghaied, not by a few cranks and kooks and mercenaries, but by a large wing of eminently credentialled climate scientists. As if Ivy League climate researchers were coming out in droves to say “Nothing to see here! I’ll explain why at the next Heartland conference!”

As Wren-Lewis notes, eminent economists have said things that an undergrad might fail for when discussing stimulus policy. That’s not even a failure of economists-as-technocrats, it’s a failure of economists as, well, professionals.


john c. halasz 01.03.13 at 1:45 am

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.


Robert 01.03.13 at 1:46 am

Some extremely stupid, ignorant, and knavish economists comment anonymously:
They seem to think that Quiggin is a heterodox nut and that the substantive issues can be settled by seeing whether Quiggin or Williamson is cited more. See, how can one respect economists?

David Ruccio notes that macroeconomics never has had a consensus for, say, the last 50 years:

By the way, when I wrote “I’m thinking better of my earlier recommendation of Schlefer”, what I meant is that Schlefer’s book is better and more apropos than some of the other recommendations I’ve seen.


William Timberman 01.03.13 at 1:57 am

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…..


mclaren 01.03.13 at 2:13 am

@James Wimberley: Thanks for the correction. Memory betrayed me.

Re: Bruce Wilder @ 104: “Macro, in its determined abstraction, lacks a sense of mechanism. “ No it doesn’t. The mechanism is straightforward and logical and generally predictive.

Money circulates at a given velocity and under normal circumstances the IS/LM simplification gives excellent general predictions about interest rates, savings, and the money supply given the proper inputs. The model is non-dynamical so it’s a simplification, and it also has boundary conditions — meaning that it assumes we don’t have a general glut or hyperinflation or some other pathological condition.

This is pretty standard for scientific models of complex systems. The IPCC’s climatological models are relatively simplified compared to the complex reality, but they’ve given excellent predictions so far. Neils Bohr’s model of the atom was extremely simplified and also lacked a sense of mechanism, but it worked. You could accurately calculate spectral lines from it.

There’s been some back and forth about macro’s lack of ability to precisely predict bubbles. This proves typical of complex systems, folks. Current meteorology can’t predict when hurricanes will form or how strong they’ll be, yet I don’t see anyone running around claiming that meteorology “lacks a sense of mechanism” or calling it a politicized pseudoscience.

I think it unlikely that we’ll ever be able to predict when bubbles form, or in what sector of the economy, or how far they’ll got before they burst. That’s in the realm of human behavior, something notoriously hard to predict ab initio. But once a bubble forms, current macro is very good at telling us what the consequences will be and how to deal with them to minimize those consequences. The IS/LM model does very well in that regard.

Macroeconomics differs from particle physics or astronomy or chemistry because macro involves the behavior of human beings. This leads to those boundary conditions I mentioned. In physics, when your Reynolds Number gets too high (too big a shock to the system), the system starts to get chaotic and exact predictions become impossible. You can predict general behavior of the system, but not specifics. The same applies when people in an economy start to panic or get irrationally greedy. The economic system becomes chaotic for a while and exact predictions become impossible — but you can forecast general behavior of the system.

For example, history clearly shows that if financial malefactors aren’t punished, the bubbles tend to get bigger and the collapses get more spectacular. Scholarly work has been done on fraud, and not only on Wall Street, but fraud in science as well. The findings are clear: see, for example, “Fraud: causes and culprits as perceived by science and the media. Institutional changes, rather than individual motivations, encourage misconduct,” EMBO reports published at This specific paper relates to scientific fraud rather than financial fraud but the principle remains the same. Fraud results from dysfunctional institutions, and the solution is to reform the system and punish the malefactors. For scholarly work on financial fraud see “Looting: The Economic Underworld of Bankruptcy for Profit,” by George A. Akerlof and Paul M. Romer. 1993, Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 24(2), pages 1-74, and “The Market for ‘Lemons’: Quality Uncertainty and the Market Mechanism,” by George A. Akerlof, Quarterly Journal of Economics, Vol. 84, No. 3, Aug., 1970.

Obama should either know this stuff, or he should surround himself with people who know this stuff. And he should direct the Department of Justice to come down on financial crime like a ton of bricks. Once again, we’ve got a solid mechanism here: when financial malefactors recognize that fraud isn’t being prosecuted, they tend to perpetrate more of it. It’s easy to make the general prediction that until a bunch of Wall Street criminals get thrown in prison, we’re going to get more and bigger bubbles and worse financial collapses and the GDP will grow at a smaller rate because no one wants to invest when the regulators are asleep at the switch and your investment is likely to be another Enron or Lehman Brothers. The mechanism at work here is simple and straightforward and everyone who hasn’t been bribed to ignore it understands the mechanism clearly.


Michael Harris 01.03.13 at 2:18 am

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?


john c. halasz 01.03.13 at 2:18 am

mclaren @ 125:

What planet are you living on?


Michael Harris 01.03.13 at 2:19 am

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


John Quiggin 01.03.13 at 2:49 am

“Are Australian economists smarter/better than their American counterparts? If so, why?”

I think it’s more the absence of an equivalent of Chicago, particularly as regards macro. ANU used to fulfil that role, but not any more. So, it’s not that our sensible macro people are smarter than their US counterparts, but that we have fewer of the other kind.


Michael Harris 01.03.13 at 3:02 am

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.


William Timberman 01.03.13 at 3:57 am

Michael, given how little I know about Australian politics or economics, if I were to make any specific comments about either on this blog, I’d have to be dumber than any macroeconomist who ever lived. Speaking more generally, I would say that countries in which great economic power is concentrated — e.g., Japan, the U.S., China, Germany — tend to be more firmly in the control of elites who don’t see solidarity with the lower orders as either necessary or desirable in achieving their goals.

When things are going swimmingly, this matters less than when some of the more anti-social tendencies of those elites steer the whole collective into a ditch. Then comes the triage, which is inevitably from the bottom up, and the 25% unemployment rate in Greece or Spain, or the 13% foreclosure rate in Las Vegas is predictably trumpeted as divine punishment for the moral turpitude of the hoi polloi.

Not to put too fine a point on it, this sucks, but it doesn’t seem to me that conditions in Australia don’t suck because Australia has solved the political problem. Before pulling the cover over my bunker, I’d say rather that Australia has avoided the problems that come of being a world power. Good on ’em, but I’m not sure there’s much of a lesson for other countries, in their better management of this particular crisis.


Colin Danby 01.03.13 at 4:28 am

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.


Michael Harris 01.03.13 at 6:10 am

Thanks William. That’s helpful.

And you do know I’m poking you, right? (Good-naturedly, but still.) If I were a competent practising macroeconomist, which I’m not, I could still potentially “do a Krugman” and analyse Japan’s economic malaise in terms of the liquidity trap, while being as comparatively ignorant of its politics as you are of Australia’s. My skill-set and toolkit would be, to some extent, internationally adaptable. I could even move jobs and take my skills with me. Much less so if I had to abide by your rules of the game, knowing the minutiae of the political system I was operating in.

(On the other hand, if you were to say: well, OK, but you can’t do your analytical/technocratic work and just act like the politics don’t matter, I would be inclined to agree.)

There are two things I felt inclined to point out about the academic economics profession which can be kind of unpleasant, both relating to its status-differentiation tendencies.

The first concerns the “wheres”: where you studied, where you work, and where you publish. There’s an incredible focus on “good schools” and “good hits”. And to work in a good school, you need very good hits, consistently. And the profession ranks itself this way, I think much worse than many other disciplines. (Certainly, as far as I can tell, the sciences.)

You could see this play out when Williamson reviewed Quiggin’s book and started out by dismissing him as some provincial hack who’d done some stuff in agricultural economics. (He can’t be this dismissive of Krugman, who’s a Nobelist at Princeton, so he paints him as a smart guy who’s gone rogue and is taking potshots at people whose work he hasn’t kept up with and doesn’t “get”.) The Econ Job Market Rumors link that was posted above shows the same tendency: who’s the bigger academic gorilla is the appropriate question in their minds, as though that makes clear who’s correct.

The Australian profession is not immune from this completely, but the necessary egalitarianism still applies somewhat: there are people here who’ve studied at top tier universities and who have published in the AER or wherever, but nobody here is working at Harvard or MIT, by definition, and everyone is inevitably surrounded by some bright people who’ve studied at lesser international, or even local(!), universities. And you can get hired/promoted by publishing in local journals (although preferably not exclusively).

The second is where you stand in the profession by virtue of your field. Micro theory (including general equilibrium, industrial org, game theory and “applied theory”) and macroeconomics are the core components of the discipline, and there’s always a good market for those papers in the top journals (the “good hits” journals). However, if you work in labour or development or international trade or environmental economics, you’re a bit off to the side. If you’re superbright and highly productive, you can get a high-status job at a top tier place, because they’ll need someone to teach those “field courses”, but more likely you’ll be somewhere more provincial and you’ll be publishing in (possibly quite respectable) field journals that the prestigious theorists don’t regularly read, and usually don’t even contemplate publishing in.

Which means you could (and probably do) have serious and capable economists tackling some of the politics questions that interest you, while the technocratic central banker economists and their academic macro counterparts are unaware of/oblivious to that line of research. I don’t mean this as a “there’s so much going on, we can’t be aware of anything” thing, I mean it as a criticism of the profession, in that there can be a definite lack of curiosity towards areas outside one’s own field. (Also, a general and wide-ranging intellectual curiosity does not necessarily help you get published, or promoted, or hired by top tier places.)

I feel like Bruce now, in the “this sounded coherent in my head but now I’m less sure” kind of way.


Michael Harris 01.03.13 at 6:20 am


Zamfir 01.03.13 at 6:52 am

Is there really more to the Australian situation than a surge in commodities exports that happened to coincide roughly with the crisis? It’s politically always easier to spend new found wealth, when the claims on it are not yet fully entrenched.

While in general, debates on Keynesian stimulus have to deal with the unavoidable distributional effects of running larger or smaller government deficits.


John Quiggin 01.03.13 at 7:09 am

@Zamfir There was a big, though, temporary drop in commodity prices at the beginning of the crisis


Neville Morley 01.03.13 at 9:34 am

mclaren @ 114 (was 113): “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.”

I don’t imagine you intended to use ‘design’ in a strong sense here, but as it stands this reads rather like a second cousin of Intelligent Design ideas: rather than “such complexity in the world cannot have arisen naturally so we must posit a designer”, we have “this was designed, therefore it can’t be as complex as it looks at first glance”.

Rephrase this as “all our economic systems developed as the result of untold numbers of individual human decisions, each with their own rationale” and things look rather different.


Marco 01.03.13 at 9:56 am

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 01.03.13 at 10:04 am

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).

Picking up on this, all areas of science deal in testable predictions. Not all of them deal in laboratory experiments: astronomy, for example. But astronomy still makes predictions.


Michael Harris 01.03.13 at 10:09 am

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


Barry 01.03.13 at 2:28 pm

Michael Harris @120: “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?”

I agree with this view, and further assert that we’ve seen both sides post their predictions for several years now. Krugman has been right, and the opposition has been wrong.


William Timberman 01.03.13 at 2:41 pm

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.


Barry 01.03.13 at 2:55 pm

john c. halasz 01.03.13 at 1:45 am

” 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.”

I for one can’t figure out what Bruce was talking about; I took him to be confusing short and long term ‘cycles’.

Perhaps Bruce could clarify that post.


LFC 01.03.13 at 4:00 pm

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 steele 01.03.13 at 4:34 pm

Sorry to jump in, but every time someone on the Internet says “science doesn’t require prediction (or forecasting),” it seems, they make a comparison to some field that’s indisputably a science like geology. They are rarely interested in a picayune discussion of the differences between “forecasting” and “prediction.” Instead, they usually seem to want to argue that geology is subjective in some way chemistry isn’t. I’ve never seen anyone argue along the lines of: geology is like P, and geology appears to be unlike chemistry yet is really closer to chemistry than you think, so it’s entirely possible for P to be very like chemistry. What they argue, usually, is more like: geology is like P and unlike chemistry, yet geology is a science, so P can be a science as much as geology is, even though it’s happily very different from chemistry. (When they’re not arguing: geology and evolutionary theory aren’t like chemistry, so who’s to say intelligent design isn’t as validly a science as they are?) Maybe your experience is different.


LFC 01.03.13 at 6:11 pm

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.


Bruce Wilder 01.03.13 at 6:37 pm

Barry @ 115, 143
Michael Harris @ 120

I don’t know if this will help clarify things a bit, but here’s Paul Krugman, rather belatedly imho, noticing that, yes, Virginia, there does appear to be a serious structural problem at work:

I don’t think Krugman was wrong, in his advocacy of fiscal stimulus as a remedy, just incomplete. And, I don’t think his honorable opponents (even forgetting the clowns, like Mulligan), whose position he characterized as relying on “structural” arguments, were in any wise, right.

What I think is that a defensible argument calling for stimulus has to also take a position on structure, to identify the structural problem(s), because there will be particular structural problems, and the particulars matter and must be remedied in a particular way. 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. It doesn’t cut it, in the political sense that it is doomed to be politically impotent, since it does not map to anyone’s personal experience of the economy and its problems and therefore mobilizes no political will, and, it does not cut it, intellectually, in the sense, that it isn’t sufficiently anchored in the objective to gain agreement from people, whose way of thinking isn’t identical to Krugman’s idiosyncratic abstract idealism. You cannot be putting together a train with a locomotive, but no freight cars and no caboose, and expect to run a railroad that way.


john c. halasz 01.03.13 at 7:04 pm

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.).


ponce 01.03.13 at 7:29 pm


Another way to tell if a field is a real science or not is see whether it deals with objective numbers like mass and average temprature or subjective numbers like happiness and participation rate.


Walt 01.03.13 at 7:31 pm

Yeah, god forbid science tell us something about happiness.


ponce 01.03.13 at 7:52 pm

I think science tells us happiness is hard to define.


mds 01.03.13 at 9:48 pm

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.


Bruce Wilder 01.03.13 at 10:44 pm

I’m sure everyone is bored with this, but me, but I’ll offer one more cut at “structural” explanations, by taking up the Great Depression.

To a large extent, the consensus of mainstream macroeconomics, has been formed by devolving, degenerating explanations/interpretations of the Great Depression. The most influential one is that the counterfactual story created by Friedman and Schwartz in A Monetary History of the United States, 1867-1960, which blamed the Federal Reserve for bad policy creating the prolonged and rapid deflation of 1930-33, and basically denied that anything else mattered. Friedman’s view, essentially, was that if monetary policy was steady and “neutral” (inducing no purely monetary “shocks”), then the natural economy, the self-organizing, self-equilibrating “free” market, competitive economy would optimally solve all other problems. (Look ma, no hands! [but the invisible ones])

Bernanke would later re-write the Friedman counterfactual from its vocabulary, anchored in the discredited Quantity Theory of Money, into a framework of money as credit creation. So Bernanke’s implicit theory, like Friedman’s, was, apparently, that, absent the devastation of the financial sector in the deflation of 1930-1933, none of the other reforms of the New Deal (e.g. Social Security) would have emerged to hobble the economy, and things would have been just jim dandy for everyone.

Christina Romer has produced an extremely spare retrospective analysis of the economic recovery, 1933-41, which occurred during the New Deal portion of the Great Depression, explaining it all in terms that either a New Keynesian or a monetarist could love. After 1935 or so, it was all driven forward by an inadvertent monetary expansion attributable to the emigration of refugee Jews from Europe. (I kid you not.)

You’ll excuse me, if I don’t mention Amity Shlaes or Cole & Ohanian. (You can google, if you like.)

During the actual events of the 1920s and 1930s, a number of serious structural problems emerged. The U.S. emerged into the New Economy of the 1920s light-years ahead of the European powers, which devastated themselves in WWI. The Second Industrial Revolution, which began in the 1860s, entered its mature phase, producing a vast array of new products and vastly improved production methods: automobiles, movies, radio, electricity, fertilizers, hybrid corn, telephones. Many things, which were not novelties, such as mass-circulation newspapers, expanded rapidly.

The U.S. was so ridiculously far ahead of the other industrialized countries that it could hardly help, but completely dominate international trade, even discounting the unfortunate effects reparations had on Germany, or the dissolution of the Hapsburg Empire had on what had been the emerging industrial powerhouse of Eastern Europe. These structural problems put enormous pressure on the gold-exchange standard, which emerged after WWI.

When agricultural prices dropped with the end of WWI demand, U.S. agriculture went into crisis, as productivity increases from advancing technologies caused prices to fall and to become extremely volatile. Many U.S. farmers beyond the reach of roads and electricity fell disastrously behind those within the narrow geographic bounds of the New Economy in the cities of the Northeast and Great Lakes and West Coast.

WWI Federal control of the economy had resolved pre-WWI labor unrest, by a huge increase in real wages — something like 50% increase in real wages in 18 months — and suppression of the radical labor unions. The deflation of the 1921 Harding recession erased some of the wage gains, and Labor made few gains in wages in manufacturing, despite galloping increases in productivity, during the 1920s.

Electricity was key to many of the advances in industry, agriculture and consumer lifestyle. Electricity generation was also subject to vast economies of scale, which made rates, problematic. In the presence of unrealized economies of scale, there literally is no such thing as a market-clearing equilibrium. Epic political struggles ensued over hydroelectric projects on the Tennessee, at Niagara, on the Colorado, and over institution of public utility regulation of electricity (and telephone) rates. A failure of expectations over returns on electric utility investments would be a core issue in the stock market crash of 1929 that set off the crisis.

My point is that there were structural issues, big ones, emerging in the 1920s. There was, in effect, a momentous struggle going on, over income distribution, on several fronts. Some of this struggle over income distribution was papered over for a time, by the novelty of a loose money policy by the New York Fed, which, in turn fed the novelty of consumer credit to finance purchase of consumer durables to go with the housing boom fed by easy mortgage credit, and feverish stock market speculation.

Separating the structural problems — especially the struggle over income distribution and industrial wages — from the monetary and financial crisis, as Friedman did, was a magician’s sleight of hand. He hid reality behind a monetary veil.

Given the structural problems, generally falling prices and wages, were a complete catastrophe. Full-employment equilibrium was only possible at higher wages, and a higher wage share of national output, relative to Capital. The debt-deflation, instead pushed income toward Capital, the exactly wrong thing to do. Markets in vast sectors of the U.S. economy were completely incapable of generating competitive prices or allocating resources properly; agriculture was the glaring example of a dysfunctional sector: somehow, agriculture had to find a way to shed labor on a massive scale, while attracting investment to implement the new technologies, on an equally massive scale, while faced with extremely volatile product prices, (not to mention the devastation of the Dust Bowl in the heatwave of the 1930s). Also, rapidly expanding food processors were gaining enormous bargaining power of raw agricultural product prices.

In the event, the New Deal managed a number of successful institutional reforms and investments in public goods infrastructure that restructured the economy, in ways that made a full-employment equilibrium possible again, while incorporating the technological advances. Industrial wages rose during the Great Depression, despite high unemployment, as industrial unions expanded their scope and power. The Agricultural Adjustment Acts (1933,1935,1938), especially the second scheme put in place circa 1935, put in place one of the most successful industrial policies in history, setting off a remarkable increase in productivity across a broad range of crops, while enabling the outmigration of labor.

The big issue of income distribution would not be settled, finally, until WWII. People often think the WWII spending confirmed the Keynesian thesis, which it did, but it also enabled the Great Compression in income distribution, which solved one of the central problems, of a mass-production, mass-consumption economy struggling to be realized: paying people enough to buy the stuff they produced.

Economists painting with a broad brush often obscure the structural details. It is common to assume a degree of substitution of labor for capital, or vice-versa, which is simply not feasible. Technology-embodying capital tends to be very lumpy. As Pareto said, there’s only seat on the farm tractor. There’s no feasible labor-intensive alternative way to employ the technology, and the technology dominates completely craft methods. And, the “capital-intensive” method may not be capital-intensive in any common-sense meaning of the term, at least relative to traditional craft production.

The actual economy is not a “market economy” in any common-sense meaning of the phrase, and to assume otherwise is wilful ignorance of the first-order. Most of the economy consists of vast hierarchical and networked organization, with little or no reference to anything resembling an actual market. Economists should not be simply assuming that markets exist, let alone that they always exist and function in ways that can cope adequately with financial and monetary shocks, or the pressures introduced by changing technology.


Michael Harris 01.03.13 at 11:29 pm

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!”)


William Timberman 01.03.13 at 11:33 pm

BW @ 153, etc.

For what it’s worth, your contributions to this thread are much appreciated. Fiscal and monetary hocus-pocus is all well and good, but it definitely does obscure as much as it clarifies. Yours is the best exposition of what’s actually been obscured as any I’ve read, and is even more impressive given how compressed it has to be to fit into a comments thread like this one. In my opinion Krugman’s recent, and jaw-droppingly belated discovery of the advantages capital derives from 21st Century improvements in the technologies of production, a piece of which you link to @ 147, is pretty thin by comparison.


Barry 01.03.13 at 11:52 pm

Thanks, Bruce – that clarified things a lot.


Stephen Frug 01.04.13 at 2:57 am

A belated thanks for all the recommendations, esp. the ones in #75, #81 and #91.


ponce 01.04.13 at 4:54 am


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.


Michael Harris 01.04.13 at 5:39 am

Ponce, please troll somewhere else.


ponce 01.04.13 at 5:45 am

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.


Michael Harris 01.04.13 at 6:06 am

I don’t assume William T or Bruce W or JW Mason agree with me when I engage with them but the engagement was worth the effort. They’re smart and have things to say.

On the other hand, I don’t so much disagree with you as see you as someone entirely ignorant of economics, but with an attitude problem about it. That’s fine, knock yourself out, but don’t assume me finding engagement with you a waste of effort as some kind of indication of a fundamental intellectual disagreement. Ain’t nothin’ intellectual about this.


ponce 01.04.13 at 6:11 am

You said it, not me :)


reason 01.04.13 at 8:39 am

“While in general, debates on Keynesian stimulus have to deal with the unavoidable distributional effects of running larger or smaller government deficits.”

As against the unavoidable but largely ignored distributional effects of monetary policy.


reason 01.04.13 at 8:58 am

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.


john c. halasz 01.04.13 at 6:02 pm

reason @ 164:

Any advanced production economy is divided into sectors that produce inputs for each other “before”,- (i.e. that’s half logical, half temporal),- they produce for final consumption output. Hence for such an economy to reproduce itself, let alone expand or grow, the ratios and relations of its underlying reproduction scheme must be maintained. Such a reproduction scheme may or may not be mediated by market transactions, wholly or in part, but it is not derived from market transactions, but rather is a constraint the production system imposes willy-nilly on market transactions (and prices). Hence sustainable economic “growth”,- (leaving aside the issue of whether there is actually any useful content to such “growth”),- must be inter-sectorally balanced expansion. Add on the problem of underlying, ongoing technical change, which means that the ratios and relations of the reproduction scheme are themselves constantly changing, and the problem that investment is primarily driven by private profit, such that there is an inherent asymmetry and lag in the distribution of income between profits and wages from productive gains, and such that, as the available technical possibilities for investment are used up and opportunities dry up, returns to investment diminish in a backwardly lagging way, and you get a tendency to crisis precisely out of the very “success” of the prior boom, due to over-investment, inter-sectoral coordination failures and insufficient wage-based consumption demand. And of course, the crisis will be all the more severe, if the prior boom is prolonged through financial speculation in the place of diminishing real investment opportunities and thus the accumulation of masses of fictitious capital becoming unpayable debt.

This isn’t merely an “Austrian” idea. (The original Austrian idea was a time theory of production, itself based on a time theory of interest as delayed consumption, resulting in round-aboutness of production, but, among other problems, they had a peculiarly subjectivistic and abstracted conception of time). The idea of a reproduction schema goes back to the Physiocrats and was extensively reworked and elaborated by Marx.

Of course, nowadays, with MNC production platforming, the globalization of supply chains and massive, largely unregulated global financial flows, it is difficult to speak of a discrete economy on a national or regional basis and we are caught in a twilight zone between “open” economies and a single global closed economy. But, even though my window on the world is in the U.S. and yours in BRD or AUS, I think we both agree that a prime causative factor in the ongoing global crisis was massive global CA imbalances and based on that factor alone, one could foresee the coming crisis, even if not predict its exact timing and ramifying course.


Charles Peterson 01.07.13 at 6:48 am

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.

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