Further proof of why Timmy shouldn\’t do macro

I came across Real Business Cycle stuff yesterday. As a result of someone making huge fun of it. Then I went and read a bit about it and it seemed reasonable: well, reasonable sometimes that is.

Don\’t bother with what it actually is, this isn\’t the point. Similarly, I can see that the Austrian idea about recessions has its moments. You have a great big boom then there\’s going to be a time of clear up as a very crude approximation. The Keynesians, that, again to entirely bastardise the point, everyone gets into a funk, the animal spirits vanish and so there\’s slack around. I\’m sure it\’s possible to construct similar short descriptions of all the other theories out there about recessions/depressions.

For example, I\’m very taken with Arnold Kling\’s ideas about Recalculation: there\’s a structural change going on, we don\’t really know much about it and the recession is the period in which we\’re all groping for the best response to that structural change.

Now my point isn\’t that my descriptions of these different theories are right or wrong. Only that there are a number of such different theories. And looking at each of them one can see that, yah, OK, that sorta makes sense. I can see that that could happen. Indeed, it\’s usually possible to point to a specific recession which does seem to be explained by one or other of the theories.

My point is rather that, what if all of these theories are in fact correct? No, not that all recessions are caused by the preceeding boom, that all are caused by structural change, or endogenous change, or by a lack of animal spirits. Rather, that each theory explains some, one or another, a few, recessions, but no one theory explains them all.

By analogy, you go to the doctor with a headache. Sometimes it\’s the booze you had the night before, sometimes it\’s dehydration, rarely, but possibly, it\’s sinus trouble, or malaria, possibly, very rarely indeed, brain cancer.

We can see the symptom, the headache, but we need to know the cause, the underlying problem causing the symptom, before we can devise the correct treatment: lay off the sauce, drink orange juice, take a decongestant, have some quinine or possibly go home to die respectively.

What if recessions are similar? We can see the symptom, we can see the decline in GDP for two quarters (which is the technical definition of a recession) but our treatment will need to be different dependent upon the cause, not just the existence of the symptom.

For example, if the cause if a structural change then a reflation to excite those animal spirits is not what is called for: we will simply be recreating the old economy without having changed to the new circumstances. If it\’s just the misallocation of capital caused by the previous boom then perhaps working through that reallocation is again better than reflation. And if it is simply the animal spirits thing then perhaps reflation is indeed the solution.

Which leads to a thought, one that marks Timmy out as someone who almost certainly shouldn\’t muse upon macro-economics. Just about everyone with a cure for a recession is like a doctor with his leech. Different leeches, to be sure, but each insistent that it is their patent leech which will cure all known headaches: reflation/waiting/recalculation/whatever will cure all known recessions.

But what if recessions are like headaches: as opposed to a broken arm for example, where the treatment, however the break occured, is the same, set and immobilise the limb?

Are recessions headaches or bone breaks? Do they all have one cure or does the cure depend upon the cause?

And where does this leave everyone waving their own patented brand of leech?

2 thoughts on “Further proof of why Timmy shouldn\’t do macro”

  1. Presumably it was macroeconomics that James Galbraith meant when he said that Economics was a disgraced profession. Or, rather, those who purport to pursue macroeconomics.

  2. The mere fact that they are so many theories for economics is an indication that it’s more a headache type issue than a simple bone break. With a bone break style economics, the way of controlling the economy would have been found soon after the invention of money.

    The problem with economics is that it’s not a simple study. It incorporates social theory, maths theory, political theory, business theory, plus a bit of spirit theory.

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