The death of macroeconomics

Here\’s a thought. May be the problem is not with the maths or stats of macro but with the actual idea of macro itself. May be aggregate economics just doesn\’t work, we lose too much valuable information in the process. May be the costs of aggregation are just too high, we need to look at the micro level for solutions to so-called macro problems. For example unlike the macro-level data, micro-level data provides little evidence in support of Solow\’s productivity paradox to do with the effects of computers in the economy. While the macro level data can tell us that something has changed, as it did mid-90s in the U.S., it can not tell us what changed and why. The productivity data is the aggregated result of changes at the micro level, in this case at the level of the firm. Such changes require a microeconomic explanation. Would it not be better if we were to go back to thinking about issues like unemployment and monetary theory as microeconomic issues. We could see unemployment as a problem to do with labour markets and interest rates as relative prices, monetary policy as having to do with the supply and demand of money etc. Do away with teaching students AD/AS analysis from day one and just teach them about markets and consumers and producers instead.

As I\’ve said before, I don\’t know much macro. Partly because I really don\’t get the math used, partly because, well, partly because I\’m not convinced by the basic idea.

It is indeed sometimes true that things behave differently at the macro than the micro level: Newton\’s a great guide to planetary movements but what goes on at the quantum level is quite different.

But I\’m not entirely convinced that that economics is like that. Certainly, over the long term, it really is all micro. Today\’s level of interest rates, exchange rates, inflation, unemployment rates, they\’re going to have between very little and sweet fuck all influence on the economy of 2060. The incentives that people face, the nuts and bolts details of regulation, taxation, relative prices, these are going to be what will determine that 2060 economy.

But there\’s another reason I\’m really not all that fond of macro: the uses to which it is put. Or the use, which is to tell politicians what they should do. And given my entire lack of trust in politicians to do the right thing, I\’d rather they didn\’t even try. I\’d prefer that they concentrate on those micro things, most especially that they concentrate on not screwing up prices, incentives and all the rest, as a result of their grand plans.

It\’s all a bit John Cowperthwaite really. He wouldn\’t let anyone collect GDP figures for Hong Kong because he was aware that people would only try and do things with them. Given that everything seemed to be going just fine without anyone doing anything with GDP figures, best to not let the fools have any peg to hang their hats for action on.

So it is with macroeconomics in my more cynical moments. We don\’t want to study it because politicians will only use it as an excuse to do things.

9 thoughts on “The death of macroeconomics”

  1. I have long believed in a parallel – that we obsess about strategy rather than focusing on tactics. Business – and other organisations – spend time and monet on grand planning while ignoring the detail. As one colleague put it:

    “Damart’s strategy is ‘we are a mail order company’ – everything else is tactics.”

  2. “The only function of economic forecasting is to make astrology look respectable. “

    John Kenneth Galbraith
    US (Canadian-born) administrator & economist (1908 – 2006)

  3. Agreed. People interested in micro-economics (how stuff actually works) tend to be ‘free market liberal’ and people who are interested in macro-economics (aka ‘one sided economics for beginners’) tend to be politically motivated (whether left- or right-wing is immaterial).

  4. I used to think it was because I was like Barbie Doll. “Maths is Haard!”
    Now I think it’s just bunk.
    Partly because of the measures used. GDP is misleading, when hiring an extra one-legged effnik dance coordinator adds to GDP while a useful invention decreases it.
    As for Keynes’s notion of deficient demand, gimme strength… or at least gimme your land, your money, your women, your twitter account, your plastic surgeon…

  5. Tim (and everyone else): you’re beginning to appreciate that the Austrians have been right all along and most especially for about the last 90 years.

    All–100%–of “economic policy” consists in attempts to counteract the outcomes of normal market activity/function beyond the strictures of ordinary common civil and criminal law (and even part of which–such as the control of money and monetary matters–cannot but, ultimately, interfere negatively in the common good.

  6. The majority opinion is probably that macroeconomics, as has been practised, has served to justify politicians not doing things – as intellectual cover for a laissez-faire, you’ll only make it worse, philosophy.

    Conversely, microeconomics, the study of industrial organization, innovation, oligopoly, market failures, information problems, externalities etc. gives plenty of scope for government intervention.

    and as for why study macro – it’s the difference between partial equilibrium and general equilibirum, innit – it’s for when the assumption ‘holding everything else constant’ isn’t appropriate and you need to think about feedbacks etc.

  7. Gene Berman: All–100%–of “economic policy” consists in attempts to counteract the outcomes of normal market activity/function beyond the strictures of ordinary common civil and criminal law

    I find myself in the odd position of at once both wanting to disagree with you, and also wanting to say “d’uh, isn’t that obvious”. To indulge the first impulse, proposals for free trade are both economic policy, and are an attempt to let the outcomes of normal market activity, by restraining ordinary common civil law (trade barriers are exceptionally common, I believe there was an attempt to rescue Queen Mary of Scots that foundered because customs stopped the would-be rescuers over insufficient paperwork). Furthermore, there is the econonomic policy that looks at the strictures of ordinary common civil and criminal law.

    And now for my second impulse, of course the point of a lot of economic policy is to counteract the outcomes of normal market activity, eg the introduction of ITQs into open-access fisheries. The point of regulation has been to avoid fish depletion, and this has moved beyond the strictures of ordinary common civil and criminal law. So what’s your point?

    and even part of which–such as the control of money and monetary matters–cannot but, ultimately, interfere negatively in the common good.

    Awfully confident, aren’t you?

  8. Tracy W.:

    I’ll begin at the end: yes–I’m awfully confident
    (Being right so consistently and over such a long period of time–nearly 50 years–tends to do that to one.) The important thing–insofar as my own connection with economic knowledge is concerned–is that I found myself, an adult, with no economic knowledge or understanding whatsoever, making some “outrageous” predictions (based entirely on what seemed to me rather simple observations) branding me as some sort of lunatic. And then, when, in quick succession, a number of my predictions came to pass, it dawned on me that “something big” was going on of which my attention had been drawn only to the most (to me) obvious. More by luck than anything else, I stumbled on Mises and the Austrian School–and that’s where I’ve stayed.

    To go back to your beginning–you’ve got it just about right. There’s nothing sacred about either the “market” nor the “private property order.”
    Both are, essentially, tools of human ingenuity–intended for specific purposes; both evolved (I would posit, though cannot claim to “know”) in history by consensus-driven changes. They’re
    related (!) systems–each subject to disruptions in the other.

    The animal, homo sapiens, can undoubtedly exist without the institution of private property. Indeed, we are born without any of the stuff and depend on others to furnish all that might be required. If lucky, we live to such advanced age that similar care must be taken lest we demise prematurely. But the major span of lives of men is bound up with certain things: food, clothing, shelter, a variety of implements. We call a man FREE if he, himself, has essential control of the items on which his existence depends; if he doesn’t, then he isn’t. We can’t prove (nor dis- prove) such a thing from anthropological or archeological evidence but man seems, from nearly the beginning, to have been concerned both with his stuff and his freedom. Private property law (including custom) has evolved ever since, each shortcoming giving rise to what economists call an “externality.” The problems might seem novel–but they’re not, really; they just mean another trip “back to the drawing board.”

    The market–trading with others for what one lacks–whether with those nearby or from afar–
    is some mens’ answer to the existential question: how to attain his desires for things the quantity of which do not permit full satiation because of others like himself whose desires for those same things must conflict with and diminish his own potential for satisfaction.

    Men can (and do) compete for best attainment of these satisfactions. The most primitive reaction we can equate with the competition observed throughout lower forms . Kill or drive off the other to get unrestricted access (though lower forms generally accomplish this without overt violence: a mutation attains an advantage and the competing form starves).

    Men can kill one another to get what they want; they always have, maybe always will. But with exception of some no longer existing about whom we know not, most are capable also of appreciating the fact that such course involves risks–if not immediate, then in the future and, if not from this particular potential victim, then another. He may even wind up kill-ee instead of kill-er. Prudence (fear) alone may suggests compromise. Moreover, men are capable of observing (whether as a result of such compromise or, perhaps, even earlier) that the total satisfactions to be produced as the result of compromise may range from a low just below that formerly felt adequate (now enlarged to extent of the risk-reduction) up to an amount neither would have ever been able to attain even by eliminating the other. Indeed, a brand-new
    satisfaction–“peace”–formerly unknown and impossible to attain–may be widely available.
    From this recognition, men compete in a different way (Mises’ term is “catallactic”–price–competition). They compete to determine who gets the job he wants most (usually because it “pays more”–but not always–sometimes simply because it gives him a greater amount of a variety of things he prefers).

    So, each works at what he does or likes best and gets more of what he originally wanted. Pretty soon, monkey see, monkey do, ever’body’s doin’ it–specializin’ up a storm. And before long, you’ve got a whole fucking CIVILIZATION going on. What’s not to like?

    People create laws by consensus. Government
    is instituted to enforce the laws so that people needn’t resort to violent action similar to the pre-civilized condition but which is occasionally required to defeat and discourage “malefactors” both from without and within. Markets, whether
    small or large, require no sort of law other than that characteristic of other aspects of life; some have to do with the fulfillment of contracts–we call them “civil” law; others have to do with suppression of force and fraud: we call those “criminal” law.

    “Policy” is an entirely different matter. It is an attempt to bring about a condition different from the “unhampered” market. Policy is “anti-market law”: attempt to achieve outcomes on the market different from those the market would have determined.

    Policy does not “work.” That is one of Mises’ enormous intellectual discoveries–all made about 90 years ago–but yet minimally recognized today. I’ll mention all three discoveries: 1.) that economic calculation is impossible under socialism; 2.) that “policy” cannot achieve the anti-market goals of the policy-proposers and must (always) produce results worse–in the estimation of the policymakers, themselves, than the conditions they hoped to “correct” through their policy; and, last (and MOST importantly): 3.) that the only “cures” for the negative effects of policies are either abandonment of the policy in favor of the market OR “strengthening” of the policy by stronger (and usually more widely-applied) policy, with each increment approaching more closely to a state of totalitarianism (in 1920,
    Mises said, simply,summing up: “There is no ‘Third Way’ “–the gist of which formed the thesis for Friedrich Hayek’s Nobel-Prizewinning masterwork, THE ROAD TO SERFDOM.

    Gene Berman, an armchair economist, has a practical corollary to Mises’ discoveries:

    All governments are, essentially, socialist; they suffer, like any other socialist entity, from an inability to perform economic calculation (due to their “assets” not being on the market and subject to determination of profit/loss/ROI, etc.). The only way in which the (any) gov’t. may be rendered relatively incapable of wreaking damage is to keep it comparatively small, as uninvolved as possible in any activities other than its primary function, and severely constrained to such function (as by adherence to constitutional processes).

    But (and most especially), the ONLY real constraint people may exercise against their government is to deprive it –legally–of the means–the funds–with which to do further damage. That includes, when necessary, a refusal to permit “deficit financing” of its budgets and obligations. Only in this manner may a government be prevented from the wholesale decumulation, via consuption, of capital accumulated over generations and even centuries.

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