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.