But what are theses variables and relationships that have such mathematical precision? Consider V, velocity. Velocity is the residual of the measurables nominal income and money. Thus, the derivative of V with respect to i (the interest rate) is really from the derivatives, and their correlations, of nominal income and money. Are either of these stable in any sense (d(PY)/di, dM/di)? No. They have no stable values and suggest they are no better than asserting a mathematical relationship between your body temperature and how much coffee you drank based on thermodynamics: there\’s a simple effect from the initial impact, but very shortly feedback effects that make the initial physical model worthless.
And so it goes with all these relationships. The economy is a complex, nonlinear, adaptive system where short run effects are often opposite of long run effects.
In short, an interesting theory, this macroeconomics lark, but not all that much use to anyone.
No, not the Keynesian version, the RBC, New Classicals, New Keynesians and so on, it doesn\’t depend upon which flavour. Just the discipline itself, just not very useful.
Concentrate on the micro and to any useful level of accuracy, things will sort themselves out.
macro – in this sense – is about the short-run, recessions. I don’t know what “concentrate on the micro” and “things will sort themselves out” means in this context. Does “sorting themselves out” involve millions of extra people being unemployed for a few years? If so why should we be content with that?
it’s all very well carping on about non-linearity and feedbacks, but macro is about thinking about feedbacks etc. and trying to understand why recessions happen and what if anything can be done about them. What are you asserting, that doing “nothing” is the best of all possible worlds? And when the government comes to choosing its budget, what does doing “nothing” or just “thinking about the micro” entail?
Tim adds: OK, another way of making the point. Don’t screw up the micro (prices, incentives etc) in order to deal with perceived macro problems.
Do you think the government should have a monetary policy or is this some kind of private-currency argument?
same question as Matthew: what does “not screwing up prices” say about the interest rate?
[I don’t see that temporary expansion of government borrowing and spending to offset private sector contraction is “screwing up prices and incentives” terribly]
I’m studying macro (as a compulsory part of an MBA) and couldn’t agree more.
it’s all very well carping on about non-linearity and feedbacks, but macro is about thinking about feedbacks etc. and trying to understand why recessions happen and what if anything can be done about them.
We know why recessions happen. They happen when there is a rapid mass change in the subjective appreciations of values in the economy, causing some goods which were previously thought to be of high value to be reappraised as being of low value, thus causing a collapse in the industry(ies) producing them.
E.g. houses, dot coms, whatever.
The only thing you can then do is let the economy readjust to the new value state and, if you are kind, hand out some welfare to stop all the people who were producing the now useless goods starving until they can find a new job in the new state of the economy. You can fiddle with the money equation until your palms go hairy but it won’t give you a better answer, because recessions are nothing to do with aggregates of output or anything else, they’re due to a rapid change in specific goods values and no matter how much money you pump in, nobody is going to revalue those goods back to their old values; because they’ve realised they were worthless after a delusional period thinking otherwise.
Ian B
you make some assertions about why recessions happen and what can be done about them – how did you form those opinions, without thinking about macroeconomics? If you are correct (which I do not think you are) that knowledge would be useful. That’s not “not doing macro” that’s doing macro and coming up with particular answers.