Timmy elsewhere

At the ASI.

We don\’t know much about macro but we do about micro: so let\’s concentrate on getting the micro stuff right, eh?

13 thoughts on “Timmy elsewhere”

  1. Well, because there isn’t really any macroeconomics, certainly not of the kind it is intended to be; in which certain aggregate variables can be associated by precise arithmetical formulae and manipulated. It simply doesn’t exist. You can measure things; you can measure employment, or the price level, or production in money units. But you cannot measure any of them to any significant degree of accuracy, nor can the relations between them be described by arithmetic. It just doesn’t exist.

    All you can make are general statements; if the money supply increases, prices will generally tend to rise, but you cannot say which prices or by how much. You can say that investment in productive facilities is a generally good thing, but you cannot describe how much aggregate production will increase in any particular economy due to some increment of aggregate investment. It is not lack of data which is the problem, or insufficiently refined formulae; these things are simply intrinsically unknowable.

    Macro-economics is a pipe dream born more than a century ago; a fallacy that by understanding processes, central planning could do better than the market. It is the same dream as a gambler trying to “beat the house”; believers in both fields are very reluctant to give up their dream.

    This is why the Austrian School rejects the concept of “macro” and with it, the tarot-reading of econometrics, and why the other central planning focussed “schools” reject the Austrian approach. All we can really say is generalities, in particular that every attempt to drive the economy on a straight path simply introduces more chaos and instability.

    You can’t beat the house. Reality is a bitch.

  2. Getting the micro stuff right is a very good idea. But the government still has to make macro-economic choices. There’s no neutral strategy.

    The Austrian School says that since all models are imperfect (which is true) and all data are noisy (also true) it’s best to throw them away and follow the guesswork of the Austrians instead (which somehow appeals more to them than to the rest of us).

  3. Paul,

    Except the point is, none of the macro-economics works. You may have noticed that recently. And in the past. The Austrian School isn’t saying that the models are “imperfect”. It’s saying that they aren’t models of the real world. They don’t work at all.

  4. Conventional medicine doesn’t work – everyone still dies. So we should obviously ignore all the evidence and take up homeopathy instead.

  5. Paul, macroeconomics is more like homeopathy in your analogy, or religion. Just because people want it to be true, and give them something better than reality can deliver, doesn’t mean it is true.

    Conventional medicine works fine, but accepts its limitations. It can’t cure all cancers, it can’t save everybody, and in the end everybody dies. That’s accepting the limits of the real world. Governments and their economists need to accept the existence of similar pragmatic limitations. It’s statist economics that gives people water, and tells them it’s the right medicine.

    A better metaphor might be providing people with a variety of variously poisoned waters and telling them it’s medicine, but now our metaphor is stretching to a breaking point.

  6. Ian B, not sure I follow. Govts have to decide how much to tax, whether to spend on certain things etc. Central banks need to decide what base rate to set. Can/should such decisions be taken without any consideration of macroeconomic effect? (no dispute that they should be humble about how certain they are)

  7. Luke,

    Governments tax as much as they think the population will stand; the decisions are more about losing votes or driving certain classes abroad or what have you. There isn’t any real theoretical basis for how much to tax, or whom. Some cultures (e.g. Scandinavia) are more tolerant of taxes for ideological reasons than others (e.g. USA). There isn’t a “right amount of tax” equation.

    The Austrian School (which I loosely follow) is resolutely against central banks and centrally set interest rates; our argument is that this system is fundamentally broken and there is no “correct” central bank interest rate. As we’ve seen recently with the property sector disaster. It is price fixing, and the one guarantee of price fixing is that it will always make matters worse than there would have been without it, by preventing market prices adjusting to the conditions experienced, subjective value judgements, and preferences by the individual economic agents.

    In other words, rather than chase the fool’s gold of the “correct economic policy”, governments need to learn not to have one at all, particularly as regards running State central banks.

    As it stands with the current system, for all the central bankers’ pomp and solemn words regarding macroeconomics, the numbers they pick for a central bank rate do no better than random. Stable prosperity has always been finally achieved, right up until the next financial collapse occurs.

  8. Ian B, I’ll leave out central banks as I have no idea what would happen, for good or ill, without them.

    But tax – I’ll grant that big factor is what govts think they can get away with, but are you really saying that no govt has ever cut taxes ‘cos it thought that would boost the economy (or that no govt ever should)? Reagan, Lawson cutting to 40% (most beneficiaries were hoping for 50%). Bush?

  9. Luke,

    Sure they have, and it probably did boost the economy. The Austrian argument is not that you cannot know anything about economics. It is that you cannot make specific predictions; so economics as a discipline just offers general advice, such as “don’t tax more than you have to” and “don’t fix prices”.

    Macroeconomics purports to offer mathematical methods by which specific predictions can be made and thus the economy driven towards specific economic targets. The argument is that that is fallacious. There are general economic principles, but the models are a mirage. The worst part is that these misleading models have everyone expending vast amounts of useless effort, and frequently making things worse, arguing about which illusory lever to pull in which direction.

    You can see this at the moment with planner saying “if we do this it’ll boost the economy” and it doesn’t and “growth will be X next quarter” and it isn’t and “where did this “double dip recession” come from? We weren’t expecting that!” and “we’ll do some QE but it won’t cause inflation because we’re in a deflationary phase”, but it does, and so on ad nauseam.

  10. Ian, you do use an extraordinary number of words to say “macroeconomics is imperfect, so it’s better to let Austrians guess what to do.”

  11. Paul, you do have an incredible capacity for ignoring what has been said. So I’ll restate the point, clearly made, very briefly.

    “Macroeconomics isn’t imperfect. It is wrong.”

  12. Thank you Ian. Your statement is clear, but it’s not very meaningful. Macroeconomics is not a single prediction, it’s a field of study. And you must mean something non-obvious by “wrong”, because an indicator that’s always exactly wrong is as useful as one that’s always exactly right: consider for example a compass that always points due south.

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