A third is economic competence. I would love a commonplace comprehension of modern monetary theory, but even some awareness that macroeconomics is not microeconomics grossed up would help. The trouble is, most who call themselves macroeconomists don’t get that last point and so fail to appreciate that macro us usually the opposite of micro, to which it provides the double entry in a great many cases.

This is actually one of the great controversies within economics. Do macro theories have to be based upon aggregations of micro? Or not?

This is actually important. For example, so, we have some Keynesian stimulus – and you can extend this if you like, to monetary stimulus, QE, whatever – and what’s the effect of it? We’ve not got enough actual examples of this to be sure at that “We did stimulus, therefore the effect is”. A handful of economies over a few decades, not much more than that, for detailed economic numbers. Given the complexity of economies that’s not enough data for us to be able to tease out, with any certainty, what actually happens.

Sure, we’ve got some theories but they do need to be road tested against reality.

So, think micro for a moment. Say Friedman is right about permanent income hypothesis. We’ve all got an idea of what we’re going to earn in the future, we’ll save or spend according to that idea we’ve got of what lifetime earnings will be and we’re trying to spread it over that time that we live. This is obviously true at some level – no one would save for a pension if this were not so. But how much is this true? Do temporary changes in income lead to no, small, medium, large or total changes in spending habits?

Or a refinement. If we observe that the increase in income has come from deficit spending, then we’re going to have to pay the tax to make it up (or, for QE, we’re going to be taxed through inflation, say) do we spend the money or save it to pay the future tax bill? Ricardian Equivalence that is.

The answer to the second is a very few of us yes either way, most of us a bit either way and how much changes with the times. Not all that useful an answer as a method of calibrating the effect of deficit financed stimulus but there we are, that’s just reality for us.

This whole thing is one of he great scholastic arguments within economics. Of course macro cannot be entirely inconsistent with known attributes of human behaviour at the micro level. Further, macro has some attributes – the paradox of thrift perhaps – where we know that simply summing micro isn’t quite the point. But how much is this true, when and where?

But Snippa knows and has declared. We’re all looking forward to that trip to Stockholm of his, aren’t we?

7 thoughts on “Sigh”

  1. This is priceless

    ‘Another is competent politicians. Electoral reform plus the requirement to negotiate coalitions, and to establish priorities and policies as a consequence, would solve that. In Europe only Belarus shares our absurd commitment to absolutism that so debases political competence.‘

    Boris is Alexander Lukashenko – just read through the whole of the entry on Scotland – fair play to Kevin Hague saying Murphy ‘can’t do arithmetic’ – if only that were his sole limitation – more people need to call the guy out on his truly stupefying ignorance of all aspects of politics and economics

  2. This whole thing is one of he great scholastic arguments within economics.

    Maybe they’d do better getting a proper job. Macroeconomics, astrology for the 21st century.

  3. Bloke in North Dorset

    This is actually one of the great controversies within economics. Do macro theories have to be based upon aggregations of micro? Or not?

    If macro isn#t the aggregation of micro what do they refer to that aggregation of micro as?

  4. “This is actually one of the great controversies within economics. Do macro theories have to be based upon aggregations of micro? Or not?”

    Wasn’t the correct answer: “It depends on the level of detail of the thing you’re looking at.”?

    Like in fluid dynamics, real climatology, biology, and a host of other sciences using the same type of math, at certain levels of aggregation, the micro stuff becomes mere background noise compared to the general tendencies.

  5. @Grikath

    I think not, if you’re suggesting the “correct answer” has been arrived at, since I don’t believe economics is anywhere close to that point yet. Pretty sure there’s no simple consensus like a simple “oh it just depends on your desired level of detail” (non-)answer, and as Timmy says the point about e.g. whether every macro theory really needs microfoundations to be useful, or even can be explained in that way, remains actively contested. Ken (or one of the other econ profs who occasionally visits this site) would be far better-placed to comment on that than me, of course.

    See e.g. http://noahpinionblog.blogspot.com/2012/03/why-bother-with-microfoundations.html which attempts to look at several modern-ish angles on the question.

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