{"id":3298,"date":"2011-09-10T12:19:25","date_gmt":"2011-09-10T12:19:25","guid":{"rendered":"http:\/\/meeseeks:5080\/blog\/?p=3298"},"modified":"2011-09-10T12:19:25","modified_gmt":"2011-09-10T12:19:25","slug":"the-macroeconomic-dark-ages","status":"publish","type":"post","link":"https:\/\/vukutu.com\/blog\/2011\/09\/the-macroeconomic-dark-ages\/","title":{"rendered":"The macroeconomic dark ages"},"content":{"rendered":"

Paul Krugman<\/a>, writing about the failings of macro-economists before and after the Great Recession, notes the wide social consequences of the pro-abstraction, anti-history turn in the study of economics this last half-century.\u00a0\u00a0 Sadly, this turn has been another instance of the dominance of Descartian autism\u00a0in western intellectual culture<\/a>.<\/p>\n

Early in 2009, when the Obama stimulus was under discussion, I was stunned to read statements from a number of well-regarded economists asserting not merely that the plan was a bad idea in practice \u2014 a defensible idea \u2014 but that debt-financed government spending could not, in principle, raise overall spending. Here’s John Cochrane:
\n
\n\u201cIf the government borrows a dollar from you, that is a dollar that you do not spend, or that you do not lend to a company to spend on new investment. Every dollar of increased government spending must correspond to one less dollar of private spending. Jobs created by stimulus spending are offset by jobs lost from the decline in private spending. We can build roads instead of factories, but fiscal stimulus can\u2019t help us to build more of both. This is just accounting, and does not need a complex argument about \u2018crowding out.\u2019\u201d
\nI won\u2019t go into detail here about why that’s wrong. Let’s just say that statements like this reveal a complete ignorance of almost 80 years of macroeconomic analysis. Even the simplest multiplier model tells you that while it’s true that S<\/em>=I<\/em>, that equals sign cannot be replace with an arrow running from left to right.
\nBut what became clear in the policy debate after the 2008 crisis was that many economists \u2014 including many macroeconomists \u2014 don\u2019t know<\/em> the simplest multiplier analysis. They literally know nothing about models in which aggregate demand can be determined by more than the quantity of money. I\u2019m not saying that they have looked into such models and rejected them; they are unaware that it’s even possible to tell a logically consistent Keynesian story. We\u2019ve entered a Dark Age of macroeconomics, in which much of the profession has lost its former knowledge, just as barbarian Europe had lost the knowledge of the Greeks and Romans.
\nAs long as monetary policy could bear the burden of macroeconomic stabilization, this didn\u2019t seem to matter too much: even as equilibrium business cycle theory became increasingly dominant in graduate study, central banks, like medieval monasteries, kept the old learning alive. But once we were hit with such a severe banking and balance sheet crisis that monetary policy hit the zero lower bound, it was crucial that the economics profession be able to weigh in knowledgeably and coherently on other possible actions. And it turned out that it couldn\u2019t.
\nYou often hear people saying that the crisis has revealed the need for new economic thinking, for new ideas about macroeconomics. Yet the first priority seems to be to resuscitate old ideas. Brad DeLong describes an interview of Larry Summers by Martin Wolf as follows: \u201cAsked to name where to turn to understand what was going on in 2008, Summers cited three dead men, a book written 33 years ago, and another written the century before last.\u201d And in my view, Summers basically got it right.
\nHow did all this knowledge get lost? Well, being the age I am, I was able to watch the transformation of macroeconomics in real time, and I\u2019d say that what happened was a runaway social process.
\nFirst, success in academic economics came from publishing \u201chard\u201d papers \u2014 meaning papers that used rigorous and preferably difficult mathematics. This in itself biased publication toward equilibrium business cycle models, as opposed to the ad hoc<\/em> modeling typical of what I consider useful macroeconomics. Graduate education, in turn, became increasingly focused on the kind of work that could get published and lead to tenure. Successive cohorts of students were trained only in the newly rigorous version of macro, which had lost touch with the field’s previous intellectual achievements.
\nAnd as these cohorts became professors in their turn, they closed off both publication and promotion to anyone who questioned the dominant academic approach. Robert Lucas wrote more than 30 years ago \u2014 approvingly! \u2014 about how participants in seminars would \u201cwhisper and giggle\u201d when someone presented a Keynesian analysis. No wonder that any non-equilibrium ideas dropped out of the curriculum and the conversation.
\nAll of this would have been OK if the triumph of anti-Keynesianism was justified by superior empirical success. But it wasn\u2019t. As I read the history of the equilibrium approach, it’s a story of failing upward. Lucas-type models clearly failed to account for the duration of slumps; rather than reconsider flexible prices and rational expectations, Lucas’s followers moved on to real business cycles (RBC). RBC models failed to generate any strikingly successful predictions, and in fact lost whatever plausibility they had once productivity started becoming pro-cyclical rather than counter-cyclical. But by that time the people doing these models didn\u2019t know that there was any alternative.
\nAnd the result was that faced with a severe economic crisis, the profession spoke with a cacophony of voices. Or maybe a better way to put it is that the policy debate of 2009\u20132010 was virtually indistinguishable from the policy debate of 1931\u20131932. Long-refuted doctrines that should have been consigned to the dustbin of history were stated as if they were fresh new ideas \u2014 and they were fresh and new to many economists, because our profession had lost so much of its heritage.
\nIn short, in responding to the crisis, the profession presented a sorry spectacle of unnecessary ignorance that didn\u2019t even recognize itself as ignorance, of bitter debate over issues that were resolved many decades earlier. And all of this, of course, made the profession mostly useless at a time when it could and should have been of great service. Put it this way: we would have responded better to this crisis if macroeconomics had been frozen at the level of knowledge it had in 1948, when Paul Samuelson published the first edition of his famous textbook. And the result has been to leave actual policy discussion without any discipline from the people who should be shaping that discussion: politicians and officials have been free to follow their prejudices and intuitions, never mind the lessons of history and analysis. Economists have failed to fulfill their social function.”<\/p><\/blockquote>\n

Reference:<\/em>
\nPaul Krugman [2011]:\u00a0 Presidential Address: The Profession and the Crisis<\/a>.\u00a0\u00a0\u00a0Eastern Economic Journal, <\/em>37:<\/strong> 307\u2013312.<\/p>\n","protected":false},"excerpt":{"rendered":"

Paul Krugman, writing about the failings of macro-economists before and after the Great Recession, notes the wide social consequences of the pro-abstraction, anti-history turn in the study of economics this last half-century.\u00a0\u00a0 Sadly, this turn has been another instance of the dominance of Descartian autism\u00a0in western intellectual culture. Early in 2009, when the Obama stimulus […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[25,31],"tags":[],"class_list":["post-3298","post","type-post","status-publish","format-standard","hentry","category-economics","category-global-economic-crisis","p1","y2011","m09","d10","h12"],"_links":{"self":[{"href":"https:\/\/vukutu.com\/blog\/wp-json\/wp\/v2\/posts\/3298","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/vukutu.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/vukutu.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/vukutu.com\/blog\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/vukutu.com\/blog\/wp-json\/wp\/v2\/comments?post=3298"}],"version-history":[{"count":0,"href":"https:\/\/vukutu.com\/blog\/wp-json\/wp\/v2\/posts\/3298\/revisions"}],"wp:attachment":[{"href":"https:\/\/vukutu.com\/blog\/wp-json\/wp\/v2\/media?parent=3298"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/vukutu.com\/blog\/wp-json\/wp\/v2\/categories?post=3298"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/vukutu.com\/blog\/wp-json\/wp\/v2\/tags?post=3298"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}