Wednesday, March 29, 2017

Mainstream macro is the worst form of macro, except for all those other forms

But these same economists then invoke ‘economics’ in a similar way to justify their own policies. In my opinion, this only reinforces the dominance of economics and narrows the debate, a process which is inherently regressive. ... Reclaiming political debate from the grip of economics will make the human side of politics more central, and so can only serve a progressive purpose.
Unlearning Economics (emphasis mine).

I have read the debate between Unlearning Economics (UE) and Simon Wren-Lewis (and joined by Brad DeLong) about the criticism of mainstream macroeconomics with what could only be described as a sense of growing dread. I am coming from a place where I believe there is much to criticize about how macroeconomics has been practiced, but also that the criticisms (as well as the alternative ideas) that have popular traction replicate some of the exact same problems just from a different viewpoint (or just make little sense from a scientific viewpoint).

I originally wrote a much longer post, but then thought I'd condense it to three main points. And then that was too long, so I decided to condense that post into this even shorter one that only tries to make one point.

UE seems to believe that the outcome of a more human political economy will be progressive policies; I could not disagree with this conclusion more. The outcome of a more human political economy will be zero-sum policies, populism, oversimplified heuristics, and just-so stories. More generally, it would be motivated reasoning in favor of conclusions justified by human gut instincts. You don't need academic macroeconomic theory to do this. 

In fact, many examples UE cites of mainstream macro being harmful are precisely examples of human-political macroeconomics:
  • Mainstream academic macro told us that "austerity" was bad. It was really the human-political approach i.e. looking at (at the time) extremely recent non-peer-reviewed working papers (the infamous Alesina and Ardagna paper was from October of 2009, the infamous erroneous Reinhart and Rogoff paper was from January of 2010) that buoyed the case for austerity.
  • The impacts of low inflation targets could be considered entirely a human-political result. People want low inflation because they think inflation is bad (and use the good begets good heuristic). Mainstream academic macro is much more mixed on the subject.
  • The free trade and Friedman/Pinochet stories are entirely human-political macro. One thing that I believe is forgotten is that those right-leaning economists of the Chicago school genuinely believed that their ideas would help bring people out of poverty. Friedman's philosophy was that free trade and free markets made free people. He probably would have called it progressive if given the choice between progressive and regressive. Regardless of whether this is true or not (I personally don't believe it), this is an example of the human side of politics being more central and not serving a (left) progressive purpose. And it is zero-sum human-politics that fills the void if mainstream academic macro is excluded.
  • Although it isn't macro (but rather finance), effectively blaming LTCM's failure on the Black-Scholes equation misses the source of the failure. The equation is only valid (has scope) over time periods where asset prices are approximately random walks. If it was the equation, it was the human side that ignored the academic caveats.
In fact, there are many places where UE points out that mainstream academic macro doesn't actually say the things that are supposedly econ gone wrong ("I’ve always acknowledged that economists themselves are probably more progressive than they’re usually given credit for" ... "The economics textbooks may be against monopoly" ... "[mainstream econ's] more complex economic models ... do imply that trade will harm some people while benefiting others" ... "Economists may complain that economic ideas have been misused by vested interests" ... "[Wren-Lewis] complain[s] (perhaps correctly) that these are inaccurate representations of the field").  If we ignore the defense's case, mainstream macro sure does appear guilty.

This is not to say that there aren't problems with mainstream academic macro. As DeLong says, Reinhart and Rogoff "came from inside the house!" We should also think of Max Planck's quote [1] when it comes to mainstream academic macro. The fact that the generation of mainstream academic macroeconomists who think that monetary policy is always better than fiscal policy because they were working during the 1970s haven't died yet doesn't mean that academic macro favors regressive policies (and as Noah Smith and UE point out it is actually much more progressive than many critics think). Coupled with the need for long time series, the paucity of empirical data, and the political ramifications of macro results we should always take the conclusions of mainstream macro with a grain of salt. But that doesn't mean we should fill the void with heuristics, zero-sum thinking, and just-so stories that come from the human side of politics.

Paraphrasing Churchill's comment on democracy:
Many forms of political economy have been tried, and will be tried in this world of sin and woe. No one pretends that academic macroeconomics is perfect or all-wise. Indeed it has been said that academic macroeconomics is the worst form of political economy except for all those other forms that have been tried from time to time...
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Footnotes

[1] "A new scientific truth does not triumph by convincing its opponents and making them see the light, but rather because its opponents eventually die, and a new generation grows up that is familiar with it." (Max Planck)

2 comments:

  1. The analogy with Churchill's comment doesn't sound very appropriate since reproducing such statement when referring to abstract theories or defining models, appears more arbitrary. And actually neither is it true. Mainstream economics is mostly a collection of non sense and non scientific claims and pseudo models giving legitimacy and authority to astrology, which is more serious. There is no any chance they can get any idea about capitalism and the way it works. However, they are quite effective with regard to manipulating ideologically the understanding of economy. The so called neoclassic theory that should be named anti classic had the goal of inventing an unreal world, distracting, and discarding the classics. It happened that the inmates have taken over running the asylum and are lecturing everybody.
    Maiko

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  2. Unlearning Economics and Simon Wren-Lewis are as bad as each other IMHO. Both employ partisan arguments (like lawyers) while claiming to be doing science as they use facts and models. Lots of people use facts and models without claiming to be scientists. Science is more that facts and models.

    They also continually blame other people for the lack of social acceptance of economists as scientists. Unlearning blames economists like Wren-Lewis. Wren-Lewis blames the media, politicians and economists who work in finance.

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