It is definitely a negatively focused piece – to celebrate what feels like a difficult Christmas for “economic analysis”.

“one of the good things to come out of the present crisis is that macroeconomists are being forced to confront the limitations of the last twenty year’s research agenda”

I completely agree – however, my concern is that if recent research appears too limited in scope there will be pressure to completely throw it out. Throwing the baby out with the bathwater so to speak.

It is the same thing that happened with Keynesian economics in the 1970’s, and classical economics in the 1930’s – the crisis refocused minds but also destroyed/misplaced some of the knowledge that was inherent in the school.

“The problem is that we macroeconomists have concentrated on the tiny bit of it that financial markets have deemed important, at the expense of a wider perspective. They have become obsessed with one class of models at the expense of a broader perspective”

A realisation that when we model we should be describing a situation which reality could be a subset of would be a key issue for all economists to understand – if we haven’t been doing this we require change, if we have then I don’t see a problem.

Ultimately, economics provides a good framework for explaining thing that have already happened – but I’m not sure that economists are the best people for explaining what will happen. Maybe there is another group of people with a “better” set of value judgments, who could apply them to our economic framework and improve the accuracy of forecasting. Isn’t this part of the justification for increasing multi-disciplinarianism.

Effectively, what we are currently experiencing in financial and now real markets stems from a “tipping point” type argument with some asymmetric information thrown in for good measure. Multiple equilibrium and tipping points create situations that do not provide clean results – but we can’t say that academic economists haven’t analysed them. Ultimately, part of the problem might be the dissemination of concepts from academia to the set of economists that try to make forecasts.

The problems with academic macroeconomics are legendary, and it may be that one of the good things to come out of the present crisis is that macroeconomists are being forced to confront the limitations of the last twenty year’s research agenda. We should celebrate the fact that neither optimising representative agent models nor poorly identified time series models have provided much insight into the current difficulties, because practioners are being forced to read again so that they can say anything useful about the current state of affairs. I hear rumours that central bankers are reading Bagehot (they should make sure they read chapter 8 on the difficulties encountered hiring central bank governors, as well as chapters 2 – 6 on credit crises)and investment bankers are reading Galbraith. Everyone is (or should be) rereading Bernanke on the Great Depression, Dybvig and Diamond on bank runs, Okun and Kahneman on the way firms set prices in a downturn, Goodhart on the useless nature of current monetary models, and even Summers on why he never learnt anything from time series techniques applied to macroeconomic data, because so little was properly identified.

It is not that there isn’t good macro out there: there are fantastic macroeconomists writing great papers. The problem is that we macroeconomists have concentrated on the tiny bit of it that financial markets have deemed important, at the expense of a wider perspective. They have become obsessed with one class of models at the expense of a broader perspective. As Leijonhufvud lampooned 25 years ago
“Among the younger generations, it is now rare to find an individual with any conception of the history of Econ. Having lost their past, the Econ are without confidence in the present and without purpose and direction for the future.” (“Life Among the Econ”, Western Economic Journal 1973)