Macroeconomics may have incentive problems, and there may be a lot of room for improvement or refocus, but I think saying that “contemporary macroeconomic theory has failed” is going too far.
Now, I’ve shown myself to be no fan of some of the economics that has, and will, be performed – I quoted approvingly when Dani Rodrik said that some economists had abused the theory. Similarly I nodded my head when Arnold Kling said the same thing. When Agoraphilia pointed out that the “rational expectations hypothesis” is constrictively narrow (namely in how it treats beliefs and expectations) I jumped around in an orgy of agreement.
However, I don’t think we can call contemporary macroeconomics on its predictive failures and then not attack the rest of the economics discipline on similar grounds.
“Macroeconomics” as a discipline is a fishy animal. According to Wikipedia macroeconomics is the study of the whole national economy. This definition isn’t particularly useful for me – given my belief that all economic systems can be reduced to the actions of individuals. In such a framework macro is merely a subset of micro.
Contemporary macroeconomics has always been explained to me as “applying economic tools to explain stylized facts about the general economy”. In this case people have realised that, even though macro is theoretically a subset of micro, the complicated strategic interactions involved make it difficult to start from the micro structure and move up without more specific information.
The information to frame our analysis then comes from “long-run stylized facts about measured economic variables”.
Now contemporary macroeconomics has made a good showing of explaining these stylized facts – and building a framework that explains them that is consistent with more fundamental economic intuition.
If you don’t believe me about this description, pick up a graduate (or even most undergrad) macro text books from the last 20 years – I bet it starts with a section on stylized facts. If it doesn’t, it will start with a micro description which will implicitly respresent some type of stylized facts.
But macroeconomists didn’t foresee the crisis – so they failed
The focus of macro has been on EXPLANATION, not on prediction or policy prescriptions. Sure there have been economists who have taken that extra step, added some value judgments, and made bad calls – but this failure does not mean the contemporary macro has failed in its goals.
But the goal of macro should be to predict short term fluctuation
Now, if we actually believed the goal of macroeconomists is to predict – not describe we can call them failures in some sense.
But I am trying to understand what discipline would be a success when looking at its predictive accuracy instead of it’s descriptive accuracy. Other economics schools definitely can’t say that they provide massively superior predictions to macroeconomists – financial and microeconomists are consistently releasing papers with relationships that seem to break down as soon as the paper comes out, developmental and growth economists hardly have a track record for accurate descriptions let alone predictions, and behavioural economists are still working on measurement issues.
For the past five years macroeconomists have “under-estimated” growth, because it was above what their stylized facts were telling them. Now they are “over-estimating” growth because it is below what these stylized facts suggest.
There are definitely issues with the models, and better ways that macroeconomists can do things. There is even the possibility for macroeconomists to realise the limits of their own models – something that would go quite a way to improving the economic advice they give 😛 . However, even with all this, I would not term contemporary macroeconomics a failure.
Note: I would also like to point out that I can’t see how anyone can predict things without information – the information economists work with in incomplete (no-one could see Lehman’s balance sheet) and often quite old (there is data from the 90’s that still gets revised). How it is possible to “predict” short-term movements without knowing what happened a year ago it beyond me.
Well then why have economists dropped the last 30 years of research to explain things!!!
Simple, they haven’t. The last 30 years has seen macroeconomists define their field more strongly and begin working on a mathmatical framework for viewing issues.
However, outcomes depend so so so so strongly on subjective assumptions by modellers – as there are just so many issues that we can’t come up with nice objective models for.
The divergence of opinions you hear from all these professional macroeconomists don’t come from some or all of them throwing away the central model – it comes from the fact that they all have different “value judgments” surrounding parts of the world.
Now, sometimes we hear people run back to IS/LM in order to explain the economy – they do this because it is easier to phrase things in this way than to go through the logic of a New Keynesian DSGE model (especially when the rigidities and assumptions in the model aren’t actually there – they are just in the authors head). These guys are all coming from the same framework – they just have different “opinions” they are trying to sell you on.
The research program was never able to solve for all the value judgments required about how the economy works – but that doesn’t mean that it hasn’t been useful. Fundamentally, the work of the last 30 years should make it more obvious WHERE these guys differ – something that makes their conclusions and recommendations more transparent.
I wouldn’t call that a failure.
Just because macroeconomists didn’t anticipate the current crisis doesn’t make the “contemporary macroeconomics a failure”.
Macroeconomics (if not some of the macroeconomists) had long ago realised the limitations of its predictive accuracy – and built a discipline focused on describring and explaining movements in the economy once the data was avaliable.
Even if we then turn around and try to say it is a failure anyway we should remember to apply the same critique to other disciplines – I don’t think we would have much left that would not be termed a “failure”.
The thing is, I agree with many of the criticisms that I linked to above (especially the discussion of how poorly belief formation is treated in macro). But I don’t think the conclusion that “contemporary macro is a failure” logically follows from these critiques.