The upcoming war of succession and the future of Macroeconomics!

It appears that economics is on the verge of war … ok maybe I’m being melodramatic – but the change in tone of economists recently (well, actually mainly macroeconomists) has been startling!

During the credit crisis, more and more economists have moved towards a panicked position.  However, the first true indication that this might be different than a few little methodological spats came to me from these posts (Econlog and VoxEU).

These posts indicated that the very structure of economics was preventing research into valuable fields – we had failed to achieve knowledge by focusing on “equilibrium”, “mean reversion”, and/or the constant obsession by ignoring the depression when we analyse data.

There are two primary areas where I think the main set of criticism will fall – and the size and scope of this criticism will determine whether it is war, or merely an evolution of ideas.  These areas are 1) aggregation and stability conditions (so macroeconomics and its current foundations) and 2) behavioural assumptions (a more widely shared issue).  Tyler Cowen links on both issues to some degree 1,2.

Hopefully there is a realisation that economic methods and models are useful – even if the value judgments economists make aren’t always up to scratch.  My concern is that disputes about value judgments will lead to a situation where the entire framework is thrown to the side.  However, if this occurs it will be partially the result of some economists inability and unwillingness to describe their assumptions openly – something we should all keep in mind.

How do we compare Keynesian and modern economics?

Over at, Chris Trotter states (ht Rates Blog):

Keynesian economics was never more than the rational response of decent and compassionate men to the human cost of economic management when reposed in the hands of the avaricious and the uncaring

This is an incredible mis-representation of “Keynesian economics” – however, it is also an incredibly common mis-representation.

Among many on the left and right of the political spectrum there is a belief that Keynesianism is left-wing macro-economics and modern economics (which people attribute to Friedman – even though in general terms his ideas only apply to monetary policy, not the whole shabang). However, as CPW once said to me, the correct comparison is not one of political ideology, but one of science – Keynes was like Newton, while Lucas/Friedman/the crew are like Einstein.

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Posting trouble

Hi all, For some reason I can’t post anything particularly long at the moment – as the site doesn’t like me.

As a result, none of the ideas I have for posts can be satisfactorily placed on the site. I can still comment though – its just taking a while.

If you want you can comment on this in the comments section of the post (ht Marginal Revolution, Econlog). I will try to get some posts up tonight.

What is modern business cycle theory

If you want to know, have a look at this post. It is completely non-technical, and explains the way macro-economists look at things pretty danged well! (ht Marginal Revolution).

Fundamentally, this view of the business cycle is highly focused on methodological individualism – the business cycle occurs in the context of individuals maximising their happiness given constraints.

Before this strain of thought came out, business cycle theory was a surprising holistic section of economics – something that did not match with the individualistic nature of microeconomics (see Schumpeter). Furthermore, business cycle theory, long-term growth theory, and near term macroeconomics (effectively old school Keynesianism) were relatively incompatible.

Following the collapse of the “consensus” in macroeconomics during the oil crisis the one ray of hope was that we macroeconomics could be recreated in a way that is consistent with microeconomics. According to Kids prefer cheese this research area is still active – which is exactly what we want to hear.

Update: Paul Walker discusses the same article.

Growth and happiness

The Standard was at Joe Stiglitz’ talk in Wellington last week and was particularly interested an audience member’s question about growth. The question is whether economists focus too much on growth, to the detriment of human happiness. It’s an interesting and worthy question, but not one that hasn’t been considered by economists. There are two important issues around GDP: first, whether it’s a good measure of growth and, secondly, whether growth is particularly important. Read more

The economist’s economic growth bias

Reading the titles of the last two posts (the birth rate vs the growth rate and growth forecasts and government) I realised that neither rauparaha or myself defined what ‘growth’ we were talking about. Like all economists, we took ‘Growth’ to be synonymous with growth in gross domestic product.

Could this possibly imply that economists such as rauparaha and myself have an inherent bias when discussing normative statements about welfare that points us towards pro economic growth policies – even when there is a hefty trade off in other social values. Do economists focus too strongly on technical and allocative efficiency without taking social efficiency and equity into account?
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