Without irony, Greg Mankiw points to both John Makin, arguing in the Wall Street Journal for loose money, and Martin Feldstein, arguing the next day for tight money.
Meanwhile, today’s Washington Post has a story with a typical headline:
Economy’s Fate Hinges On Shoppers’ Stamina
This is what I call “folk macroeconomics” or “folk Keynesianism.” I think that it ultimately derives from what my co-blogger has documented as the make-work fallacy, the popular belief that jobs are inherently scarce.
In general, I think that the economy’s fate hinges on its ability to adapt to changes in relative prices. If there are few large shocks, then full employment will not be disturbed. With large shocks, then people need to respond to incentives to exit some occupations and industries in order to enter others.
My daughter who is a freshman left a message that she wants me to explain macro to her. I can do that, in the sense that I can teach what is in her textbook. In reality, however, macro is a muddle that no one can explain. The undergraduate textbook, a graduate textbook, and macroeconomics as practiced by policymakers (what Mankiw calls the “engineering approach”) have nothing in common with one another.
Every macroeconomic pronouncement should be accompanied by a disclaimer that says, “This is just my opinion. We don’t really know.”
READER COMMENTS
John Thacker
Apr 15 2008 at 9:10am
Without irony,
I’m not entirely convinced that Professor Mankiw was without irony when posting those. He makes a lot of very subtle ironic points on his blog, indirectly.
Troy Camplin, Ph.D.
Apr 15 2008 at 9:43am
I wrote on macroeconomists back in March here.
Matt
Apr 15 2008 at 10:10am
The irony in the conflicting recommendations is that they will both be carried out, first one then the other; repeating the same banking cycle as the Fed is brow beaten by Congress.
We would like both recommendations carried out, simultaneously and in smaller amounts. We want a private fed that sees opportunities worth reflating a bit and another, private fed, that is pulling back on its lending to certain sectors.
We can only get both things happening simultaneously if a competitive monetary system. If we institute this, ten we get what is common to both recommendations, and endorsed by Paul Krugman, namely, we get incentivized bankers who go out and find new investment opportunities.
hutch
Apr 15 2008 at 5:07pm
For what it’s worth, on the same opinion page yesterday, when Makin’s piece appeared, the Review & Outlook argues for tight money. So, on the same page, the editors argued for the opposite of Makin.
pushmedia1
Apr 15 2008 at 6:05pm
A muddle compared to what? Physicists aren’t asked to make policy recommendations. I suspect if they did, their muddledness would be exposed too.
Carl Dahlman
Apr 16 2008 at 9:06am
Compared to global warming science, macro is actually pretty solid. It’s built on a clear national accounting framework, which is the heart of the approach, and uses replicable data and models. What it has in common with global warming science is that we can’t definitively refute any results or models. Therefore, the questions are always the same, only the answers differ over time. That’s not science, it’s a pastime for muddled politicians, a career for some economists who should have known better, and an eternal scourge for undergraduates who learn nothing except to manipulate simple algebraic formulations of economic fables.
Troy Camplin, Ph.D.
Apr 16 2008 at 9:19am
Actually, when physicists have been asked to help the government and the country out, it resulted in the Manhattan Project which, while leading to nuclear weapons, also led to nuclear power. The difference is that with physicists, one can do an experiment and test to see if your ideas work before they are implemented. WIth macroeconomists, the implementation of their ideas IS the experiment. Physicists understand that, in order to control nature, you first have to obey it. How many macroeconomists understand economics as a natural phenomenon? Few, if any. How many could explain how it could be understood as a natural phenomenon?
fundamentalist
Apr 16 2008 at 12:23pm
I’m curious as to why Kling has rejected Austrian macro. I have read Caplan’s excuses and found that he has a shallow understanding of Austrian econ. Mankiw admits that he has read nothing but Hayek’s “Road to Serfdom” and assumed that everything good in Austrian econ was incorporated into mainstream. Does anyone know of posts or articles in which Kling explains his objections to Austrian econ?
Gary Rogers
Apr 16 2008 at 4:13pm
I agree that there is a lack of understanding of macro economics, but also feel this is unacceptable. Macro drives government policies and to have so many unanswered questions about the effects of taxation, deficit spending, interest rates, regulation, currency strength and other critical issues is worrisome to say the least. It is not like there has been no opportunity to try different policies and analyze the results. I think the problem is more that the answers are not politically correct and too many economists are willing to provide desired answers instead of the truth.
fundamentalist
Apr 16 2008 at 8:09pm
Troy: “How many macroeconomists understand economics as a natural phenomenon? Few, if any. How many could explain how it could be understood as a natural phenomenon?”
The impossibility of that is one of Mises’s main themes. Economics is the study of human behavior, which has few fixed properties in the way that natural science does. One of the reasons that macro is so muddled today is that economists believed that aggregates, such as GDP, interest rates, CPI, supply and demand, have the same deterministic properties as do mass, velocity, gravity, and electromagnetism. So they decided to use math in econ the same way physicists use it to describe the natural world. E=MC^2, so why not MV=QP?
After the massive failure of mainstream, mathematical econ during the stagflation of the 1970’s, econ became the laughingstock of the academic world. It became clear that mainstream econ had very little acquaintance with the real world. The Fed ignored econ policy and flew by instinct for the next three decades, and actually did a better job than they had done when trying to follow mainstream econ.
But did the econ profession learn anything from their embarrassments over the past 40 years? Not a thing! They’re still recycling the same old failed policies that gave us the great inflation of the 70’s. Someone has said that trying the same failed strategies over and over, while expecting different results each time, is the definition of insanity.
The main reason I became interested in Austrian econ was that I was embarrassed by the failures of mainstream econ in the 1970’s. I didn’t earn my masters in econ until the late 1980’s, but it was clear then that the profession had no answers to those problems. Later, when I discovered Austrian econ, I realized it had the answers that elluded the mainstream.
Today, I still tell students to study and make a good grade in econ, but pretend it’s a fairy tale. It’s an interesting story, but has no relationship to real life.
fundamentalist
Apr 16 2008 at 8:13pm
PS, FEE has a good article on macro by Steve Horwitz called “Thinking about Macro” at http://www.fee.org/publications/the-freeman/article.asp?aid=4771
fundamentalist
Apr 17 2008 at 1:42pm
Discussion on this topic seems to have died, so no one will probably read this comment. But it’s interesting to me that the Mises web site has a lot of articles and discussion about the current macro situation while this one has very little. In fact, their seems to be very little interest in econ on this site, judging merely by the topics posted by Kling and Caplan. It seems that not only is mainstream macro muddled, but mainstream economists aren’t even very interested in the subject. Does this indicate the state of mainstream macro today?
Troy Camplin, Ph.D.
Apr 18 2008 at 8:13am
I don’t know that it’s impossible. Part of understanding economics as a natural phenomenon is to understand that it is a nonlinear, complex phenomenon with emergent properties that cannot be predicted and not a linear, simple, predictable one. Mathematics can’t even understand biological phenomena very well, and biology is two magnitudes of complexity simpler than economics. This is what I mean by understanding economics as a natural phenomenon — in thew way the Austrians in fact did.
Tom Grey
Apr 21 2008 at 8:38am
The tight money/ loose money debate is almost perfect for demonstrating why macro is a muddle, and not a science.
Whereas if it was possible to “hold all other things constant”, than the tight money is likely to offer a better future, the most convincing argument is for loose money. To avoid nationalization of mortgages: because “do something!” is the advice followed by politicians that voters actually vote for.
The housing bubble has been in preparation for popping for years — where are the “free market” oriented solutions to the future problem from before the pop?
At this point, printing money is more likely to do less long or mid term harm than most other politically feasible solutions. While it gives many wage earners a small negative income cut, it should save the banking industry from worse nominal insolvency, and will most likely avoid a strong recession now.
It’s crucial to avoid the kind of recession that allows big-gov’t populists to dominate election victories in 2008. Unexpected inflation, with a couple of quarter lag, does this better than most other macro responses.
And certainly better than any of the responses that look politically likely.
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