The appealing idea that macroeconomics should develop naturally from standard microeconomic foundations must be recognised as a distraction. In its place, we must accept, in the language of systems theory that macroeconomic phenomena are emergent, arising from complex interactions of behaviors we do not fully understand, but must nevertheless respond to.
I am not sure what he means by “must nevertheless respond to,” but otherwise I agree. “Standard microeconomic foundations” means the restrictive “haiku” to which Olivier Blanchard refers.
I would add that it is also a distraction to insist on closed-form mathematical solutions. Macro problems occur because the economy faces recalculation problems that are too complex for markets to solve. They are too complex for us to solve, also.
Thanks to Mark Thoma for the pointer.
Update: Greg Mankiw points to a brief defense of contemporary macro by Narayana Kocherlakota (or is the essay here. It strikes me as anti-Quiggin, or at least anti-Kling. He seems content to the look under the mathematical lamppost for the macroeconomic watch, even if the watch won’t be found there.
READER COMMENTS
E. Barandiaran
Sep 17 2009 at 7:04am
Arnold,
By definition if a problem is too complex for markets to solve, it’s also too complex for us to solve.
E. Barandiaran
Sep 17 2009 at 9:16am
Sorry, I should have said:
By definition, if a problem is too complex for us to solve, it’s also too complex for markets to solve.
Daniel Kuehn
Sep 17 2009 at 11:14am
An excellent point, Arnold! With that established, we also need to inform people that Hayek isn’t the only source for emergent macro, and that other schools of thought based on ideas like Minsky’s understanding of bubbles and financial fragility can add structure to the body of Keynesian and New Keynesian macroeconomics.
I think this focus on complex systems is important. The problem is, different schools of thought (and not just Austrians… Krugman wrote a book called “The Self Organizing Economy” a while back too) think that they are exclusively introducing the idea of emergent behavior to the field. Nobody is uniquely doing this – it’s pervasive (emergent, if you will), it just might need to be brought to the fore in the wake of RBC and EMT.
ajb
Sep 17 2009 at 2:23pm
Well said Arnold. The unspoken premise is that if you try your best using the mathematical rules and get gibberish, it’s the best that can be done. In contrast, simpler models which are incomplete or which are a mix of rigor and hand-waving might well be informative but are considered unacceptable in these days of de rigeur formalism.
So what the author should have said is that macroeconomists are doing the best they can **within the limits of the artificial rules they have imposed on themselves.**
Rodger Malcolm Mitchell
Sep 17 2009 at 5:21pm
Perhaps one problem causing difficulty understanding elements of macroeconomics occurs when our preconceived ideas are too strong to allow us to understand what we see. It falls under the old saw, “There are none so blind as those who refuse to see.”
For instance, the negative reputation of federal deficits and debt is so overwhelmingly powerful, it overrides interpretation of historical fact. When every politician, every medium and nearly every economist warns about the dangers of the debt and deficit and the need for revenue-neutral programs, it can be difficult to imagine there is an alternative possibility.
Yet, all the data I have seen indicates not only that deficits are necessary for economic growth, but *growing* deficits are necessary. (See: http://rodgermmitchell.wordpress.com/2009/09/07/introduction/)
But I could be wrong, and I’d like to find out. There is a website called Naked Capitalism – http://www.nakedcapitalism.com/. The site claims 12 million visitors in two years. On July 20th, 2009, I posted the following:
“Does anyone know of data showing that high deficits cause recessions, depressions, inflations or tax increases, reduce the availability of lending funds and/or have any other negative economic effects? If you have such data, please contact me at rmmadveritising@yahoo.com.
Thank you for your assistance.”
To date (9/17/09) I’ve not had a single response. I can think of three possible reasons:
1. The site has visitors, but not readers, or
2. The answers are felt to be so obvious, they are not even worth thinking about or
3. No one has an answer.
I lean toward #3, but #2 is a strong contender. Any time I attempt to discuss what I believe to be the net positive effects of federal deficits, I am met not just with disagreement but with outraged disagreement along with name-calling, as though even to consider the possibility is evidence of my idiocy.
I’m at the point where I would welcome evidence showing I’m wrong, so I could step down from my soapbox and avoid the tomatoes thrown my way.
If you know of such data, I very much would appreciate seeing it.
Rodger Malcolm Mitchell
Bob Murphy
Sep 17 2009 at 10:25pm
Arnold, I love your “recalculation” idea, but in this post you worry me. The reason we’re stuck in this recession so long is that the government keeps crippling the market’s responses. Rather than let prices adjust and find their new levels, the government pushed interest rates to zero and propped up the bloated housing sector. Then it nationalized a bunch of huge companies, banned short-selling for a while, borrowed $1.5 trillion, blah blah blah.
So I don’t think the problem is too complex for the market to solve, it’s rather that the government isn’t letting the market solve it. Or rather, the government keeps making the problem harder.
Daniel Kuehn
Sep 18 2009 at 8:52am
Bob Murphy –
Your critique presupposes that equilibrium interest rates would be somewhere above zero. Do you have any justification for thinking that, or are you just asserting it?
Rodger Mitchell –
I think you’re largely right but I’d be careful about proclaiming that sort of thing universally. Yes, government deficits can help an economy tremendously in terms of long-term growth. That’s different from saying that they’re never harmful. They do obviously put pressure on private credit markets and they obviously also may threaten larger tax burdens in the future. But insofar as public spending is correcting glaring market failures, accessing private credit to remedy those failures is obviously going to be an efficient course of action. That DOESN’T mean that’s what governments always end up doing. You should read James McDonald’s “A Free Nation Deep In Debt” – I think you’d really enjoy it.
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