"I thought I would offer some light entertainment today. This Paul Krugman post struck me as perhaps more deranged than usual on the topic of macroeconomists."
"Here are the two closing paragraphs, to give you the idea:
In fact, the freshwater side wasn’t listening at all, as evidenced by the way 80-year-old fallacies cropped up as soon as an actual policy response to crisis was on the table; and as for changing views in response to facts, well, we all know how that has gone.http://newmonetarism.blogspot.com/2012/12/rottenness.html
The state of macro is, in fact, rotten, and will remain so until the cult that has taken over half the field is somehow dislodged.
What is so deranged? Is it to feel that Macro is dislodged? SW, of course, thinks things are going swimmingly in what he calls "Modern Macro"-again, that means post-Lucasian Macro.
"This is actually a relatively tranquil time in the field of macroeconomics. Most of us now speak the same language, and communication is good. I don't see the kind of animosity in the profession that existed, for example, between James Tobin and Milton Friedman in the 1960s, or between the Minnesota school and everyone else in the 1970s and early 1980s. People disagree about issues and science, of course, and they spend their time in seminar rooms and at conferences getting pretty heated about economics. But I think the level of mutual respect is actually relatively high. There seem to be more serious disputes, for example, between structural and astructural labor economists than among macroeconomists."
Right. We don't have any kind of animosity today in the profession unless it's SW himself discussing Krugman.
http://diaryofarepublicanhater.blogspot.com/2012/12/krugman-noah-smith-and-stephen.html
As I've mentioned before I'm reading Steve Keen's "Debunking Economics" right now. One interesting point he makes-he makes many, many interesting points actually; this book was just what I needed-is that economics-and this is true even of the "hard sciences"; econ is in reality a social science no matter what it tries to tell itself-is not just about the gathering of knowledge but it is also a society. This, again, is true of all scholarly sciences. While intellectual integrity and dedication to knowledge is genuine, it's also like any other society, based on accepting certain truths or precepts. Without these you're disbarred as it were.
SW is particularly sensitive about criticisms of his society. He has stated in the past that when you're part of the institution you defend the institution-the institution in the most concrete sense, he says is your friends. Those who don't do this, aren't liked, he explained. That's why Krugman is hated so much by many in Macro: whether you're talking about SW, or Sumner, or Bob Murphy. Note, though that Krugman remains part of this society even as he is one of its most critical members.
I think SW's own rancor shows that there's not less animosity today than there was in the time of Friedman and Tobin. Krugman's visceral effect shows this. On Krugman's side there's much animosity as well, no doubt. He feels that he's been duped in a sense. He feels his institution has betrayed him.
"Indeed. Saltwater economists in the New Keynesian school — which sort of included me, for instance in my liquidity-trap writing — were doing intertemporal-maximization models that in effect conceded a lot of ground to freshwater styles of analysis, but with distortions — monopolistic competition and sticky prices — that made room for demand failures as a cause of recession. And many of the economists doing this stuff imagined that they were part of real discourse with the freshwater side, as witness Olivier Blanchard’s The State of Macro, written just before the crisis. Olivier’s abstract declares that
largely because facts do not go away, a largely shared vision both of fluctuations and of methodology has emerged and concludes that “the state of macro is good.""Famous last words. In fact, the freshwater side wasn’t listening at all, as evidenced by the way 80-year-old fallacies cropped up as soon as an actual policy response to crisis was on the table; and as for changing views in response to facts, well, we all know how that has gone."
http://krugman.blogs.nytimes.com/2012/12/17/something-everything-rotten-in-the-state-of-macro/
He felt there was a genuine dialogue but now it feels to him like he and his fellow NKers were never really respected by the New Classicals-only tolerated to keep them in line. Yet Krugman remains part of the institution, it would seem. With the low opinion he has of the NCers, does he ever ask himself why he continues to use their models as see them as valid?
Steve Keen suggests that one insurmountable problem in neoclassical macro, is neoclassicals feel that the very field of macro is an affront. Macroeconoimcs-Keynes' invention with his General Theory-shouldn't exist at all. The goal is to reduce macro to the level of microeconomics-ie, a return to pre General Theory economics where there was no macroeconomics.
Does this Scott Sumner post state this very clearly? The title says it all: NKs Win When Only the RBC Model is Left Standing."
"Macroeconomics is the study of policy failure. Once an issue goes away the field loses interest. Liquidity traps were dropped from the curriculum in the 1970s, when 13% inflation and 15% interest rates made the “problem” of being stuck in deflation and zero rates seem absurd."
"The reason New Keynesians and real business cycle-types got along so well during the 1990s and early 2000s is that the nominal problem seemed solved. NGDP growth was stable enough that NKs thought that the Fed could do the job, and that fiscal stabilization wasn’t needed. And the RBC-types were basically fine with a 2% inflation target, and in any case they were more interested in other issues. With the fight over NGDP off the table, macroeconomists could focus on other topics, mostly classical in nature."
"Of course all that came to an end in late 2008. The NKs began to see low NGDP as a huge problem. They also saw that inflation targeting wasn’t enough. The RBC-types continued to believe inflation targeting was all you needed on the demand-side."
"In 1984-2007 we came close to solving the key macro problem, NGDP stabilization. We were thrown off course by a number of factors, including an inability to use the interest rate instrument at the zero rate bound. If we can get a better policy instrument (NGDP futures targeting anybody?) then we will go right back to the macro problem being solved. When that happens, it will no longer be necessary to divide textbooks into micro and macro splits. The remaining macro areas (such as long run growth) will be special topics, analogous to international trade."
The irony here is that the NKs (and of course us market monetarists) can only succeed by making our models obsolete—thrown into the dustbin of history—and by allowing the RBC-types to take over what little is left of macro.
http://www.themoneyillusion.com/?m=201205&paged=5
Of course, the return to the era of good feeling in macro-brought about by it's being eclipsed will be achieved by the Fed following Sumner's NGDP rule. Then macroeconoics truly will be as "tranquil" as Stephen Williamson wants it to be.
It's funny...I think one could argue that both SW and Krugman are partially correct here. During the earlier times SW discusses, the underlying assumptions of macro models and the policy views of Dems vs Republicans were seemingly more diverse (Republicans today are far more accepting/encouraging of govt action on many levels). So the two sides are closer together today. However, that statement is far from saying the state of macro is good.
ReplyDeleteSumner is also partially correct, as long as GDP growth remains positive and unemployment remains low, most macroeconomists will start worrying about other issues or countries. Unfortunately, this ignores the reasons why the macro-economy is stable and whether those underlying features are sustainable. In the most recent case, an underlying private credit boom was taking place that could not continue indefinitely due to the effects of compound interest. Unsurprisingly, current macro models ignore private debt and interest expenses, which left them blind to the developing crisis.
Sumner may have his day when NGDP targeting is implemented, but that will only lead to its failure and demise. A tranquil macro may only occur if everyone accepts the discipline as a failure (which I'm hopeful won't occur).