What is macroeconomics good for?
Paul Krugman comments on a blog by Jonathan Portes supporting macroeconomics against criticisms levelled by Diane Coyle. Portes:
Essentially that she is arguing that macroeconomists (and macroeconomics) have so little credibility in general that it is no longer possible for someone like me, or Professor Krugman, to dismiss the arguments of those who disagree with us on the basis of either macroeconomic theory or empirical evidence; and that therefore macroeconomics has – and deserves – little influence on policy. She contrasts this very sharply with microeconomics, arguing that macroeconomics “does not stand on the same kind of increasingly sound empirical footing.”
Krugman responds to Coyle by saying that in fact the basic findings of macro, particularly the ISLM model, have been borne out by the crisis. But saying that the ISLM model is valid under certain circumstances doesn’t prove that macroeconomics is spectacularly successful. One of the main criticisms of conventional macroeconomics by people like Steve Keen is that it had limited ability to cope with disequilibrium and crisis. Minsky was completely unknown to mainstream economists until his “moment” came, and by then it was too late. Neoclassical economics had little to say about the dynamics of capitalism or indeed about debt — the defining feature of the crisis.
It is this blindness, this wholehearted love of equilibrium, that explains why so few economists saw the crisis coming. Those that did foresee some sort of crisis, like Keen and Anne Pettifor, were completely outside the mainstream.
On the issue of realism of assumptions in microeconomics, we all know that perfect foresight and rationality, etc. aren’t how things work in the real world and that they are used so as to make matters more mathematically tractable. These fictions can be discarded later. But if the central assumptions of a model are so demonstrably untrue empirically, then it’s unlikely they will often get us even remotely close to the truth. If the purpose of the exercise is to flex our mathematical muscles, then it’s not really science, it’s puzzle-solving. Argument and conventional rhetoric can sometimes be better tools. Insisting on the use of unrealistic assumptions just so that you can employ highly formal methods is like using a pneumatic drill to dig a flower bed. The funny thing about Krugman is that he will defend neoclassical economics to the death because his whole career is invested in it and he has won a Nobel prize in it, yet his often sensible policy arguments often don’t have anything to do with neoclasssical economics. They’re the clever thoughts of an insightful thinker.
Emergent Economics 
I couldn’t agree more – the good news is that macroeconomics, well …. exists! The economy ‘goes on’ out there, so SOMETHING is happening. The bad news is that there are far too many moving parts (with many lurking far off the radar) to be confident in modelling it.
Krugman is right to say, for example, that austerity is like balancing your boat when you are leaking by holing the other side of the hull too (my metaphor). But just as he appeals to sound maths and sound reasoning, he should definitely be cautious about claims that models work except in their most general terms – the ISLM makes intuitive sense but is a mess of assumptions that, if true, are still based on equally shaky ground.
Yes, I think it’s also important to be aware of schools of thought, which is something that conventional economics as it is taught in universities is very bad at. You’re usually taught that there are a few models that differ only in their assumptions – eg. it might feature sticky prices (new Keynesian models) or it might not (like real business cycle models). But there’s really no wider awareness of the range of different schools of economic thought, including Austrian, post-Keynesian, Marxist, Ricaridan or whatever. So you’re definitely right – macroeconomics is out there and it exists; it’s just a lot bigger than the world in which Krugman et al operate.
I also agree with your point about hubris. Economists tend to be far more convinced than is warranted by their methods. Complexity isn’t really properly accommodated within the conventional framework, and neither is uncertainty. Genuine Keynesianism, or post- Keynesianism, rather than the bastardised sort practiced by Krugman, puts uncertainty at the heart of its methodology. For example we can’t know about the future, so we tend to hold more money (the theory of liquidity preference), which tends to influence the interest rate. If macroeconomics cast its net wider instead of limiting itself to the study of a narrow range of theories, most of which are really just variations on a theme, it’d stand a higher chance of being relevant, and scientific. I suspect that if some on the supposedly radical fringe had been listened to, like Keen and maybe even Pettifor, politicians might have had a better chance of avoiding or mitigating the worst of the crisis.
re: “Genuine Keynesianism, or post- Keynesianism, rather than the bastardised sort practiced by Krugman, puts uncertainty at the heart of its methodology. For example we can’t know about the future, so we tend to hold more money (the theory of liquidity preference), which tends to influence the interest rate”
This is not unique to post-Keynesianism at all. This is universally regarded as the reason for liquidity preference. Krugman absolutely agrees with this.
No, true Keynesian uncertainty isn’t universally regarded as the reason for liquidity preference and Krugman doesn’t strictly agree with this. New Keynesians like Krugman aren’t interested in the fact that Keynes distinguished between quantifiable and unquantifiable risk. Krugman explicitly said in a lecture at Cambridge last year that he saw himself as a “part 1er [who sees] Keynesian economics as being essentially about the refutation of Say’s Law, about the possibility of a general shortfall in demand” rather than seeing chapter 12 as the most important, whose “essential message is that investment decisions must be made in the face of radical uncertainty to which there is no rational answer.”
Click to access keynes_and_the_moderns.pdf
Keynes himself, as Krugman acknowledges, was a “chapter 12er” who thought that certain types of future outcome were incalculable and hence unquantifiable: we just rely on instinct or fear. Because neoclassical economists didn’t understand this, they had a mistaken theory of interest. Keynes does also think that some risk is calculable, and this is where neoclassical economics becomes applicable. It is only relevant to the special cases where risk can be quantified. If you actually read Keynes, you’ll see that his specific approach to uncertainty — there are many situations where we just can’t know the future, even using probability distributions — was absolutely central to his economics.
re: “If you actually read Keynes, you’ll see that his specific approach to uncertainty — there are many situations where we just can’t know the future, even using probability distributions — was absolutely central to his economics.”
I do “actually” read Keynes, thanks.
And yes – I am not disputing your view of what Keynes said at all. Just like I was never disputing the view that economists should think a lot harder about methodology.
WordPress sseems to have lost the first comment… anyway I was just pointing out that liquidity preference is talked about after ch. 12, that there is no other explanation of liquidity preference other than uncertainty about the future, that NKs are completely on board on that point, that this is the point of Krugman’s Japan paper after all. All he said in the thing you cited was that he doesn’t personally get as much mileage talking extensively about the difference between calculable and uncalculable risk and worrying about modeling that, etc. He clearly considers liquidity preference central to his “chapter 1” points and there’s no other explanation for liquidity preference out there except for uncertainty about the future. That’s chapter 15 stuff, not chapter 12 stuff.
You seem to be of this brand of PKs that decides they can just tell NKs what it is they think and lambast them for views they don’t even hold. That doesn’t seem very helpful to me.
No, not all. I quoted Krugman quite clearly, at length, so as to represent his views properly. In no way was I telling any new Keynesian what they think.
And, further to that, see link:
http://www.huffingtonpost.com/2012/06/28/paul-krugman-manifesto-for-economic-sense_n_1634312.html
I think you have identified a key tension here – yes, appeal to economic sense and pay attention to economic history (which my economics degree completely ignored, but is apparently now more on the agenda in teaching) … but that goes against his appeal to ‘real’ data and ‘facts’ because no matter how many (I agree insightful) comparisons one can make with the Great Depression, someone will appeal to ‘facts’ about how different the economies are now, and dismiss the argument. I am therefore keen to draw comparisons, but not to sign up wholeheartedly to his appeal that people are ignoring ‘self-evident’ truths.
The reason I love economics is because it (as mentioned) really does exist, it has rules of thumb and very insightful principles lying in its history of thought, but it is also a very amorphous and moving target, and requires an appeal to art and observation as well as the numbers. Most models, in truth, are fragmented and do not easily ‘knit’ together … those omni-models like ISLM are valuable in understanding the deep structure, but they are not a meat-grinder through which you can just churn data and get a reliable result at the end!