What is macroeconomics good for?
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.