Although I wish to avoid spending too much time on economic squabbling, the discussion here might be useful if I ever get around to writing an obituary for mainstream macroeconomics.
Sure, Economics Is Just Not MacroOne standard complaint of mainstream economists is that critics are all wrong about what economists do: they do not all do macro forecasts. That is probably true. However, that is an utterly irrelevant point for most people: they do not really care about the non-macro parts of economics. To be more precise, the average person cares about non-macro economics as much as they do about any other field of the humanities: not a whole lot. This is perhaps unjust, but I think anyone in any other branch of the humanities could have explained this to economists a long time ago.
If I take my personal example, I had contact with hundreds of economists over the course of my career. Furthermore, I probably read articles or saw television interviews of hundreds more. Every single one of those economists' day jobs was macro analysis. I am not some weird outlier; anyone in finance or who watches financial television, or reads the financial press, would have pretty close to the same outcome. Probably the only people who might experience otherwise are academics in economics departments.
(These mainstream academics make a big deal about whether economists produce forecasts or not. Technically, not all macro analysis is forecasting; in fact, I do not do forecasts. However, if you are a mainstream economist and argue that economic outcomes are the result of optimising behaviour along with accepted deviations from optimality, macro analysis is tied to some entity doing macro forecasts.)
So if any mainstream economist reads this, yes this is not a critique of your non-macro academic work.
Paul Krugman: Mainstream Macro Is DeadPaul Krugman published an article: "Good enough for government work? Macroeconomics since the crisis" (the paper is currently available for free, but I think that will only be for a month).
I worked as an academic in a real academic field. One of the requirements of being minimally competent was being able to read another researcher's paper, and compare what they demonstrated within the body of the paper versus what the abstract says the paper accomplished. One of the distinguishing characteristics of the DSGE macro literature is the gulf between the claims in the abstract and the actual analysis done. If you take article abstracts at face value, every single problem in macroeconomics has been solved at least five times. The fact that all of these "solutions" do not agree with each other tells us all we need to know.
Therefore, it is a mistake to look at Paul Krugman's conclusions about the state of macro, rather, one needs to look at the details of his argumentation.
In summary, he argues that we could just use IS/LM (with a correction for the effect of the zero bound, which he coincidentally has a paper about) to analyse the policy response to the Financial Crisis. Basically, we have two dials: "monetary policy" and "fiscal policy", and we move them to manage aggregate demand. In other words, we can use the "state of the art" 1960s undergraduate textbooks (which he used when he was a student, plus of course, Krugman's zero bound paper) to solve all of our macro problems.
There is a grain of truth to this. Faced with an economic collapse, ramping up government spending will help speed up a recovery. For that particular situation, that's perhaps all you need to know. However, everyone other than ideological extremists knew that already. That said, knowing that an increase in government spending will most likely raise nominal GDP does not answer most of the important questions. How large is the effect? What are the costs? Stop-go aggregate demand management has a deservedly bad reputation. The insight has extremely limited value in other contexts, such as judging the effect of a universal basic income, or Job Guarantee.
It also runs into a rather obvious problem: everybody working in the macro side of finance has access to those textbooks (and may have even studied from them in university). However, the IS/LM model (or whatever variant Krugman is discussing) rarely shows up in discussion -- because it is largely hopeless. It consists of two arbitrary lines on a chalkboard, that can jump around for any number of imaginative reasons. You can use it to predict almost any possible outcome -- which is not a useful property of an applied model.
Even if one insists on sticking closer to Krugman's interpretation of his analysis, the existing body of mainstream macro looks to be in a very bad state. He notes how mainstream analytical tools failed to offer useful clues for the direction of inflation after the crisis (the large negative output gap implied deflation). The entire theoretical core of DSGE macro is based on price determination; the theory of inflation it provides is normally seen as the main theoretical advantage versus heterodox approaches. Admitting that we have no idea how to forecast inflation -- when the main triumph of mainstream economics was to put in place central banks whose entire job description was to stabilise inflation -- is a serious admission of failure.
Look at Us, We're Doing All This Amazing Stuff!The other line of defense of mainstream macro is that young researchers are doing all this amazing new work. However, given the track record of the people involved, why would we expect any better outcome with the latest iteration of mainstream macro?
One argument is that mainstream macro is more empirical. Yes, so was the Reinhart and Rogoff government debt analysis. Their empirical analysis was useless even in the absence of the spreadsheet error since they commingled data from free-floating sovereigns with those in currency peg regimes. You cannot do useful empirical work in a complete absence of a theoretical framework. Analogies to physics do not cut it: we are working with complex systems, and you cannot infer the behaviour of complex systems from stand alone analysis of individual components.
The other line of defense is that researchers are working on relaxing the various obviously wrong assumptions embedded in representative agent DSGE macro. As is obvious, I am not following that literature, but from what I have seen, the usual tendency is to relax one assumption at a time, and leave the rest of framework intact. That's known as "bolting on epicycles," and one does not need a doctorate in the history and philosophy of science to guess what the outcome will be.
The other thing to keep in mind that to the extent the new literature works, it is jettisoning existing mainstream macro theory. They are starting off from scratch, and refusing to look at the literature that diagnosed the problems with mainstream macro decades ago. How likely is it that they will develop any conclusions which were not observed much earlier by post-Keynesian economists?
Concluding RemarksAs should be clear, I pay almost no attention to the latest developments in mainstream macro. Perhaps some discoveries will surprise me, and end up being useful. If the reader wishes, they are free to read the literature, and draw their own conclusions.
Nevertheless, I remain cautious. The mainstream has a long history of announcing that problems are solved, or great progress has been made ("the state of macro is good!"). Even by the standards of mainstream economics backers, the new research areas show little sign of producing insights that were not already obvious to someone with a slight familiarity with post-Keynesian economics. (For example telling us that people's behaviour is not entirely rational would not surprise anyone paying attention while reading Keynes' General Theory.) Unless you are being paid to keep up with the latest research fads, it is probably safe to wait until some form of new consensus appears among researchers before actually reading the papers. (If you see anything that sounds plausible, feel free to send me questions about it.)
(c) Brian Romanchuk 2018