What went wrong in the economics profession?

I've been putting off this topic but reactions to Krugman's essay don't seem to go away.  Mark Thoma links to everyone.  Here is a Krugman post,criticizing Chicago School economists.  Via Greg Mankiw, David Levine offers the latest broadside.  Here is Alexander Rosenberg criticizing John Cochrane.

I would have preferred it if this debate had focused on what real business cycle theory — whatever its limitations — has to offer.  For instance if you are postulating a "jobless recovery," most likely you are invoking ideas from real business cycle theory.  RBC theory has been a major contribution, even if it doesn't explain the core of the recent financial crisis or even if it has some very limited one-person models.  If you think seriously about the persistence of business cycles over time, or the spread of business cycles from one sector to another, probably you are invoking ideas from real business cycle theory.  For all its prominence, Keynesian economics tends to portray states of affairs and it often has difficulty presenting a business cycle per se, such as the time paths of variables across the entire range of the cycle.  RBC theorists have formalized what a cyclical explanation, in the full sense of that term, has to look like and so they have done a big service to Keynesian ideas also.

At this point the debate is more a topic of sociology than substance.  The substantive issues will be better worked through in other forums; this forum has been spoiled.  The remaining lesson — and perhaps the major lesson — is that the Jacksonian mode of discourse does not very well suit a discussion of macroeconomic theory.

In the comments I would say stick to the issues and don't bother criticizing any of the participants in the debate.


>>I would have preferred it if this debate had focused on what real business cycle theory -- whatever its limitations -- has to offer.>>
There's also the issue of what Keynesianism and its descendants has to offer.

It is too bad that this is often a food fight rather than a serious discussion.

"the Jacksonian mode of discourse does not very well suit a discussion of macroeconomic theory"

Keynes pretty much set the standard for this with his all pejorative and no substance attacks on Hayek in the 1930s, didn't he?

Krugman is merely aping his hero Keynes.

The debate is indeed disappointing. Most of the posts lack substance. Rosenberg and the latest Krugman in particular offer nothing new, except when Krugman makes the important point that Keynes' work has been banished from many (most?) top doctoral programs. But this is precisely what Cochrane says, although to the latter it was clearly a good thing. Rosenberg's post is a well written but meaningless mish-mash. He attacks one straw man after another (Agents' beliefs are sometimes wrong! Data include measurement errors! People are not rational-expectations automatons!) and draws the wrong conclusion from the stagflation episode.

I hope someone redirects the discussion towards a more constructive platform.

What's the Jacksonian mode of discourse?


I was wondering myself and come to the conclusion that it refers to a rough and tumble debate. For example, read the history of the election of 1828.

What's most galling is the positive conclusions critics of macro often tend to draw from their purely negative arguments. Macro doesn't tell us much about business cycles or the economy as a whole, therefore my preferred policy choice are justified. Obviously a horrible, unlicensed inference. This should result in mass worry and agnosticism, not as evidence for the efficacy of the stimulus or the need for government intervention.

The fact that you cannot determine who are the real quacks pretty much proves that you are all quacks.

Kalevala, thanks for the pointer to Falkenstein. I also like his comment on Minsky:
"He was a maverick, but perhaps a bit too much."

Who did better than the economists?

Politicians? Regulators? Pffft.

Some macro models clearly predicted that the conditions for a major crisis were building up, even before the money market break in summer 2007. The best I know of these is set out in Godley and Lavoie's 'Monetary Economics' It is stock-flow constrained, and takes in the accounting concepts. (It has begun to be used in undergraduate teaching, I understand.)

Most macro economists ignored these storm signals. They were steering to the inadequate charts of our mainstream theories; theories we had developed to increase our understanding, not to design concrete policies to cope with events.

The applied economists working for the US and UK Treasuries, the IMF, and the central banks appear to have picked up more of the storm warnings. By October 2007 they were signalling hard that banks needed massive amounts of extra capital. But when the market drive to recapitalise stalled, the authorites took no action. It seems political will failed.

Why did political will fail? Partly because most politicians hope trouble will go away before they have to take uncomfortable action, no doubt. But partly also because we had let our mainstream economic theories condition the mind-set of political (and business) decision makers without warning them that these theories were only sketchily tested against reality.

We are not villains, any more than the Second Officer of the Titanic was; but the trouble did happen on his and our watches.

This is an interesting take on where economist's went wrong, from the finance side.


Be interested to know what people thought of the claim about Arrow/Debreu.


"You were asked not to personalize the debate." [...] "Or are you merely stupid?"

And you point it out this way because?

There seems to be a misunderstanding about the logic of saying that a generally accepted prediction about some future bad news will bring the bad news forward, so that the claim about timing will be wrong. The alternative is that a generally accepted prediction about future bad news will lead to remedial measures. Neither of these is a claim that macroeconomics is unable to make predictions. The claims is that, to the extent the prediction is credible to a large number of people, or to enough people that matter, the prediction will be overturned by responses to the prediction. That is not a weakness in macroeconomics. That is a recognition of reality.

The problem we have experienced is that forecasts of disaster this time were not accepted by enough people, or by people with enough power. That's why we had the problem. In cases in which risks are identified and can be treated, they don't manifest. That doesn't mean the prediction is wrong, but rather that it was useful.

I don't claim to know the frequency of useful predictions, but at least we ought to get our logic right.

I firmly believe that the monetary and fiscal policies that the world is embarking on have created liquidity induced securities speculation (all over again) and have engendered inefficient resource allocation. You can't erase trillions in bad loans and poor capital investment decisions just by throwing around some "stimulus" funds and lowering interest rates to 0%.

READ - The Resurgence of Keynesian Economics and Interventionism

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