21 Sep 2009

Mainstream Macro’s Ridiculous Apologists

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I actually have a ton of “real work” today so this may be my last post (unless gold shoots up $50 or something). First, I wanted to alert you that Floyd Norris has approved a bunch of our comments; some good ones in there from all of you.

Second, Alex Tabarrok has a great post today clarifying the complaint that “economists failed to predict this crisis.” Some big guns have come out and said that not only should they be excused for failing to predict the crisis, but they should be congratulated for predicting that they would fail to predict this and all future crises. (If you think I’m exaggerating to make a joke, read it yourself.) So Tabarrok calls this move for the obvious foul that it is. (Incidentally, Tabarrok is responding to this defense of macro by David Levine. But when I get more time, I have to write a full-blown article on it, it’s so bad.)

For now, let me just alert you to some funny excerpts from a Minnesota economist’s response [.pdf] to all this. Now in contrast to Easterly, Cochrane, and Levine, this particular guy (Kocherlakota) isn’t being ridiculous; I think it’s a fair response to Krugman. However, some of the excerpts are just plain funny:

Once you start using macroeconomic models with heterogeneous agents and frictions, government intervention is almost inevitable.

Some macroeconomists use calibration, some use econometrics, and some use both. There’s no real methodological debate left in the field on this issue. What is true is that most people outside of macro do not like calibration. I don’t know why. I spent seven years of my life thinking about whether econometrics was better than calibration … and pretty much decided that the answer is: “it depends”.

Why do we have business cycles? Why do asset prices move around so much? At this stage, macroeconomics has little to offer by way of answer to these questions. The difficulty in macroeconomics is that virtually every variable is endogenous – but the macro-economy has to be hit by some kind of exogenously specified shocks if the endogenous variables are to move.

As you can gather from this candor, this particular economist (Kocherlakota) isn’t shouting the wonders of macro from the rooftops. I think he at least understands why someone could wonder if they’ve done anything useful in the last 50 years.

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