Wednesday, 21 May 2008

The trouble with macroeconomics

Arnold Kling is not happy about macroeconomics. At the EconLog blog he is posting on the topic of The Trouble with Macro. He writes,
In my view, macro seriously undermines sound economics. It treats work as scarce and consumer wants as insufficient, which is the opposite of what we teach in micro. Macro treats saving as contractionary and international trade deficits as contractionary, which is contrary to general equilibrium micro. Most people with no economics training intuitively believe that jobs are scarce, that they help the economy when they spend rather than save, and that trade deficits are bad. In general it is the job of economists to explain why those views are fallacies.
He ends by saying,
The combination of IS-LM and AD-AS has so many degrees of freedom that one may tell just-so stories about any conceivable combination of macroeconomic variables. But most economists do not believe that the predictions from macro-econometric models based on those concepts have been sufficiently accurate to validate the models. To me, that suggests a scientific failure.
This post follows an earlier one in which Kling argues for a macro-less economics major. I'm not sure he's wrong. But then I'm a micro-economist. I have often wondered if inflation is the only true macro phenomenon. Micro is about relative prices, rather than the price level. All other macro issues boil down to the working, or not working, of markets. Unemployment is about labour markets, interest rates are about financial markets, economic growth is about the sustained expansion of multiple markets within an economy, GDP is just the sum of activity in multiple markets etc.


Thoughtful Review Guy said...

He and I must have had different economics instructors.

Matt Nolan said...

The way I see it, Micro is the fundamental tools you use to do analysis. Macro is a subject that is trying to explain some stylized facts of the entire economy - and is trying to find methods to do it with.

In a sense, Macro is the application of things Micro economists did 20 years earlier to an entire economy :)