Arnold Kling  

From Dark Age to Renaissance

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I'm feeling somewhat lonely these days. My understanding of macroeconomics is closer to that of Paul Krugman, Mark Thoma, and Brad DeLong than it is to that of Robert Barro, John Cochrane, or Eugene Fama. And yet I am a stimulus skeptic. I'll reiterate why I am a skeptic. But what I really want to get into is my view of the intellectual history of macro since the 1970's. I think that Krugman's phrase Dark Age of Macroeconomics aptly describes the whole period.

First, about the stimulus. My objections are:

1. We have a heterogeneous labor force, and that will require Hayekian market adjustment, not central planning. Look at this data from page 96 of the Goldin-Katz book, which shows the percentage of the labor force with various levels of education:

yearhigh school dropoutshigh school graduatessome collegecollege graduates
1950 58.624.49.27.8
20008.729.632.029.7

Can we ignore the implications of this for macroeconomics? I think not. See my lectures.

2. The stimulus plan is highly partisan and ideological in nature. Obama may claim to be Lincoln, but the content of the plan is Radical Reconstruction. The aim is to reconstruct the economy with a smaller private sector and a larger public sector. Any notion of "timely, targeted, and temporary" is out the window. The Radical Reconstructionists don't much care that a lot of their "stimulus" will begin after the recession is more than three years old.

3. I have a Minsky-esque view of the nature of the crisis. That is, we have gone from being risk-loving (ponzi finance, in Minsky's terminology) to ultraconservative (hedge finance, as he calls it). I don't think we can (or should) put back together the Humpty-Dumpty of securitization and leverage that we had before. Businesses need to expand out of good, old-fashioned profits. Fiscal stimulus ought to be aimed at improving profitability.

Now, on to my personal history of macro.

I spent the academic year 1975-1976 working as a research assistant at CBO and at the Fed. My job was to run simulations of macroeconometric models, most especially the Fed's model, known as the Fed-MIT-Penn model. As of about 1970, those models were thought of as the empirical embodiment of macroeconomic theory. There was no difference between "scientists" and "engineers," to use Greg Mankiw's terminology.

When I began graduate school at MIT in the fall of 1976, I had the smug notion that I would be ahead of my classmates in my knowledge of macro, based on my close familiarity with the models. I was in for quite a setback. Not only were most of my classmates ahead of me in the mathematical aptitude that really mattered, but it turned out that I was arriving at a moment when macroeconometric models were in utter disrepute. Macro at MIT was dominated by Stanley Fischer and Rudi Dornbusch, the former influenced by Chicago, the latter influenced by Robert Mundell, and both absolutely in love with the mathematics of rational expectations--Euler equations, saddle points, and so on.

My second year at MIT, Ray Fair came from Yale for one quarter as a guest lecturer. He was and still is the last academic devotee of macroeconometric models. The class consisted of him going through his model. In the back of the room, John Huizinga and other students were soon laughing at him. By this point, what we knew about statistical methods was enough to make us realize that Fair's techniques (and those of other macro modelers) were a joke.

The problem is that macro time series are nonstationary and have low statistical power. Go back to the table on labor force composition I gave earlier in this post. There is no way to estimate a model in a way that is robust to such dramatic structural changes.

Because the data are not powerful enough to reject any hypothesis against an interesting alternative, the macroeconomic "scientists" divorced themselves from the "engineers," who continued to use macroeconometric models. In my view, neither the scientists nor the engineers accomplished anything. The scientists did mathematical masturbation, with some occasional, isolated empirical work that satisfied journal referees based on whatever fads were taking place at the moment but had no lasting persuasive impact. The engineers provided forecasts and policy simulations that were precise in form and totally unreliable in substance. In any case, the engineers were kept out of economics departments.

This generation of academic macro wankers managed to achieve consensus, primarily by avoiding discussing the fundamental issues of macro--how labor markets fail to clear and how financial markets affect real activity. So we get Olivier Blanchard's smug pronouncement


a largely shared vision both of fluctuations and of methodology has emerged. Not everything is fine. Like all revolutions, this one has come with the destruction of some knowledge, and suffers from extremism, herding, and fashion. But none of this is deadly. The state of macro is good.

Now that we are in a financial crisis, this "shared vision" is turning out to be nothing of the sort. Christina Romer and Larry Summers have gone back to trusting macroeconometricians, treating model multipliers as if they were fact rather than fiction. On the other side, Fama and others seem to have gone back to some pre-Keynesian view that simply ignores the possibility that there can be such a thing as unemployment.

Unfortunately, just because mainstream macroeconomists wasted their efforts the past thirty years does not mean that the answer is to rediscover macroeconomics as it stood in 1970. The pre-Dark-Age macro is not some mystical treasure map. It has a lot of theoretical and empirical gaps that make it unsatisfying.

I find myself incorporating strands as disparate as Hayek's information theory and Minsky's risk preference cycles into my thinking. I wish I had more professional company. I agree that macroeconomics has been through a Dark Age. But I think it has a way to go in order to experience a Renaissance.


Comments and Sharing


CATEGORIES: Macroeconomics



COMMENTS (37 to date)
Philo writes:

It's not a Dark Age if there wasn't a previous Age of Enlightenment. Macroeconomics has always been, and will always be, voodoo.

Matthew C. writes:

Larger public sector. Ahh, great.

At this rate Fannie, Freddie, AIG and the superbanks will have the USSA bankrupt within a year. . .

John Turner writes:

Arnold, your macro lectures link is broken, you left out /econ/

Grant writes:

Arnold,

I admit that I didn't read all of your lectures on macroeconomics. However, what seems to be missing from the discussions I've been reading are why the market shifted towards more risk taking. It seems to me that simply asserting people were more willing to take risks is like asserting Wall Street got greedier. They're always greedy, so what changed? Either existing, prudent entrepreneurs were convinced to take more risks, or imprudent entrepreneurs were given access to more capital than they had before.

I'm no economist, but IMO its both:
Looking at the expectations of entrepreneurs as being heterogeneous (e.g., some rational, some not, most just looking at what the other guy does because they really have no idea) is very helpful. Given the nature of our banking system, I cannot help but think that credit expansion necessarily selects for entrepreneurs with either short-term goals or irrational long-term expectations (both are outlooks that support ponzi finance), essentially giving people access to capital who really shouldn't have it. Throw in Hayekian limitations on knowledge and herd psychology, and I think its easy to see why previously-prudent entrepreneurs might be duped into following the temporarily-successful. The truly prudent would not take advantage of excessively low interest rates, but they can not stop the imprudent from doing so.

John V writes:

I find point #1 about the labor force along with the similar take on capital structure to be the strongest points of all. Serious consideration to these points seems almost like a show-stopper to me and render the whole idea of theoretical models on aggregate demand and multipliers clumsy and woefully inadequate.

I also never see these issues and all the implications tackled by pro-stimulus economists.

Steve writes:

Thanks for the article I'll check out Heyek and Minsky. Personally I have only recently become interested in college I took macro but slept through most of it. I studied philosophy ad political science with minors in neurobio and psychology. So I am inclined to look at everything from a cognitive side.

I think the next generations breakthroughs in economics will come from the realms of what used to be considered psychology and anthropology. Academia is due for a shake up.

I think Kahneman and Thaler's nobel for Prospect Theory was the biggest recent nod towards the coming paradigm shift.

Over the next 20 years one of two things will happen. The university system will realize that their degree of specialization and categorization of knowledge is severely limiting the scope of human understanding and therefore development or we are all doomed to dwell Khrugman's Dark Age.

My prediction. Breakthroughs will come for macro economics along with the other semi-sciences. But not until they start to incorporate more ideas they have deemed as out of bounds. Anthropology, psychology, philosophy, biology, economics, will have to come together for any real progress.

As far as the Obama stimulus I'm completely with you. The answer isn't in more spending on bridges and tunnels, the workforce isn't there. Keynes is way outdated. As much of an Obama supporter as I am I sadly find myself that Bush had the best plan before this whole debacle began. Namely, to just give everyone in the country a check. I know the counter argument is supposed to be "but they will just save that money." Aren't we trying to capitalize banks? Saving money is a good idea. Anything they spend will go through the pipes of the economy and states will collect sales tax revenue. If they pay down debt we help the struggling credit industry and increase lending.

Just print some checks. Lets see... $1T split between 300 million people... I'll take my $3,333.33 and spend it tomorrow on a car.

Lord writes:

I must say I am also skeptical of what fiscal policy will be able to accomplish, but perhaps my expectations are lower than yours. While it would be wonderful if government could point us in the direction of future, this is not something I expect of it. I am happy not if it brings us the future but carries us along with it. If we can do some things that most people agree need to done and will produce some future benefit, that is sufficient. Things like a smart grid, health IT, repairing and replacing needed infrastructure. At a time when private investment is fleeing, more public investment is not only recommended but necessary. Just because public is paying for these does not mean the private sector will not benefit from it. This is not a zero sum game. Nor am I concerned some won't arrive in a year or two. We have monetary policy to adjust if it proves overly effective. Given the last cycle, I have strong reservations about over-reliance on monetary policy alone to produce recovery. It took too much, too long to produce one, and did not lead to sustainable growth. Rather than try to produce artificially high profits that cannot be sustained, we need to do the work that needs to be done that produces low but steady profits. We have to face that high profits are gone and will not return for a long time. For that we will need some real discovery and invention, not just playing financial games.

megapolisomancy writes:

The ideological and redistributionist aspects of the bailout and stimulus are so blatantly obvious that we should not even bother to argue against it on technical economic grounds.

Do you think that the popular outrage over the bailout and stimulus plans reflect technical macroeconomical reasons? C'mon!

Whatever happened to public choice and politics without romance?

pushmedia1 writes:

With all due respect, I think you're arguing against 20 or 30 year old macro. Real business cycles, the obsession of the 80's, ignored unemployment and maybe that literature was more theoretical than empirical.

Modern macro, on the other hand, has taken on unemployment. My own research, for example, is on employment dynamics from a macro perspective. In my view, modern macro is more empirical relevant than macro has ever been.

Your (or rather Mankiw's) view that there's been a divorce of macro scientists and engineers is either wrong or exaggerated. See this article by Michael Woodford.

Steve writes:

The current study of macro economics is complete hogwash. All macro is micro by nature and all micro is turning into psychology.

Get over it.

Lord writes:

> The stimulus plan is highly partisan and ideological in nature.
> we should not even bother to argue against it on technical economic grounds.

That is the most that can be asked for - admitting that your opposition is partisan and ideological. Nothing more to discuss.

The reason profits are falling is that they never existed to begin with. They were only illusory cash out of the housing atm.

Greg Ransom writes:

The dark ages of macro began in 1936.

Read David Laidler, _The Fabrication of the Keynesian Revolution_ or anything by Hayek on Keynes to get some small hint of what was lost due to Keynes's ignorance and dishonesty -- as well as the cluelessness of the Keynesians who followed him.

Really. Economists who don't know the history contained in Laidler are massively ignorant of what economics once was, before the deceptions and simplemindness of Keynes and the Keynesians took over the graduate schools.

Andy writes:

Arnold, you are a voice of reason in this stimulus/macro "debate." Keep it up!

brian writes:

Doesn't the dead era coincide with the increase in influence of monetarism (led by MF) and also supply side tax theory? Thus good macro policy became 1) low inflation and some countercyclical action via the money supply, and 2) proper tax and regulatory incentives for economic growth. Macro, as best represented by Samuelson's text, became passe.
The left, making the not completely unreasonable case that this approach failed, harkens back to Keynes.

Maniel writes:

I again submit that the blood of taxpayers should only be used to address a constructive, long-term goal, such as undoing a destructive government program. For example, a transition out of Social Security - destructive of savings, jobs, and personal freedom - will require buying out the SS "contracts" of the young (under 40?) and of older volunteers. [more about this at http://equitybasedeconomy.blogspot.com/]

Advantages: return money to working people (stimulus); reduce the burden on employers (stimulus); and restore economic planning to individuals (efficiency). Since these are all long-term benefits, this plan will raise investor confidence.

Disadvantages: debt "from here to eternity" just like any government stimulus plan, along with the usual condescending drivel that people are too stupid to save and invest on their own (so the government needs to take their money from them).

Jacob Oost writes:

Thanks for the book recommendation Greg.

Dr. K, you are going to have to do a post explaining exactly how you and that charlatan Krugman have anything in common ideologically.

Snark writes:

Keynesianism is no longer accepted with the same alacrity of spirit that it once was. For better or worse, his ideas revolutionized the profession and influenced many brilliant economists for decades following acceptance of the key tenets of the General Theory into the mainstream. To simply dismiss Keynes and his followers as charlatans is naive, at best.

brannigan writes:

Epicycles, epicycles and more epicycles, the macroeconomists never cease to amaze. The problem with macro is that it clings to Keynes as if he were the risen Christ who spake truth to the pagan gold standard worshippers.

But what if Keynes was not only partly wrong, but entirely wrong? What if Keynes was not only wrong now, but was in fact always wrong? This question would get any academic economist thrown out of the consensus and into the grim dark world of heterodoxy.

Nontheless, If macroeconomists cannot answer this question for real, they will become a joke in intellectual history, a byword for sheepish indolence of the mind.

Carl The EconGuy writes:

All you multiplier-proponents out there, answer me this:
Over the last eight years, we've had a veritable feast of a natural experiment in combined monetarist and keynesian policies. The Fed let the money supply blow like a Big Bang, taxes have been decreased across the board, and deficit spending gone ballistic. Talk about STIMULUS with capital letters!
So, where did all the Bush multipliers go? Why should they now reemerge as Obama multipliers?
How can anyone, given the last eight years, take keynesian prescriptions seriously? Just take a look at the data, for crying out loud. We've just rushed blindfolded into a bad recession after the most expansionary policies in decades! How can anyone, after this, take current stimulus packages seriously? Arnold, don't you think it's time to wake up? Toss your idiotic keynesian knee-jerks out the window -- not that modern keynesianism has much to do with The Real Keynes (I'm a student of Axel Leijonhufvud's, so I know that, you see.)

fundamentalist writes:

Grant: “Looking at the expectations of entrepreneurs as being heterogeneous…”

You’re trying to build a macro theory from micro foundations. A lot of people have criticized mainstream macro theory for being divorced completely from any kind of micro foundations. A micro foundation for macro is one of the main strengths of Austrian econ.

Grant: “…why the market shifted towards more risk taking.”

Loose money caused by artificially low interest rates encourages more risk taking. Hayek has a good explanation in his “Monetary Theory and the Trade Cycle.” Essentially, a few banks take greater risks and make huge profits. Other banks see this and are pressured to do the same. It works for a while so more people think it’s OK. In addition, mainstream econ teaches that credit expansion does no harm, only good. As a result, the bust always takes them by surprise as it does everyone else who listens to mainstream econ.

For mainstream econ to develop a sound theory of macro, it will have to go back much further than 1970. As O'Driscoll points out, it will have to go back to the 1930's and discover what it has ignored for 80 years.

Dave writes:

This is a great post. I have been in complete agreement that many right-leaning economists are just missing the point about underutilized workers and that savings are not being lent out by banks while many left-leaning economists have been much too confident in their abstractions without consideration for how economic activity emerges from the bottom up. In other words, both sides tend to be wrong, and have typically have unrealistic expectations for both stimulus and tax cuts.

It also strikes me that consumers have cut back their spending for a few reasons:
1. decreased wealth due to falling home and stock prices
2. high levels of household debt (historically speaking)
3. decreasing job security as the recession deepens

The rational response to 1 and 2 is to save more and consume less. These actions have helped lead to 3, which also encourages less consumption. The stimulus, at its best, can help alleviate some of 3 temporarily. But even if it works as well as its proponents hope, it will be very unlikely to solve 1 and 2 (temporary tax cuts may be able to help put a small dent in 2, but not much towards extra consumption). This is why I think the stimulus will be very unlikely to achieve the full hopes of its proponents. It will also not lift the economy evenly; for instance, the money spent on construction will primarily benefit activities related to construction and the workers who receive wages, while doing virtually nothing to lift the sales of, say, luxury cars. It's also a pretty expensive way to tackle number 3, adding to consumers' debt indirectly via government liabilities. Although, the way our tax system works, it really funds spending today mostly with future rich people's taxes. These increased taxes in the future will arguably restrict growth at some point.

Having said all of that, some increased infrastructure investment might be worthwhile. Labor is relatively cheap right now, and likelihood of crowding out private uses of such labor is lower than in boom times. It just seems to me that such spending should be limited and done responsibly.

AlanM writes:

The Seattle Post-Intelligencer has an interesting article today, on law enforcement and the meltdown. (I picked it up via Calculated Risk.)

"...the Bush administration was thoroughly briefed on the mortgage fraud crisis and its potential to cascade out of control with devastating financial consequences, but made the decision not to give back to the FBI the agents it needed to address the problem."

http://seattlepi.nwsource.com/national/397690_fbiweb28.html

If history judges the views of these former top FBI officials to be correct, UBL's $500k investment in 9/11 not only returned him a $3 trillion US misadventure in Iraq (Stiglitz & Bilmes) and the worsening Afghanistan/Pakistan mess, but crashed the world economy for another $3.6 trillion in capital losses (Roubini) plus 50 million job losses in 2009 (ILO).

This sort of thing is the reason macro will always have a lot in common with anthropology and history. It will never be a "hard science" and will always be contingent and interpretive. Nothing wrong with that, so long as we don't pretend otherwise.

Norman writes:

The reason for the economic downturn is akin to a corporate downturn: excess inventories need to be bled off. This is easily seen in housing. From 2000 to 2007 we had an excess of new homes built and now new home starts are the lowest in decades. Housing won't turn around until the excess inventory is used up, I think mid to late 2010 will do it.

I believe that the same is true for the automobile market and with China being able to stuff consumer goods down our throats due to being ultra cheap the same thing will hold there.

Thus, all of the stimulus is for naught. We have enough. The 'stimulus' will be nothing more than a waste to be paid for in later years. The economy will recover on its own.

The financial crisis is another matter and does deserve some attention but not the panic-like, Santa Claus effort we are now putting in.

One key thing we need is a less snobbish, more useful, core definition of science, and I think that definition should be, "that which is logical". If you want, you can add things to this core – if they're worth adding – but you should never remove the core, as it appears some have done.

If what you say is completely logical, then it's completely scientific. On the other hand, you can have all the impressive looking mathematical equations in the world, but if you use them to make the conclusion that in the actual real world the Great Depression was just a giant prolonged voluntary vacation, because you're taking downright comical assumptions literally, but you say, or try to make others think, it doesn't matter in making identical conclusions for the real world (without using your assumptions), then you're not being logical, and therefore you're not being scientific. You can breathe on your "logic" chain and it shatters.

On the other hand, if you take some very informal observations, link them to some very mild assumptions, even the most accepted things, like what we see is actually there, and from that you put together completely solid logic chains that make important conclusions, perhaps show that important things are extremely likely, then you have been scientific, and perhaps very useful, even though a lot of people will snobbily say that's not science, or scientific. Of course, something informal like this should still be written down in a careful, organized way to minimize mistakes, but if it is completely logical, in every single link, then it's scientific, and often things like this are extremely valuable.

DonLast writes:

One of the unintended consequences of this historic financial crisis might be that it kills Keynesianism as we know it. John Maynard Keynes was a magnificent economist and his theory a milestone in economic thought. Unfortunately it needs Keynes to run it. Later practitioners use it like it was a recipe for baking pies.
These fevered calls for stimulus are a madness, but of course understandable given the nature of politics and the sort of people attracted to politics, people with outsize egos, yet in truth ordinary mortals acting in an environment in which a week is a long time.
As Hayekians of micro-persuasion accept, underneath this hubris-ridden state activity, this "Magic Shadow-show", the real adjustments are already taking place. Millions of people in all walks of life in all countries are now being forced to make decisions, responding to market signals and acting accordingly. It is this teeming minutiae of micro activity which will primarily decide the future not aggregates, and simply because it so hard even impossible, to predict the outcome this does not make it any less true.

Robert Waldmann writes:

I don't agree at all with your first argument.
As far as I can understand it, you are arguing that the Beveridge curve has shifted out. I believe it has shifted in in the past 16 years. In other words you seem to be arguing that natural rate of unemployment has increased which explains why Alan Greenspan was wrong to guess that low unemployment in the mid 90s did not imply that monetary tightening was needed.

Neither you nor Hayek has explained why higher unemployment is needed to shift out of over-expanded sectors than was needed to shift into them. You can't explain why a stimulus would interfere with reallocation of talent, nor am I aware of any empirical evidence supporting Hayek's view (quite the opposite I'd say high unemployment causes people to stick to jobs which don't optimally use their skills and interferes with reallocation basically what we need to get people out of where they are and to where they are productive are job vacancies and their is this thing called the Beveridge curve).

Your point 2 explains why you would prefer a different stimulus. Obvioiusly you fundamentally disagree with Obama about most areas of policy other than, maybe, the case for fiscal stimulus right now. I think you could just say "I'm at CATO so obviously I don't like any bill proposed by Obama" and leave it at that. In any case I'd say it means you would prefer a different stimulus, but does it mean you think that no stimulus would be better than Obama's proposal ?

The only linke between your point 3 seems to be that you seem almost to be arguing that a stimulus would be bad, because it would reduce economic suffering and people should suffer to punish them for their folly and teach them better. A rather broad brush approach. I don't see why someone who hasn't even bought a house losing his job is an efficient deterrent for say AIG writing CDSs. I mean is your argument, as it seems to be, the worst it is the better it is ?
That is the only link I can see between your respect for Minsky and your opposition to the stimulus.

Robert Waldmann writes:

In contrast I agree with your thoughts on the Macro dark ages.

I have only one objectoin and it isn't to your thought at all. I do not accept Mankiw's terminology. You write "The scientists did mathematical masturbation." I agree, but, if we are right, then they aren't scientists. Rather they are mathematicians (although mostly not of a level which would meet the grade in a second rate math department).

The defining characteristic of natural science is that theories bow to facts. Theoretical physicists have high standing in the profession (higher than empirical physicists) but, if their theories are contradicted by the data, they are abandoned. The physics profession as a whole, is governed by data so theoretical physicists bow to emprical physicists (who sure are engineers) even though they feel superios.

And that's physics. One of the problems with those Mankiw defined as "scientists" is that physics is the only science they ever think of. In biology, it is perfectly possible for a Nobel Laureate to admit without embarassment that he needs to ask for help with calculus except for the simplest things (Salvatore Luria personal communication 1983). His role in the MIT biology department (then clearly the best in the world) was similar to that of Samuelson over at the economics department).

Many economists sincerely identify a scientific approach with a mathematical approach. I hope the fact that this is nonsense is obvious to everyone reading this.

I'd ask Mankiw if he can find 10 natural scientists who would consider those he calls "scientists" to be scientists.

Now as to your cricisms of the engineers -- well what would you do ? I'm new to this blog, so I note my ignorance without apology. What is your current policy proposal (say you became 218 representatives, 60 senators and the President what would be done ? Would you wait to act until you had made a new approach to macro based on Hayek and Minsky ? I don't think that would be optimal.

fundamentalist writes:

Robert Waldmann: “Neither you nor Hayek has explained why higher unemployment is needed to shift out of over-expanded sectors than was needed to shift into them. You can't explain why a stimulus would interfere with reallocation of talent, nor am I aware of any empirical evidence supporting Hayek's view…”

In equilibrium, you would be right. But Austrian econ is the economics of why equilibrium rarely happens. The excess labor in the over-expanded sectors, such as housing, came from the ranks of the unemployed in the previous depression. Every boom begins with idle resources, labor and capital. Artificially low interest rates encourage expansion in the capital goods industries which soak up the excess labor. When the idle resources are fully employed, then the capital goods sector competes for labor with the consumer goods sector. Eventually, this competition reduces unemployment below the natural rate.

In the Austrian business cycle theory, the competition between capital goods producers and consumer goods producers ends with the consumer goods producers winning and capital goods producers laying off many workers. They become idle resources again. The labor market doesn’t clear because the skills of the unemployed can’t be transferred to other jobs easily. They are too specific. It will take time, sometimes years, for unemployed workers to accept that they can’t find a job in their usual field and go through the process of retraining for a different field.

The empirical evidence for this is in the large divergence in levels of unemployment in the capital goods industries vs. the consumer goods industries. This divergence in rates is what caught the attention of all economists in the 1920’s, but the English economist Cantillon observed is back in the early 18th century. They also noticed that the business cycle take place mainly in the capital goods industries. The evidence has been there for 200 years and is quite strong. I don’t understand why mainstream econ chooses to ignore it so completely.

fundamentalist writes:

PS, As for how the stimuli thwart recovery, it does so by encouraging consumer spending. Increased consumer spending on a limited amount of consumer goods causes prices to rise and with them profits. Increased profits in the consumer goods sector causes investment to shift there from the capital goods sector which is experiencing very low profits during a depression. That shift in investments hurts recovery in the capital goods sector. In addition, higher profits in the consumer goods sector is another way of saying that labor costs are lower. Lower labor costs encourage businesses in the consumer goods sectors encourage businesses to switch from employing capital to employing more labor to increase output. This switch is micro 101. Hayek called it the Ricardo Effect. (check out Wikipedia’s article on the Ricardo Effect). When the consumer goods sector uses more labor (through having labor work overtime for example) and less capital, those businesses purchase less capital equipment. This further aggravates the problem in the capital goods sector.

Dave writes:

Paul Krugman brought up similar concerns to Waldmann. Mish answers intelligently.

AlanM writes:

Richard H Serlin wrote: "One key thing we need is a less snobbish, more useful, core definition of science, and I think that definition should be, "that which is logical"."

I think science has progressed pretty well over the past 500 years, using the definition of "results must be testable and repeatable". There's no need to expand what is represented by the word "science" beyond that.

Robert Waldman wrote: "Many economists sincerely identify a scientific approach with a mathematical approach. I hope the fact that this is nonsense is obvious to everyone reading this."

I suppose this has a lot to do with why I chose (after 3 years of undergrad engineering) to study anthropology over sociology.

It's important to understand the difference between "science", and "scientifical" or "mathematical" or "logical". It's important to respect the human gifts of intuition, interpretation, and narration.

Please have a look at the very recent video of Nassim Taleb onstage with Daniel Kahneman, a Nobel prize winner who is not wearing a necktie. I don't have a URL but the link can be found from the DLD conference website, it's titled "reflection on a crisis" or some such.

Cheers Arnold! Stay hungry!!! "How many legs has a dog, if we call its tail a leg?"

Larry writes:

I get the sense that the debate is advancing.

RBC guys have to deal better with unemployment, etc.

Keynesians have to deal with resource competition, lags, and the fact that since gvt can't stimulate forever, direct measures to get business going again make sense.

And we better figure it out before those foreigners stop lending us their money cheap.

SOL writes:

As an Emeritus Professor of Economics at a major university, I entirely agree with the very first Comment, so accurately and eloquently put:

Philo writes:

"It's not a Dark Age if there wasn't a previous Age of Enlightenment. Macroeconomics has always been, and will always be, voodoo."

-- and that's why I chose Microeconomics...

I've always been wary of those who resort to ad hominem arguments instead of the merits of whatever is at hand. Like you, I've graduated into an eclecticism that says it is better to be agnostic until the argument I stare at is sufficiently convincing.

I've tried to digest the modern macroeconomics, and I think it fails because its proponents don't want to go into territory where it might not work. I mean areas like "institutions," "animal spirits," "irrationality," or even expectations that cannot be "endogenized."

I suspect I'm preaching to the choir.

Hephaestus Rajinikanth writes:

Post-Keynesian Revival!

"Variation of capitalization,
e.g., occur without its being practicable to refer them to
visibly equivalent variations either in the state of the
industrial arts or in the sensations of consumption. Credit
extensions tend to inflation of credit, rising prices,
overstocking of markets, etc., likewise without a visible or
securely traceable correlation in the state of the industrial
arts or in the pleasures of consumption; that is to say, without
a visible basis in those material elements to which the
hedonistic theory reduces all economic phenomena."

YAY and HEH

George writes:

Richard Serlin,

You wrote,

"If what you say is completely logical, then it's completely scientific."

No; if what you say is completely logical, then you're doing mathematics, not science. Perhaps you mean "reasonable", not "logical."

Let's make a deal:

I won't spout off about personal finance, and in return, you'll keep your opinions about what is and is not science to yourself until you've actually studied the philosophy of science a little.

Here's a starting point: the Problem of Induction.

Bill Woolsey writes:

Dear fundamentalist:

What happens when international trade expands?

What happens as import competing industries shrink and export industries expand?

What happens when there is technological innovation and a new good is instroduced making some existing product obsolete?

What happens when people choose to save less
because of a greater taste for wine, women, and song, and tomorrow we may die?

Have you have every thought about any sectoral change other than those that supposedly occur because monetary policy has caused the market interest rate to fall below the natural interest rate?

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