Bryan Caplan  

The Pyramid of Macroeconomic Insight and Virtue

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Many of my friends laughed at Paul Krugman when he wrote:
Maybe I actually am right, and maybe the other side actually does contain a remarkable number of knaves and fools.

Krugman continued:

The key to understanding this is that the anti-Keynesian position is, in essence, political. It's driven by hostility to active government policy and, in many cases, hostility to any intellectual approach that might make room for government policy.

At risk of sounding misanthropic, though, Krugman is entirely correct to look at "the other side" and see a remarkable number of knaves and fools.  Krugman's mistake is that he ignores the comparable number of knaves and fools on his own side.  A calm assessment would reveal that the entire spectrum of macroeconomic opinion is sorely in need of self-improvement.  If you had to classify everyone with a position on the subject, you'd end up with a Pyramid of Macroeconomic Insight and Virtue that looks something like this:

Tier 1, the Base of the Pyramid (50%): Partisans who loudly support Status Quo Macro Policy (SQMP) as long as "their side" is in power, and angrily oppose SQMP when "their side" isn't in power.  See all the Democrats who supported Clinton's austerity, and all the Republicans who supported Bush II's profligacy.

Tier 2 (30%): Ideologues who are sure that "active government policy" will work well/poorly, even though they can't even explain "their side's" arguments, much less the "other side's" arguments.

Tier 3 (10%): People who can parrot some basic textbook macroeconomics to support "their side," but who can't answer basic objections - or even accurately parrot the parts of the textbook that conflict with their views.

Tier 4 (7%): People who understand a few Undeniable Macroeconomic Truths.  For Keynesians, these include: "Nominal wages are sticky," "A lot of unemployment is involuntary," and "Aggregate Demand matters."  For anti-Keynesians, these include: "The safety net discourages job search and sustains unrealistic worker expectations," "99 weeks of unemployment insurance makes nominal wages stickier," and "Regular government spending is wasteful, and stimulus spending is worse." 

The main problems with both groups: (a) Both loathe to acknowledge the other side's Undeniable Macroeconomic Truths; and (b) Both tacitly rely on a long list of Questionable Macroeconomic Exotica to reach their policy recommendations.  For Keynesians, the exotica include: "Monetary policy has little effect on Aggregate Demand," "Nominal wage rigidity is a good thing because it sustains Aggregate Demand," and "No matter how much we cut taxes, people will just save the money."  For anti-Keynesians, the exotica include: "Given the labor demand shock, workers are indifferent between unemployment and employment at the market wage," "Nominal wage rigidity doesn't matter because firms adjust non-wage benefits and labor intensity instead," and "The market is always right on average... except when the TIPS market keeps forecasting low inflation."

Tier 5, the Apex of the Pyramid (3%): People who freely acknowledge the whole list of Undeniable Macroeconomic Truths, while taking all Questionable Macroeconomic Exotica with a grain of salt.

Needless to say, we can argue about the precise percentages at each tier.  But can you seriously deny that most people on both sides are partisans or ideologues?  Can you seriously deny that most people who marshal textbook macro to promote or attack SQMP rarely "understand" more than a few bullet points in the textbook?

Wonks' main controversy about my Pyramid, I suspect, will focus on Tier 4 and the Apex: "You're Tier 4.  We're Apex!"  "No!  We're Apex, you're Tier 4."  I'm not going to settle this debate tonight.  Instead, I'll simply ask: If you decry your opponents in Tier 4 as "fools and knaves," what do you call your allies in Tiers 1, 2, and 3?


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COMMENTS (28 to date)
Bill Patterson writes:

I'm nowhere near the top of your pyramid, but as a non-American it seems that there is a much stronger culture of libertarianism and anti-government sentiment in America than Western Europe or Australasia or East Asia, at least from what I've observed. This makes it more likely for outsiders to see the anti-Krugman side as the more ideological, but you might say that those other places have pro-government sentiment. I think the appropriate objection to that would be that utilitarian ends are preferred and both markets and government are useful for that in different ways. In America the utilitarian argument gets much less sway, and you get things like Ron Paul saying every person must be able to keep the 'fruits of their labor' - the market rewards people correctly, and the moral thing to do is to minimize taxes and leave it up to individuals, utilitarian concerns are of much less concern regardless of their efficacy.

So if we take random samples of 'knaves and fools' from America, the proportion arguing for [stuff Krugman hates] will be higher in America than in random samples from other places. Perhaps the tip of the pyramid will be similar though? If you transplant a tier4 libertarian economist to Scandinavia, he'll probably blow a gasket and start calling the other side knaves and fools. Of course by definition this pyramid says the best economists fit into this box defined by the author which is always going to be contentious.

Tim Worstall writes:

It's also possible to take a more basic view of this. The Keynesian prescription is that in order to solve a recession we should allow George Osborne (or Gordon Brown, Obama, Ralph Nader, whoever it is who actually happens to hold the purse strings in your economy) to spend more of our money.

Having met two of those four this just doesn't strike me as a valid answer to any question at all, let alone how to escape a recession.

Yes, this is indeed simple prejudice. But prejudices, just like cliches, exist often enough because they contain an essence, a truth.

john hare writes:

I'd put myself at about 3.5, and I resent being given such a low score. Seriously I would put myself solidly in the anti-Keynesian camp with the caveat that at least I have some awareness that I don't have all the answers.

Shayne Cook writes:

This post might want to be re-titled:

"The Pyramid of Normative Macroeconomic Insight and Virtue".

I suggest Thomas Kuhn's The Structure of Scientific Revolutions. The two sides talk past each other because the two sides have different world views, different paradigms.

Also, I would say, the two sides have different world views because the two sides have different needs. Macroeconomics is a science which is useful to the state. The state needs to feed itself. The state, like most higher forms of life, can feed itself only at the expense of lower forms of life.

muirgeo writes:

As a lay person watching the debate from the outside since the boom and bust and slow recovery I've seen which side has more accurately predicted the bust, the week recovery and explained the collapse most consistent with the facts. Now with record corporate profits and anemic growth and hiring it's not the macro's who have some explaining to do. The macro's have great explanations that fit the facts while the anti-keynesians truly are waiting on fairies. See Thomas Palley at the National Economist Club ; http://www.national-economists.org/podcasts/nec198.mp3

egd writes:
If you decry your opponents in Tier 4 as "fools and knaves," what do you call your allies in Tiers 1, 2, and 3?

Well informed voters?

Lawrence D'Anna writes:

What would you call somebody who thinks at tier 5, but writes at tier 3 or 4 to pander to his tier 1 mass audience?

Vangel writes:

You forgot Tier 5.1. These are the folks who know the Undeniable Macroeconomic Truths but understand that once you start to try to use empirical and mathematical approaches to reach conclusions about complex systems macro has lost its way. Their skepticism comes from the methodology itself, not any conclusions reached by that methodology.

Bostonian writes:

Should the "knaves" behave differently? People are not intellectually honest in their public statements because they think doing so helps their cause. If Republicans spoke like disinterested scholars and left the demagoguery to Democrats, the Democrats would win more elections and enact policies Republicans oppose. The opposite would happen if only Democrats were virtuous.

Maybe the moral is not to engage in so much demagoguery that you confuse not just others but yourself and end up enacting bad policy.

I thoroughly appreciate your olive branch. As someone who is relatively new to the field, I have been discouraged by the snarky dialogue that comes from both sides.

I was very fortunate to have professors that taught models objectively, and allowed analysis and results to speak for themselves. I will be the first to say that I have preferences; however, they're never to the extent where I would refuse counter-points, belittle those who disagree, or especially go as far to personally insult them.

I am a firm believer that just because I disagree, it doesn't mean I have to be disagreeable. Perhaps it's time to reflect on our ethics.

muirgeo writes:

There is also a pyramid of understanding of the theory evolution... and then there are creationist.

Roger McKinney writes:

Then there are the Austrians standing outside the pyramid laughing as if watching an episode of “Big Bang.”

The Keynesian/anti-Keynesian debate is similar to the old story about three blind men trying to describe an elephant. Each bases his description on a single feature, such as the tail, the ear or a leg. Only someone with sight can truly describe the elephant.

The “exotica” have empirical support and are true descriptions of small aspects of business cycles, but they don’t tell the whole story. Austrian econ provides the only framework that can fit the exotica into their true relationship with the whole cycle. Roger Garrison’s “Time and Money” does a good job of that.

Hazel Meade writes:

What's entirely missing from this picture (and apparently nonexistent) is

Tier 6: Working macroeconomists who are commited only to a pure search for truth, and don't care which way the political chips fall, or if someone's "undeniable truth" gets gored.

Vangel writes:

The Keynesian/anti-Keynesian debate is similar to the old story about three blind men trying to describe an elephant. Each bases his description on a single feature, such as the tail, the ear or a leg. Only someone with sight can truly describe the elephant.

I think that you are missing the point. The Austrians understand that the mathematical based methodology on which macro is based is fundamentally flawed and essentially useless. In this case there is no elephant; only individual features that give the illusion of an elephant.

Vangel writes:

Tier 6: Working macroeconomists who are commited only to a pure search for truth, and don't care which way the political chips fall, or if someone's "undeniable truth" gets gored.

There is no such a group. We cannot find the 'truth' in a complex system like the economy by using simple mathematical tools and by making assumptions of a reality that does not exist.

Hazel Meade writes:

There is no such a group. We cannot find the 'truth' in a complex system like the economy by using simple mathematical tools and by making assumptions of a reality that does not exist.

I'm inclined to agree, but perhaps there are some aspects of macroeconomics that can be grounded in microeconomics. You can make similar complaints about climate science or any complex system, and yet there are still "sciences" that study it. You don't necessarily throw up your hands and give up on ecology because it's so hard to directly link it to microbiology.

For some fields, the 'links' between the macro-scale behavior of a complex system and the micro scale are more or less worked out. Fluid dynamics for one, you can pretty much explain "viscosity" in micro detail, even though it just becomes a number attached to a particular fluid when you're explaining fluid flows. Climate science, less so - there's a bit of thermodynamics in there, some ecology, but of course the climate scientists are always striving to ground their theories more soundly in harder sciences.


Vangel writes:

I'm inclined to agree, but perhaps there are some aspects of macroeconomics that can be grounded in microeconomics. You can make similar complaints about climate science or any complex system, and yet there are still "sciences" that study it.

A perfect example. Look at how badly the climate 'science' people got it so wrong for so long. They assumed that man had to be the cause of the little bit of warming that we got after 1975 because they could not explain it with their models in any other way. Now that the solar people are pointing to other effects and Svensmark came up with the CRF hypothesis all those models will have to be thrown in the garbage. I imagine that the equivalent of Svensmark's hypothesis will be Mises' argument about money and its effects. But Mises did not resort to mathematical games to try to prove something that could not be proven using those techniques. He used a different, and my opinion much better approach.


You don't necessarily throw up your hands and give up on ecology because it's so hard to directly link it to microbiology.

But we don't try to make things fit that do not fit or make simplifying assumptions to support our biased narratives. Science cannot take that approach and still be credible. We cannot pretend to be scientific when we base our methodology on faith.

Gordon writes:

Bryan, this is a great write up. I'm wondering if under Tier 4 for the Undeniable Macroeconomic Truths for anti-Keynesians, you could include: "Whenever a government agency has experienced a budget cut, it will do whatever it can to have its original budget restored." And under Questionable Macroeconomic Exotica, I would include: "The macroeconomy is too complex to be accurately described by any mathematical model. Therefore, all macroeconomic models are pointless."

Floccina writes:

The divide on Keynesian policy is puzzling because Keynesian policy could be enacted in a much Libertarian way than current policy. Build some roads, bridges and airports even while cutting long term liabilities related to SS and Medicare. If that is not enough write a check for each USA citizen or suspend the SS and medicare taxes.

Ken P writes:
egd writes:

If you decry your opponents in Tier 4 as "fools and knaves," what do you call your allies in Tiers 1, 2, and 3?

Well informed voters?

Well said.


Ken P writes:

Great post Bryan!

I have no problems with anything in Tier 4, but believe another truth should be added: "The capital structure matters." I'm assuming that is "questionable" and disqualifies me from Tier 5.

I also have major holes in my knowledge of some topics. That will change.

perfectlyGoodInk writes:

Hazel Meade: What's entirely missing from this picture (and apparently nonexistent) is

Tier 6: Working macroeconomists who are commited only to a pure search for truth, and don't care which way the political chips fall, or if someone's "undeniable truth" gets gored.

Economists in one of the two political camps are far more likely to gain attention, influence, and political appointments. Thus, there are strong career incentives to either join one of the two political camps outright or at least produce work that can be used as ammunition for one or more of the sides, rather than to focus on solving problems like modeling the economy more accurately.

For a field that claims that incentives matter, it seems to have done nothing to try and better align the incentives that act on it.

Mm writes:

What tier are those who always bring in unrelated arguments that are their hobby horses? Like evolution/creationism, gun control etc

NZ writes:

@ muirgeo:

Not only do most people who support evolutionary theory not understand it, but those who should understand it fail to heed or apply its lessons. For example, Charles Darwin's great great grandson Matthew Chapman doesn't seem to have heard of social evolution. As a result he does not appreciate the net advantages of religion (which, if you believe in evolution, you ought to view as a necessary adaptation), arguing instead that "the world would be better off without religion."

Mike Rulle writes:

Oh hum. Since I have no PHD in economics, it is inevitable I exist on a lower level of your fantasy pyramid. So I wonder what the point is in my commenting?

My point is Krugman. Krugman is an ideologue whose hubris is unbearable. I do not know why so many who fundamentally disagree with him in the economic space spend so much time talking about him. It is always his POLITICAL statements which are highlighted ("fools and knaves") and then backward engineered into an economic commentary such that he potentially can be given his due.

He adds no value to pyramid cellar dwellers in his political opinion pages. One of the things I have learned in life is guys who write like bullies tend to be less sure of themselves than they appear----or really have no self awareness.

Curt Doolittle writes:

PRICELESS POST

I have this wonderful little collection of Bryan Caplan posts that I quote regularly, and this one gets added to the pile.

"Undeniable Macroeconomic Truths, and Questionable Macroeconomic Exotica"

Priceless. :)

Curt Doolittle writes:

Floccina --

Some of us recommended just that solution.

There are loosely, five different policy levers that roughly correspond to a short to long time horizon. These levers are promoted by factions of economists that divide loosely into the left and right biases depending upon how the money moves through the economy.

If the government contained five houses of economists, and they all had to agree to pass a bill, then each of the five would invest in his or her favorite part of the spectrum - and everyone satisfied, progress would be made.

Instead, everyone demonizes the other in an all or nothing game that no one wins.

The logic of this nonsense escapes me. Why, if there are five levers to pull, must we only pull one or two? Because they feed the friends enemies.

Madness.

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