Monday, March 01, 2010

Macroeconomist Phelps States Macroeconomics Progressing

In this EconTalk episode, Russ Roberts interviews Nobel prizewinner and macroeconomists Edmund Phelps about macro (his main contribution was to note the Phillips curve was wrong, there is a 'natural level' of unemployment and no long run trade off between unemployment and inflation). Phelps states that macro has been very productive over the last generation.

I disagree. The main issues in macro, what is the optimal size of the government in the economy? As the size of the government in the US have grown pretty constistently over the past 100 years, with episodic upswings and downswings during major wars, suggests policy makers and voters think it has always been too small. For all the shrill excorations about market fundamentalism, and the emphasis on markets, markets have been a shrinking part of the economy. So, what is 'the fact' that needs explanation, the rise of the intellectual basis for markets, or the rise in the attractiveness of government? It seems famous, credentialed economists disagree (eg, Friedman, North, vs. Stiglitz, Krugman).

Phelps thinks we know a lot more about the economy, and by this he means, I think, that several theoretical innovations--the Phillips curve, the steady growth of money ensuring steady growth--have been proven wrong. So, some ideas have been rejected, and in that sense we know more. But there have been many innovations--overlapping generations models, dynamic programming, Hansen's generalized method of moments--have shown themselves to not really focus our efforts, but rather allows everyone to add rigor showing that some things could be true. That's hardly helpful, in that theories that explain everything explain nothing, and bad ideas are a dime a dozen (ie, developing an enthusiasm for the Phillips curve, and proving it wrong, is hardly progress).

So, we currently have debates about the value of the multiplier, where values over 1 suggest government spending is good, less than 1 means counterproductive (assuming that government and private consumption and investment have the same value, ie, the cost is the value created). Robert J. Barro--a well respected economist--suggests a value of -1.1. Joseph Stiglitz--a well respected economist--argues that the multiplier is around 2.0 (1.5 in the short run). Monetary policy currently targets a nominal GDP via the Taylor rule, an ad hoc policy that is indifferent to how much of GDP is inflation or real growth, so it reflects nothing that macro theorists have figured out, but rather, a reasonable rule of thumb. There is no consensus on why poor countries are poor (Easterly: too much top-down control; Stiglitz: too much markets, too little government spending).

I think the only thing macroeconomists have learned, is that Soviet style socialism does not generate higher growth than non-Soviet style socialism, and this fact wasn't predicted by any economic consensus, but rather, the obvious failure of the Soviet Union, and the comparison of countries like East and West Germany, or North and South Korea.

1 comment:

Anonymous said...

Macro-econ is a complete fraud, it is a reversal of cause and effect and based on collectivism. Economy wide measures (e.g. GDP) are a result of freely acting agents not govt policy and make no sense apart from voluntary trade. One can see this by imagining the govt outlaws stop signs and street lights... we would have 100% employment overnight and GDP would rise dramatically as we pay people to hold stop signs and guide traffic through intersections but we would be much worse off economically despite macro-stats improving. This is the fact ignored and buried in the piles of papers, rationalizations and models of macro-econ.

Macro is a rationalization for govt interference in the economy, i.e., increased political power over producers. This approach did not start with Keynes but he institutionalized it. Krugman continues the scam but he is getting a bit testy because the internet will put an end to this fraud and he is smart enough to know it. I will make a prediction that Krugman (if he hasn't already) will come out in support of regulating or controlling free speech on the internet.

Finally, there is really only two branches to economics. Economic principles (e.g. supply and demand, marginal utility, comparative advantage, etc) and the application to specific areas such as the firm, consumers, trade, etc. And monetary (and price) theory. Both branches are *normative*, contrary to what is currently taught in econ, i.e., if you love living as a human, values, production, science and wealth these are the principles of production one *should* follow.