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The state of macroeconomics is not good

If you think international relations theory has problems, let me introduce you to the most influential and problematic subfield of economics.

Milton Friedman in 2002.
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Yesterday’s post about the stale quality of international relations theory provoked some pushback from international relations scholars. It also probably generated some bemusement by economists.

This is mostly because economists are close to insufferable when they opine about the other. Indeed, in “Economics Rules,” an otherwise critical book of his discipline, Dani Rodrik offers up numerous asides about how economics is more rigorous than the rest of the social sciences, such as, “economics is by and large the only social science that remains almost entirely impenetrable to those who have not undertaken the requisite apprenticeship in graduate school,” which allows him to conclude that, “because economists share a language and a method, they are prone to disregard, or deprecate, noneconomists’ point of view.” And this is empirically true: Other academic disciplines cite economists frequently, but they do not return the favor nearly as often.

This has mostly worked out gangbusters for economists. In a 2015 paper that examined how well economists have thrived in the world compared with the other social sciences, sociologist Marion Fourcade and two colleagues conclude:

Most economists feel quite secure about their value-added. They are comforted in this feeling by the fairly unified disciplinary framework behind them, higher salaries that many of them believe reflect some true fundamental value, and a whole institutional structure — from newspapers to congressional committees to international policy circles — looking up to them for answers, especially in hard times.

Most economists are perfectly content with this status quo, believing it to be fair and just. And I’d just like to take this opportunity to tell economists that this is a complete and total crock.

One could argue that the two subfields of economics that have had the largest real-world policy influence have been in finance and macroeconomics. The problem is that this influence has mostly been catastrophic. In the arena of finance, University of Chicago economist Luigi Zingales has lambasted his own subfield, acknowledging that “our view of the benefits of finance is inflated.”  Stanford University professor Paul Pfleiderer accuses finance scholars of using models as chameleons, engaging in “theoretical cherry-picking” to advance ideas that are not necessarily grounded in reality. Other economists acknowledge that a narrow focus on financial variables caused them to miss political sources of the crisis and its aftermath.

If you think that’s bad, though, let’s talk about macroeconomics for a minute. One could argue that the most high-profile contribution by macroeconomists to the post-2008 global economy has been an emphasis on fiscal austerity as a solution to stagnation. That prescription has been, well, pretty much disastrous.

I bring all of this up because Paul Romer has a lulu of a paper entitled “The Trouble with Macroeconomics” that rocketed around the social media of the social sciences. If you think the title implies criticism, read the abstract:

For more than three decades, macroeconomics has gone backward. The treatment of identification now is no more credible than in the early 1970s but escapes challenge because it is so much more opaque. Macroeconomic theorists dismiss mere facts by feigning an obtuse ignorance about such simple assertions as “tight monetary policy can cause a recession.” Their models attribute fluctuations in aggregate variables to imaginary causal forces that are not influenced by the action that any person takes. A parallel with string theory from physics hints at a general failure mode of science that is triggered when respect for highly regarded leaders evolves into a deference to authority that displaces objective fact from its position as the ultimate determinant of scientific truth.

It gets more brutal from there, as Romer mocks the logic of real business cycles (a core component behind much of modern macro) and relabels its key explanatory variable as “phlogiston.” In history of science circles, that is a sick burn.

In the paper, Romer acknowledges that because he’s no longer in the academy he can make these arguments with little worry of professional repercussions. It should be noted, though, that other respected economists are echoing Romer’s critique, if not his language.

None of this is good for the rest of the world. We’re operating in a moment when the value of things like policy expertise is already heavily devalued. Prominent subfields of economics committing intellectual suicide is not going to help. At least economists are beginning to acknowledge that they have a problem, which is the first step to recovery. But given the research that shows economics to be the most rigid discipline when it comes to the incorporation of new ideas into mainstream scholarship, it would be great if they could get on with their reformation as soon as possible.