It occurs to me now that this might have been a good title for my latest book. Here is my thought process.
1. Economic thinking can be too simple or too abstract. What I call Goldilocks economics involves thinking about specialization and trade, and in particular the implications of the extremely complex patterns of specialization and trade in the modern world.
2. Too-simple thinking tries to generalize from what you see in your immediate world as a consumer or in the workplace or in a small segment of society. It comes from not having absorbed enough economics to understand Goldilocks economics. In the book, examples of too-simple thinking include using a camping trip as a model economy or thinking that “sustainability” means conserving a particular resource.
3. Too-abstract thinking is what academic economists undertake and force their grad students to undertake. The exercise of “modeling” creates a false impression of scientific endeavor. Mathematical and statistical models look like the sorts of things that engineers use to design machines, but that appearance is deceptive. The economic world is not as straightforward to manage as a machine.
4. Interestingly, macroeconomics manages to straddle both too-simple and too-abstract thinking. Keynesianism in its popular form uses the too-simple notion that spending creates jobs and jobs create spending. That is how most economic journalism treats it, and that is how many freshman macro classes treat it. What gets taught in grad school as macro is something completely different–very abstract.
5. Economists have never found it easy to reconcile the too-simple version of Keynesianism with standard microeconomics. So what can be done?
a. Say that macro is true in its own way, and micro is true in its own way, and don’t bother trying to reconcile them. That was the state of things around 1965, and much of the profession seems to have reverted to it since 2008. But choosing to ignore the discrepancy does not make it go away.
b. Say that macro is just dynamic stochastic general equilibrium theory. Try to explain macro fluctuations in terms of people time-shifting their decisions to work and consume. Maybe there is a more charitable way of putting it. This approach dominated the profession for thirty years–right up to the point in 2008 when Olivier Blanchard was telling us that “the state of macro is good.” Although it still has some adherents, I have always thought that it was garbage.
6. As of 1965, the too-abstract approach to Keynesian economics was the large-scale macroeconometric model. As of 1980, it was the rational expectations mathematical model, eventually becoming the DSGE model. Today, you show your Keynesian colors by uttering magical phrases like “zero bound.”
7. In either the too-simple or too-abstract formulation, Keynesianism treats the economy as a GDP factory. Specialization is assumed away.
8. The Goldilocks approach is PSST. Instead of thinking of jobs as created by spending, think of them as created by the discovery of sustainable patterns of specialization and trade.
A nice post with a lot of food for thought.
Minor quibble: do you need a “close quote” after the word “good” in 5b. ??
“Economists have never found it easy to reconcile the too-simple version of Keynesianism with standard microeconomics”
This strikes me as charitable to a fault. I think it would be pretty easy if they would try. It’s hard because they don’t want to try. But they like being able to straddle, or rather hop back and forth between the two depending on which serves their desired goal. Let’s say that “spending creates jobs and jobs create spending.” Well, how often do you hear mainstream economists talk about the side of such a feedback loop where too much spending has created too many jobs that have to be given back? Well, I’ve never heard it that I can recall. I’ve heard it from the people the mainstreamers ridicule.
PSST is also too simple and too abstract. No explanation at all really. Why do patterns develop in concert rather than no pattern at all? Why does the pace and magnitude vary? Why are they large enough to dominate the economy as a whole? Why do patterns go awry? Is it waves of technological change? Changing tastes and fashions? Moods of hope and despair, greed and fear? Positive surprises and disappointed expectations? What factors affect their trial and success, their stability and failure? Development of patterns is a theory of growth, not of recession, of investment, not of liquidation. Why does dissolution dominate development?
Do you want to be his first grad student?
“Spending creates jobs and jobs create spending.”
The late Harry G. Johnson sometimes used the term “vulgar Keynesianism” to refer to lack of fiscal discipline or probity, justified with references to Keynes.
I see it more as “Systems Economics”, analogous to Systems Thinking. It’s an abstraction (patterns) built over microeconomic phenomena that describes the relationship between the phenomena, not just treating the abstraction as truth. Aristotle’s Golden Mean and Goldilocks seem to be getting at a different idea- “just right”.
‘Too simple’ and ‘too abstract’ seem like two sides of the same coin.
But tho PSST doesn’t seem to provide much explanatory power. So, regardless of its greater accuracy, it’s less helpful for those searching for justification instead of reasons.
If I wanted to better understand the gross patterns of the details of PSST, i’d start by modeling (on a computer) lots of simple agents. And I imagine that I’d discover that PSST ends up a lot like ecology or evolution. Living things are also engaging in long chains of ‘trades’ among other organisms. Maybe they’re prey to the same macro forces as we are, were we to abstract the different domains *just right*.