The title is not a typo. Brad DeLong reproduces a list of papers that ten years ago he thought were on the frontier of macroeconomics. Pointer from Mark Thoma. My take on the list is that there is a strong negative correlation between the probability that the ideas are correct and the probability that they are relevant.
Some random thoughts about the state of macroeconomics:
1. Any post that contains a sentence “This chart proves that. . .” doesn’t.
2. Macroeconomists should be much more daunted by measurement issues than they are. I think that we have reasonably good ways of counting the number of people who do paid market work. But that is a far cry from knowing “labor input,” because (a) skills are very heterogeneous and (b) as Garett Jones famously tweeted, most workers are not making widgets but instead are building organizational capital. Output has become increasingly difficult to measure. In the case of goods, quality change has sped up, putting more pressure on statisticians to rely on imputations. And in the case of important services, including education, finance, and medical services, we have almost no conceptual idea for measuring output. We do not know how to factor into our statistics the increased diversity in consumption baskets across individuals. All this casts doubt on our measures of inflation, productivity, and real wages.
3. As of the early 1930s, many economists and commentators thought that the capitalist system had broken down. They saw the decentralized market process as no long working effectively to organize economic activity. See Katznelson, or even better read chapter two of Leuchtenburg’s The FDR years. The biggest intellectual influence at the time was nostalgia for the government planning that took over when the U.S. entered the first World War.
In contrast, Keynes blamed the Depression on what he called a drop in aggregate demand, and Milton Friedman blamed it on a contraction of the money supply. In fact, Keynes and Friedman led the profession down a false path. The pre-Keynesian diagnosis was more apt. I just disagree that central planning was the best solution, although I think it is fair to concede that when you have unemployment rates over 15 percent you are giving central planners a decent shot at doing something right.
4. The Monetary Walrasians (Patinkin and everything that followed) wasted our time. Money does not determine nominal aggregates. It does not determine transactions. The causality runs from the desire to undertake transactions to financial institutions/technology to what people use as money.
5. Money does not determine the price level. Habits determine the price level. Consider the amnesia experiment. If everyone developed amnesia about what money prices were yesterday, then Monetary Walrasianism predicts that today prices would soon find an equilibrium determined by the quantity of money. In fact, my best guess is that people would find money to be worthless in such a setting, and they would resort to barter until a new standard of value emerged.
6. The theory of rational expectations is a waste of time. The simple model of employment fluctuations as arising from errors in aggregate expectations is wrong. And the underlying principle of rational expectations, that everyone as the identical information, is anti-Hayekian, and not in a good way.
In short, almost nothing that gets taught in undergraduate macro is correct. And graduate macro is worse.
“when you have unemployment rates over 15 percent you are giving central planners a decent shot at doing something right.”
I, for one, have never claimed you cannot artificially occupy people, or in a pinch kill them out of the labor pool.
Btw, your post is amazing, but do you think you are giving short shrift to the idea that money supply is a string that can be pulled a little too taut occasionally? I mean, your words here give almost zero shrift to that idea. Do you consider that the correct amount of shrift?
It’s possible that what we want out of macroeconomics is just an impossibly hard question to answer.
Microeconomics is like predicting what will happen to a drop of water that falls to the ground if there is a soft westerly breeze blowing.
Macroeconomics is like predicting how many drops of rain will fall into a bucket between in the first week of October.
Experience will give you a rough guide to seasonal cycles and long-term trends, but you will never have much ability to predict year on year variation.
The desire to undertake transactions is important, but so is the ability. When banks and businesses fail taking assets and savings with them, it impairs both. When asset prices rise, it helps both. It is the influence on these that is important, even if the belief is an illusion, it is a self fulfilling illusion. (Fed as psychiatrist with market on a couch.)
Economics in general suffers from what I call the “volition” problem.
In physics, so far as we know, fundmanental particles such as photons do not have desires, or goals, or incentives. They do not change their behavoir to gain advantage over one another. They are not in active competition with each other. What’s more they all have “pefect information” and “perfect rationality” regarding how to do/be what they are.
People, it is plan to see, people have goals and anti-goals, respond to various incentives and disincentives. And above all, will some of the time change their behavoir to gain advantage over one another, or to gain advantage over the economist or policy maker. Due to natural selection combined with a host of human traits, they are in competition with each other and the policy maker. They also have strong and complicated ties to each other. They have very imperfect knowlege about themselves and the world. And most any individual’s sense of how to evaluate something is very much more complicated than any model an economist might make, and may be impossible to articulate.
These things will always place serious limits on what economics can achieve, on what politics can achieve for good (though they can be manipulated to achieve much for bad.)
The sainted Sir John Cowperthwaite:
“Money does not determine the price level”
If you are going to say something like this, don’t you have to account for all the central banks that appear to be determining the price level, all the time? Central banks haven targeted inflation, or exchange rates, or gold, all with apparent success. Did they just guess what the price level was going to do and pick their target to match?
He means, if I may, the REAL (as in, relative) price level over the longish run.
“Money does not determine the price level. Habits determine the price level. Consider the amnesia experiment.”
What causes the amnesia in countries with hyperinflation like Zimbabwe and was it just coincidence that the population contracted amnesia around the same time that the government printed lots of money? Here is some data showing a strong correlation between monetary base growth and inflation [http://www.themoneyillusion.com/?p=20216]. Why does mass amnesia tend to be accompanied by large growth in the monetary base?
Wasn’t there a recent story about how they now use dollars along with 20 or so other currencies? The new monetary environment has changed the structural monetary result. I’m just trying to point out that we should understand exactly what Arnold is saying.
Arnold: “The causality runs from the desire to undertake transactions to financial institutions/technology to what people use as money.”
http://www.npr.org/blogs/money/2010/07/07/128355729/in-zimbabwe-u-s-dollars-go-to-the-laundry
Not sure I agree with your point about organizational capital. Take Airbnb, for example. All the hotel back-office staff are laid off, replaced by a computer. The only people still employed in the hotel business are the landlord and the cleaners. There’s no organizational capital there unless you count the landlord. But he’s not an employee.
Lawyers are being laid off. Accountants aren’t doing too well. College professors are increasingly underemployed. People with organizational skills are not doing well unless they’re entrepreneurs.
A landlord and the cleaners + whatever value Airbnb brings in to the table– which I’m sure is not 0.
Engineers building Airbnb software are building organisational capital, the photographers who go around taking better pictures of the rooms are doing so, too.
Just because it looks different (different PSST for different times) doesn’t mean it’s not a similar process.
The three professions you quoted had a lot of paper-pushing– maybe computers can take over that dumb work and leave people for productive and creative endeavours. Entrepreneurs, which are super useful to have in a changing and uncertain world, for example.