Home > depression, Keynes, teaching, unemployment > Understanding Macro: The Great Depression (1/3)

Understanding Macro: The Great Depression (1/3)

from  Asad Zaman

Preliminary Remarks: “The trouble is not so much that macroeconomists say things that are inconsistent with the facts. The real trouble is that other economists do not care that the macroeconomists do not care about the facts. An indifferent tolerance of obvious error is even more corrosive to science than committed advocacy of error.” From The Trouble with Macroeconomics (Paul Romer)

Personally, I do not understand why indifference to error is worse than committed advocacy. For an illustration of committed advocacy of error, see postscript below on 70 years of economists’ commitment to a fallacious theory of supply and demand in the labor market. Furthermore, the problem is not confined to macro. Microeconomists are also dogmatically committed to utility maximization, when in fact this hypothesis about consumer behavior is solidly rejected by empirical evidence; see: The Empirical Evidence Against Neoclassical Utility Maximization: A Survey of the Literature

Understanding Macro: The Great Depression

Due to frequent headlines, there is a substantial public awareness of core macroeconomic issues like unemployment, trade agreements, exchange rates, deficit, taxes, interest rates, etc. However, even professionals are often ignorant of the intellectual battles which have shaped modern macroeconomics, since this is not taught in typical PhD programmes in economics. This article attempts to provide the history of ideas which led to the emergence of macroeconomics, since this is an essential background required for informed analysis of these issues.

Lord John Maynard Keynes invented the entire field of macroeconomics in response to the Great Depression in 1929, which could not be understood according to economic theories dominant until then. According to the classical economic theory, forces of supply and demand in the labour market would ensure full employment. Keynes starts his magnum opus, The General Theory of Employment, Interest, and Money, with the observation that the economic theory cannot explain the long, persistent and deep unemployment that was observed following the Great Depression. Keynes set himself the goal of creating a theory which could explain wide fluctuations in levels of employment that he observed. He discovered that creating such a theory involved rejecting deeply held convictions, central to economic theory.  read more

  1. February 26, 2018 at 3:54 am

    “Personally, I do not understand why indifference to error is worse than committed advocacy.”

    I think that the point being made is that scientists say things that are wrong all the time and they usually get fixed in peer review, whereas in economics nothing gets fixed in peer review.

    “Lord John Maynard Keynes invented the entire field of macroeconomics in response to the Great Depression in 1929, which could not be understood according to economic theories dominant until then.”

    Certainly macroeconomics would be incomplete without a start in ideas from people like Alexander Hamilton and Friedrich List (I don’t know who Hamilton’s understanding was borrowed from, unfortunately). The Mercantilist English Empire sure as heck didn’t get big enough to never be set upon without an understanding of capital accumulation, trade, and other relevant issues. Also, IMO, Keynes makes an unfortunate mistake (concession to his peers?) when he talks about stickiness of wages. If wages weren’t sticky the economy would have only imploded even faster during the Great Depression as demand was destroyed even faster.

  2. Craig
    February 26, 2018 at 6:40 am

    Keynes thought around, and in some instances plagiarized Douglas, his contemporary, and neither one wrote 10 words when they could less decipher-ably write 50. Douglas however, was definitely the more insightful and more in touch with present time and economic reality. Macro-economics is really more a body of knowledge to avoid significant economic and monetary insight than to garner it, although Steve Keen’s herculean task of de-bunking DSGE is admirable as is Michael Hudson’s focus on the tyrannous key business model of finance. Now if they’d just practice paradigm perception instead of macro-economics…they’d see how Wisdomics-Giftonomics unites their thinking and creates policies and regulations that would resolve the major intractable problems of modern economies.

  3. February 26, 2018 at 2:53 pm

    “Personally, I do not understand why indifference to error is worse than committed advocacy.”

    This is the mark of mature thought that transcends the religiosity of economics and point to an entire philosophy far beyond what many ever consider.

  4. C-R D
    February 26, 2018 at 4:18 pm

    On Utility maximization, please see also:
    Theoretical and Practical Research in the … – ASERS Journals

  5. February 28, 2018 at 9:36 pm

    Asad Zaman: To repeat others explanations above: Romer’s “indifference to error is worse than committed advocacy” seems to be following Francis Bacon: “Truth emerges more readily from error than from confusion.” And it seems to me you essentially agree, the difference comes from characterizations of the situation.

    The situation in economics is better characterized as “indifference” / “confusion” than mere “committed error”. Everybody messes up, but science progresses by cleaning up the Augean stables just a little bit more. And that only comes about if you can notice the stables are dirty and if you want to clean them. You don’t get 70 years of error and regression in economic understanding without serious confusion and major indifference to error – in other words most economists have no interest in economics or truth or facts.

  6. February 28, 2018 at 11:33 pm

    I got the point about how peer reviews could correct mistakes, and agree that this is probably what Romer meant. However, Romer himself writes that the Chicago group was very insular — they ignored criticism from the outside. They ignored conflicts with empirical experience. They were fanatically, committed to their theories. The peer reviews were there — biting criticism of Solow, who found their assumptions ludicrous, and many others as well. So how did this majorly flawed position (real business cycles) become dominant orthodoxy to such an extent as to EXCLUDE other sensible, strongly empirically supported points of view from even being able to publish in journals? There seems to be more involved then mere indifference to error.

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