The best way to think about macroeconomics

Russ Roberts, the host of the Econtalk podcast, just put up a really good post about the limits of knowledge. Here’s an excerpt:

 

Suppose the economy does well this year–growth is robust and unemployment falls. What is the reason for the improvement? Will it be because of the natural rebound of an economy after a downturn that has lasted longer than people thought? The impact of the stimulus finally kicking in? The psychological or real impact of extending the Bush tax cuts? The psychological or real impact of the November election results? The steady hand of Obama at the tiller? All of the above? Can any model of the economy pass the test and answer these questions?

The reason macroeconomics is not a science and not even scientific is that the question I pose above is not answerable. If the economy improves, there will be much talk about the reason. Data and evidence will be trotted out in support of the speaker’s viewpoint. But that is not science. We don’t have a way of distinguishing between those different theories or of giving them weights to measure their independent contribution.

 

The macro economy is just too complex for us to be able to suss out the reasons that things happen with any sort of exactness. When we look at an end result like employment, GDP, or the stock market we naturally try to figure out “the reason” for that thing to be the way it is. There is no single reason, there is no single vector that can explain an aggregate result. It’s like seeing shapes in clouds. A pattern emerges, but there isn’t any one thing controlling it.

Macroeconomics is inevitably apologetics for a particular policy track. Anyone spouting it inevitably feels as though the government can in fact steer the economy. They never seem to ask themselves the question that if the government can control stuff like that, why didn’t they stop the bad stuff from happening? The fact that government officials can’t see things coming and then promise to fix things later should make people wonder.

 

 

 

You can read The Test: “” from Russ at that link.

 

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