Over the past month, the GEM Blog has mounted a powerful, attack on the stabilization-relevance of mainstream macroeconomics. In a recent conversation, a friend of the GEM Project argued that, despite the demonstrated superiority of the generalized-exchange approach, the Project’s campaign to replace consensus macro theory will fail. In support of his gloomy outlook, he quoted Kafka: “In man’s struggle against the world, bet on the world.” Mainstream theorists control the dissemination of macro research and, protective of their market-centric human capital and professional reputations, will continue to freeze out any restoration of the balkanization of rational exchange. Self-interest will never permit admission that what has been taught to graduate students for decades cannot support stabilization-relevant modeling. Too much personal loss would result from caring about providing useful guidance on how to prevent future Great Recessions and their huge public costs.
The Project’s Friend Is Wrong
Perhaps it is wishful thinking, but I think my friend got the relevance of the Kafka quote wrong. The plight of mainstream macro theorists is that, in their defense of their micro-coherent, general-market-equilibrium model class, they are struggling against the world – at least against the way highly specialized economies actually behave. In defense of a 19th-century description of resource pricing and allocation, they must ignore important facts about the modern world that evolved after Walras and the other great market-centric marginalists made their elegant contributions.
In its on-going campaign against recognizing crucial differences between the economies described in Walras’ Elements of Pure Economics and Keynes’ The General Theory, the macro academy has greatly damaged the credibility and future prospects of mainstream macroeconomics. The stubborn failure of consensus theorists is most dramatically illustrated by their inability to accommodate rational causation from nominal demand disturbances to involuntary job loss and recognizably-sized movement in employment, output, and income. They cannot accommodate meaningful wage rigidity and the rational suppression of wage recontracting. They cannot accommodate wage rents, rationed good jobs, or pure profits that everyone else knows is the central determinant of investment spending. They cannot accommodate obvious, essential features of how economies rationally evolved in the aftermath of the Second Industrial Revolution and the advent of large corporations..
Modern mainstream micro-coherent, market-centric, general-equilibrium theory is fiercely defended in the academy. The approach is unapologetically required for research to be eligible for debate and disseminated. It is what is taught as stabilization gospel to today’s graduate students. Yet it is brutally criticized by stabilization authorities having been useless in the Great Recession. It is rejected by graduate students for not explaining how economies actually behave. Good economists with a conscience have objected to its stabilization-irrelevance. Practitioners, not recognizing their own behavior in mainstream modeling, reject macroeconomics as nonsense.
Bet on the World
I believe that Kafka’s advice is supportive of the GEM Project. The world has been a constant source of embarrassment to mainstream macro theorists, generating over and over again a time-line of instability that their models cannot come close to explaining. As noted, one critical client group (stabilization authorities) is already badly estranged. In the wake of the Great Recession, they made no secret of mainstream uselessness, especially when useful advice is most needed. Practitioners, who decide how to adjust to macro shocks and their propagation by nominal demand disturbances, are incredulous that respected macroeconomists believe that forced layoffs in recession are really voluntary quits and that involuntary unemployment resulting from weakening spending reflects voluntary behavior rooted in the nature of hiring practices. They are incredulous that some of our most respected New Keynesian theorists think that idiosyncratic match capital is somehow centrally implicated in the millions of layoffs that occurred 2008-09. They think that the conclusions of consensus analysis are nuts. How can anybody be that that clueless?
As the weight from being a useless joke continues to gather, mainstream theorists with functioning integrity will conclude that the time has come to loosen the hold of market-centricity and become much more modest about what they have been teaching and publishing. They will abandon their emphasis on voluntary unemployment and return to the serious pursuit of stabilization relevance. Meanwhile, in the current maddening Ptolemaic interlude in mainstream macroeconomics, maybe Kafka should be required reading.
Blog Type: New Keynesians Chicago, Illinois