Last week’s post asserted that the failure to explain the most crucial evidence on macro instability evidence would eventually doom mainstream market-centric macroeconomics. This week’s post looks more closely at an important source of that rejection.
David Colander’s (2005, p.180) survey of and interviews with graduate students at seven top-ranked economics programs in North America found that new-generation customers are disgusted with the macro product: “In the interviews, macro received highly negative marks across schools. A typical comment was the following: ‘The general perspective of the micro students is that the macro courses are pretty worthless, and we do not see why we have to do it, because we don’t see what is taught as a plausible description of the economy. It’s not that macroeconomic questions are inherently uninteresting; it is just that the models presented in the courses are not up to the job of explaining what is happening. There’s just a lot of math, and we can’t see the purpose of it.’” Another student was more succinct: “Macro sucks.” (Colander (2007), p.174).
The students are rejecting the stabilization irrelevance of mainstream macro theory, a fundamental failure that has only become more obvious. Consider the 6 million involuntarily lost jobs that occurred in the 2007-09 Great Recession; that massive market failure certainly qualifies as an inherently interesting. Just because one’s teachers insist on arbitrarily restricted rational exchange to the marketplace and therefore cannot coherently accommodate forced job loss does not mean that one should accept that cyclical unemployment is in fact voluntary. Pretending does not make it real. Look at the evidence. Ask workers who have been laid-off. Ask the managers who laid them off.
Mainstream pretending has disabled consensus theory, depriving it of stabilization relevancy and adding macro policymakers to students in its list of victims. The GEM Project provides a roadmap for how macroeconomic thinking degenerate to its current sorry Ptolemaic state. Selective identification of relevant macro facts became de rigueur in the successful anti-Keynesian insurgency in the final quarter of the 20th century. In one example, the employment volatility puzzle features prominently in modern statistical-filtering overviews of economic fluctuations; but forced job loss, by far the most important cause of employment volatility, is not mentioned. Involuntary layoffs and their relationship with nominal demand disturbances, surely among the most important business-cycle facts, are universally ignored in modern compilations of useful cyclical information.
The fundamental methodological shift of the anti-Keynesian revolution is misunderstood to be the reestablishment of the neoclassical general-equilibrium model as dominant in the macro academy. Early Keynesians worked almost wholly within that analytic framework. The retrofitting of the inadequate neoclassical model with the assumption of sticky wages provided limited, albeit significant, stabilization relevancy. The most consequential innovation of New Classical/RBC theorists was their insistence on microfounded market-centricity as a condition of acceptable modern thinking. Early Keynesian reliance on wage rigidity could not be coherently incorporated into neoclassical macroeconomics and had to be banished. The New Neoclassical Synthesis made clear that market-centric coherence trumps evidence in the new order. Why is it surprising that such restricted research has been little more than embarrassing? Frankly assessed, the on-going attempts to make the neoclassical model class fit the evidence produced by economies that are dominated by large, bureaucratic firms are inherently Ptolemaic. Indeed, the effort is arguably the most elaborate exercise in Ptolemaic model-building since the embarrassing efforts to explain away the heliocentric nature of the solar system.
Blog Type: New Keynesians South of France