Leeches, a rant
Editor's note: I didn't post this at the time ... but I was going through my backlog of unfinished posts and random ideas over my lunch break and found this to be pretty entertaining on a re-read. It's a bit unfair to macroeconomists, but if any of you out there are interested in my views on macroeconomics in one of my more bitter moods, this is a good one .... it's for entertainment purposes only. I generally think academic macroeconomists do a good job given the limited data -- it's a tough field!
Prescribing leeches. From Wikimedia commons.
A working macroeconomist reading [Keynesian proponents] Krugman and DeLong feels as a doctor would if the Surgeon General got up and said that the way to cure cancer was to draw blood using leeches.
That is David Levine, cited approvingly by John Cochrane.
I apologize in advance for what is basically a rant.
From my experience slowly learning the subject of macroeconomics, looking through the imported mathematical machinery, I would actually say that the current state of the art in macro is not just leeches, but abstract mathematical models of idealized leeches.
I have some advice that should apply all around -- to Krugman, DeLong, Levine, Cochrane, Samuelson, Sumner and every other macroeconomist: you do not understand your field very well. Sure, you understand it much better than I do or some random person off the street. But the sum total of macroeconomic knowledge seems to be effectively zero [the random person's knowledge seems to be negative on average]. I have been through a first year graduate textbook on macroeconomics. There is quite literally nothing in it on the subject of figuring out how an economy works. There are models of things that have results that may or may not reflect real economic behavior. There are collections of potential effects. Are they real? Who knows? Who cares? There are a couple of plots of data -- mostly to illustrate that the real world actually irrefutably violates the assumptions of the models. In the end, it is a math book that sets about solving different simplifications of a problem it made up.
It feels like studying Galois theory -- a topic from mathematics that seems to just exist to solve a single problem (why is there no quintic equation) for which there is no real-world application. Macro differs from string theory, about which many physicists have a similar opinion, in that string theory seems to be mildly concerned that it is supposed to be a physical theory of things that exist.
Keynes is like the application of leeches, huh? My own opinion is that the era of Fisher through Keynes and Samuelson is the era where the language of mathematics was introduced to economics. The study of the Great Depression is akin to the Cholera outbreak of the mid 1800's in London and its effect on epidemiology. That would put economics about 100 years behind medicine (not because it is backward, but because good data wasn't available). With that analogy, it should have felt to Levine as if the Surgeon General got up and said the way to cure cancer is to collect population data and do statistical analysis. Leeches would be more like going back to Hume.
One issue when you are immersed in a subject is that you tend to think of the current state of the art being comparable to the current state of the art in other fields. In general these things cannot be compared except by analogies ... and the problem there is that you are making analogies between things that are not understood.
But I'm going to do it anyway.
In the following, the word "know" is used in the sense that not only do all mainstream macroeconomists agree on the details, but that the formulation of the problem and its solution is effectively the same across textbooks. In physics, the details of the mechanism behind the Lamb shift are taught pretty much identically in every textbook and all physicists agree that it is a real effect with an uncontroversial empirical value. In that sense, physicists "know" the Lamb shift.
Macroeconomics does not currently know what money is or does
There are various theories out there about how money acquires value -- some involving the fact that fiat money can be used to pay taxes, others involving more social mechanisms, still others based on expectations of agents. There are current arguments in the literature about whether monetary policy has a strong effect on most economies (or just some economies) or not.
In medicine this is a bit like not understanding the function of food. I'm not talking about details like what kind of diet is best, but rather broad things like how (or whether) food provides energy.
An equivalent unresolved problem in physics is dark energy in cosmology. Dark energy behaves in a particular way in General Relativity (that's where it gets its name), but its microscopic origin is unknown. There are theories involving cancellation in the quantum fluctuations of elementary particles or that it results from properties of the string theory vacuum based on the so-called anthropic principle. It's basically a complete mystery that I'd say is on the level of money in macroeconomics. You'd hear a different story from different economists about the value of money much like you'd hear a different story from different physicists about the nature of dark energy.
Macroeconomics does not currently know what causes recessions or what they are
Some economists think that recessions a normal function of an economy. Some believe that they can be mitigated by government policy to great advantage.
If this were medicine, it would represent a state of the art that did not agree as to whether someone was actually sick or not. Is the illness doing what needs to be done to the body to eliminate inefficiency? Or should we give the patient a fever reducer?
I had a hard time coming up with a good physics analogy here. Should I use the hypothetical Unruh effect? Gamma ray bursts? Baryon asymmetry? The stong CP problem? High temperature superconductivity? Sonoluminescence?
But I've settled on the arrow of time. Some physicists think this is solved by entropy. However it doesn't make sense that the initial state of the universe (i.e. nearly uniform energy in the big bang) should be low entropy compared to today. In a sense, we have no real reason for time to flow in any particular direction and some fun results -- like quantizing the Wheeler-deWitt equation resulting in time dropping out of the model completely -- end up with a confused mess (or radical simplification, depending on your viewpoint).
...
Considering the unsolved problems in economics, leeches would actually represent a step forward from not understanding what food is or whether the patient is sick!