A confession: I was never very good at macroeconomics as an undergraduate, and my postgraduate studies were even more of a challenge. My lecturers described the economy as the solution to an inter-temporal optimisation problem in which a single representative household decided how much to consume and how much to save. I struggled with the sums (they were hard ones) and almost as much with the entire concept, which seemed to ignore what was interesting about macroeconomics. I did what I could, passed my exams and concentrated on microeconomics instead. (Those confused should recall P.J. O’Rourke’s explanation of the difference between the two: microeconomics concerns things that economists are specifically wrong about, while macroeconomics concerns things that they are wrong about generally.)
I do not regard my own confusion as an indictment of modern macroeconomics, but I am struck by the soul-searching that has gripped the profession in the face of the economic crisis. The worry is not so much that macroeconomists did not forecast the problem – bad forecasts are more a sign of a complex world than intellectual bankruptcy – but that macroeconomics seems unable to provide answers. Sometimes it cannot even ask the right questions.
Willem Buiter, a former member of the UK’s Monetary Policy Committee who blogs for the FT, complains that macroeconomists have simply discarded the difficult stuff to make their models more elegant: “They took these non-linear stochastic dynamic general equilibrium models into the basement and beat them with a rubber hose until they behaved.”
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