So my macro comp is on Monday - I've been studying for weeks and of course now it's really kicking into high gear. The test covers Macro Political Economy (which is all short-run), and Macro II (which is growth theory). Looking at both of these side-by-side for the last several weeks it's striking to me how much more argumentative the history of short-run macro has been than the history of long-run macro.
Formal growth theory (we're talking about formal theory in all of these cases of course) has progressed in a fairly straightforward way. You started with a pretty crude but sensible model. A major reason why it was crude was that a lot was exogenous and nothing was micro-founded. So that's basically been the research agenda for sixty years. In the 60s we endogenized savings. In the 70s we got distracted. In the 80s we endogenized technological change. In the 90s we endogenized fertility. The last decade has actually been a little more free-wheeling. There's been work integrating and expanding on the earlier endogenization projects and there has also been a lot of work on formalizing our understanding of institutions. I'm not in this world as much and maybe that gets somewhat argumentative.
Empirics are a different matter, but that's generally been a story of steady progress. The argument was "we think this way of doing the empirical work is better than that way", and the effort was in making the most out of limited data.
Contrast this with short-run macro. The general public perceives the epic battles of short-run macro as definitive of economics. Issues like microfounding old models don't just introduce new research agendas like they do in growth theory - they generate huge schisms and lead people to totally reject old ideas. Think of all the cases you know of of one macroeconomist talking about another macroeconomist and being a complete asshole about it. They were all short-run macroeconomists, right?
So why is this?
To cite politics is a little tautological. Both long-run and short-run macro have big political questions at their heart - it's not like politics is just in short-run macro. You could say "but the politics of short-run macro is where the mudslinging is", but that only begs the question - why there? Part of the problem of short-run macro is empirical obviously. Identifying these models and getting good data has been tough. But that doesn't seem like an answer because that's true of long-run macro too.
I think one reason might be that our attention is focused on the short-run by construction. Growth is a big deal ("once you start thinking about growth..."), but growth is an epic novel whereas the business cycle is like a short story. Things unfold fast in the short run by definition, so it focuses the attention of economists on what is happening right now. Let's assume the story is complicated, there are many causal mechanisms at work, constructing theories and evaluating claims takes a lot of time, and any theory is necessarily incomplete and will only explain part of the picture. If you apply all that to a situation where you're looking at a single event and really wanting an answer to your questions versus looking at a long stream of events and willing to dedicate a career to getting an answer to your question, it's clear that in the former case your answers are going to be erratic. That does not mean that the ultimate answer has to be erratic. Indeed we've come up with a consensus model that seems to do a good job answering a lot of different questions. But before we had that, in the heat of the moment, things were less stable. We're still improving. As Noah Smith discussed at length the other day, we're now adding finance to the short-run mix and it seems to be paying dividends. But the road that got us here has been a lot more winding and argumentative than the road that got us to some of the modern growth models.
If this diagnosis of the issues and this account of the consensus models is right, then it would suggest things are going to start calming down in macro. The warring camps will probably turn into more detailed accounts of special cases or specific causal mechanisms, but things will coalesce around a basic model that is going to plod along until there is some kind of major paradigm shift.
Thursday, May 30, 2013
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Well, the short-run macro guys are the one saying all the rules go out the window (under certain circumstances). If Solow said saving will impoverish a country in the long run, I'd be fighting with him too.
ReplyDeleteTo answer your 'why there?' question, I have two hypotheses: Politicians tend to have 2, 4, or 6 year time horizons (more if they're term limited, in that last term, or if they're in incredibly safe districts). A politician taking a position on short-term macro can help them in that timespan, while long-term macro will have less an effect.
ReplyDeleteShort-term macroeconomic events are more memorable to those experiencing them (voters). One year of 2% GDP decline will be more memorable than a ten year period where growth picked up 1%.
I've been reading (and doing part of my dissertation on) Britain's Industrial Revolution, and that literature looks a lot like short-term macro--worse, even, because there are so many non-economists who work on it.
Short-term macro takes place almost purely within economics, while economists represent only a small contingent of people working on modern economic growth; and even economists trying to study historical episodes of economic growth find little use in growth theory (though partially because a lot of what growth theory does is formalize insights that have been around since Adam Smith), though development economics pays more attention to it.
Isn't the answer kind of obvious? Just as with the old Willie Sutton line about robbing banks being where the money is, the short term is where the rewards are (for politicians and everyone else).
ReplyDelete"The warring camps will probably turn into more detailed accounts of special cases or specific causal mechanisms, but things will coalesce around a basic model that is going to plod along until there is some kind of major paradigm shift."
ReplyDeleteI already see this as a historical trend in parts of macroeconomics with the rise of New Keynesianism, which I think can be well parodied as throwing whatever in the model to make it work. Need a supply shock? Well, add it to the model. Need to make the AD curve behave in a certain way to make the model work? Well, then add something to the model to make it behave that way.
Not to say that competing approaches like Real Business Cycle Theory doesn't do that since calibration essentially is the same thing (Need to make your model work? Add in some parameters and calibrate them!), but I admire how the RBC'ers, especially at first, tried to apply one basic model to all the phenomena rather than using all the models to explain one phenomenon.
I think our understanding is advanced even by wrong models that are willing to be brave in how they approach the world rather than simply trying to find a model that seems to explain the world. Especially since I think that the purpose of a model is to spark conversation rather than actually explain the world, we should use theory for that (and actually differentiate between models and theories to make that clear).
I'm not very impressed by *formal* long-run macro. All of the effects you mention were discussed extensively in the first half of the 19th century and they're being formalized two hundred years later. Although it's much more woolly I think informal long-run macro is much more interesting. There are many long books explained in words the authors view on why and how development happens. Most of these books disagree, but I think that the disagreements between them are far more enlightening than formal macro. I would much rather read "Farewell to Alms" and "The Englightened Economy" (and even "Bad Samaritans") than I would read about all the variant of the Solow model. I think many people agree with me here and that's why in this area the debate is just as fierce as in short-run macro.
ReplyDeleteMy guess is that the relative lack of contentiousness in long-run macro is in part historical accident. That is, it is almost impossible to evaluate long-run macro empirically. There is just too much uncertainty. So once ideas about long-run macro become accepted, there is little reason to change them.
ReplyDeletePerhaps the near impossibility of evaluation also explains the lack of argument in a different way. Short-run macro is an area where you do have evidence, so it is where the scientific action is.