Thursday, March 22, 2012

Two good posts on thinking about macroeconomics

- First, Gene has a good post at Think Markets on a general theory of social cycles. Somehow a long comment of mine on it got lost, but in a nutshell what I like about this is that I can't think of a single business cycle theory that can't be incorporated into the theory of social cycles that Gene discusses here, which is a simple process relating equilibrium, displacement, and adjustment. This is a good thing. Too many people have tendency to think that a good business cycle theory is THE theory of the business cycle. This is a bad way to approach a phenomenon that obviously could, and almost certainly does have lots of different causes. You are less likely to make that mistake if you take Gene's approach and start the conversation by talking about cars merging into the left lane (see the post), and then move into talking about the business cycle. That sensitizes you to the fact that this is a general phenomenon. Of course this still leaves lots of room for debate. I can still think the most relevant problems are demand-side distortions and you may think the most relevant problems are policy (or fractional reserve) distortions of the interest rate. But we can argue about that as an empirical matter of relative importance and still recognize that a variety of causes are quite plausible.

- Second, Noah Smith argues that the macro wars are still on, although they've transitioned. This is an insightful take on the role of economics blogging and New Old Keynesianism in the current crisis. I find the discussion of DSGE models interesting. A lot of people dismiss this as "if the model can explain anything it doesn't really explain anything at all", but I'm not sure it's quite right. What it says, I think, is that the DSGE "model" isn't really a model at all so much as a framework for thinking about things - common language or paradigm. That's fine. It's actually a good thing that we can use a common language to talk about different answers to the same question. I have different thoughts than some people on this "predicting the crisis" point. The most important contribution of experts isn't seeing into crystal balls. Sure there are warning signs, but a lot of people were pointing to those warning signs. Aside from that, prediction is dicey. We don't expect that of evolutionary biologists - we should not expect that of economists. What we do turn to experts for is explanations of the world around us. And that is an area where many economists have failed, and where I think Krugman has had great success. Noah focuses on reactions to the crisis, and I think that fits in naturally with explanations of the crisis. That's the real value-added from expertise in complex systems: explanation, not prediction.

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