Monday, 9 November 2015

I hate Macro... but I love Macro?

I hate macro!

A reasonable conclusion one day before an exam, I guess, regardless of discipline. I'm so sick of Swan-Solow growth theory, Accelerator theories of Investment or Phillips Curves based on phantoms of natural rate of unemployment. But the other day I took an hours break from that - to argue over the alleged Swedish Housing Bubble with someone over at (an otherwise quite nice blog, but this time they really messed up). Which is pretty much macro. Clearly, I also love macro. And deep down, it's fascinating and I want to learn about it. How can the macro out there not be the macro in here?

Every student of economics has this moment of his/her education where he listens to something a professor said and responded “Hang on, that’s not what happens out there – in the real world!”, whereby the professor quickly adds the famous words “Maybe not, but this is a simplified model of how it works, for you to understand the concept – the world is too big, we have to simplify”. Most students are not convinced, but they have exams looming around the corner, and so they drop their scepticism and accept the model for the time being. Repeat enough times during an undergraduate education, and they forget their initial objections, accepting the model as reasonable image of the world. How-To-Create-An-Army-Of-Economists 101. Paul Samuelson, economics textbook-writer and Nobel Prize winner once famously said: “I don't care who writes a nation's laws, or crafts its treatises, if I can write its economics textbooks".

This is true even for students who are exposed to different strands of thought than the mainstream Neoclassical-New Keynesian mishmash of intellectual piling-bricks-on-bricks. We still have to learn these models, accept their crazy assumptions and produce that kind of answers in exams. My friend calls it “a sophisticated experiment in doublethink", which is darn accurate.

There is an actual macro out there that most students are pretty interested in (ask any number of economics students why they study economics and you’ll probably get a bunch of them saying because they want to understand how the world works or events like the GFC could occur). Yours truly definitely among them. I love macro, financial markets, analysing economic policy. But how have the simplified assumptions of perfect competition, (rational)expectations and perfect information, capital and prices fixed in the short run and constantly clearing markets, instantly-adjusting to tiny changes in interest rates, and immediately jumps to the next intersection of two curves? Pretty much nothing at all.

As David Colander (1995) argued in regards to the well-known AS/AD model in an article in Journal of Economic Perspectives I recently read, appropriately titled The Stories We Tell: we simplify models so much that their heroic assumptions become absurd, their mechanisms incoherent and contradictory. There’s nothing left but diagrams on a blackboard and narrative stories after textbooks and lecturers have simplified the models out of proportion.

It’s pretty much an insult to students. We ain't that dumb, ok? Take slightly longer to explain a more accurate model in detail, and don’t waste our time with stories. Yes, yes, I understand points such as Tyler Cowen's that starting from those assumptions gives us a kind of Weber-like ideal types from which we can then specify the difference, compare to the real world and gain valuable insights.

But nevertheless, other kinds of teachings could be had (see for instance movements such as Rethinking Economics, calling for pluralism in teaching), and a heavier focus on History of Economic Thought early on in undergraduate degrees would probably help a lot.

I love macro  and a bunch of students are here because they're fascinated by it as well. But the macro we learn in here is not the macro we see  out there, in the real world. If the point of Economics teaching is to equip us for the real world, we're pretty much wasting our time with fairy tales here.

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