STOCK MARKET WATCH -- Monday, 31 December 2012 (and Tuesday, 1 January 2013)

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21. The Major Flaw At The Heart Of Macroeconomics

http://www.businessinsider.com/the-major-flaw-at-the-heart-of-macroeconomics-2012-12

There’s been a lot of ink spilled in recent weeks over the problems (or lack thereof) in modern macroeconomics (see here and here). I’ve expressed my opinion that the state of modern macro is moving in the right direction because there’s serious debate about the problems with the mainstream approaches which has resulted in the rise of competing ideas. But any progress that’s been made shouldn’t completely overshadow the major problem at the heart of macroeconomics – political ideology.

If you study modern macro you inevitably end up studying some sort of policy. Most economists don’t build their models around an understanding of the monetary system. They build their understanding of the system to fit an ideology in a classic case of confirmation bias. For instance, most Keynesians will fit their model of the way the system works to confirm some form of countercyclical government policy. Market Monetarists fit their understanding of the monetary system to confirm NGDP Targeting. Austrian economists fit their description of the monetary system to confirm a small government view. Almost all of the major mainstream economic schools are attached to some specific policy agenda which is then confirmed by some politicized explanation of the monetary system.

The flaw in this approach is that it doesn’t actually result in any agreed upon understanding of the actual inner workings of the monetary system (like this). So you have a bunch of economists who all essentially disagree on policy AND their understanding of the way the monetary system works. Can you imagine if all of the surgeons in the world didn’t work from similar understandings of the way the human body functions and instead just experimented on the body with various hammers, scalpels and other fun toys? Modern macro is not that far from that world where a bunch of PhDs just sit around hammering the body with their policy tool of choice screaming at one another about how their tool is better than another tool. Obviously, that’s a silly approach.
I often talk about a Da Vinci approach to modern macro. Leonardo Da Vinci was famous for his work in anatomy. But Da Vinci didn’t take bodies apart so he could fix them. He took them apart so he could understand them. Da Vinci knew that you couldn’t even begin to fix a system until you understood it. Curiously, modern macroeconomists still haven’t undergone this process of discovering an agreed upon understanding of the system. There has been no Da Vinci approach in modern macro. There are plenty of surgeons pretending to have the best tools. But what we need is a Da Vinci (or group of Da Vincis). Until then, the state of modern macro will remain fairly dismal.


Read more: http://pragcap.com/the-biggest-problem-with-modern-macro#ixzz2GdBQbTFU