Macro Problems, Micro Explanations and Solutions

I have argued in our department at GMU that we should eliminate macroecoonomics from the core and expand our microeconomic course offerings.  But does that mean I believe that topics traditionally associated with macroeconomics should not be part of the training of economists?  Of course NOT.  Monetary theory, business cycles, capital theory, labor economics, etc. are all important subjects for economists to master.

There are macroeconomic problems of inflation, unemployment, fluctuations, but the explanation for these and the solution to them policy wise is to be found in microeconomic analysis.  "Austrian" macroeconomics is in fact built up from this microfoundation.  When I got interested in Austrian ideas it was the late 1970s and macroeconomics dominated economic-speak, so the Austrian theory of the trade cycle and the focus on what government had done to money was how I learned of the Austrian school.  I was then taught backwards to the theory of value and price, capital and interest, socialist calculation, and eventually to method and methodology, and finally back to entrepreneurship and development.

In many ways students today find themselves in the same situation I did in the late 1970s.  And with the times comes a variety of restatements of the Austrian approach to macroeconomics.

George Selgin has a wonderful interview in the Richmond FED periodical that is a must reading.

Roger Garrison's FREEMAN article on mainstream macroeconomics is also an important piece to read.

Steve Horwitz, Larry White and Gerald O'Driscoll have been constant in their commentary throughout the entire financial crisis.

An interesting exercise might be to read O'Driscoll and Shenoy's essay from Foundations of Modern Austrian Economics, which summed up the situation in the early 1970s and compare that with Garrison's piece.  What have we learned in the past 30 years, what knowledge was lost, and we do we go (a) teaching wise, (b) research wise, and (c) policy advocacy wise?

Comments

[Mario Rizzo]

Curiously, when I was a graduate student at Chicago, the macro course was never called "macro." It was called,"Theory of Employment, Income and the Price Level." I guess the rationale for this was that the course was defined by the problem areas and not by the method of analysis. In fact, Chicago analysis was macroeconomic in one sense (no capital structure) but was more "choice theoretic" than the typical Keynesian course on these issues.

[LVDH]

On the crisis one should also add: John B. Taylor (2009) Getting Off Track - How Government Actions and Interventions Caused, Prolonged, and Worsened the Financial Crisis. This IS macro, but it arrives at the right diagnosis, and since it is not explicitly Austrian, nobody will consider it ideologically suspect. -:)

[George Selgin]

I appreciate the logic of Peter's argument for taking macro out of the core: there's a sense in which macroeconomics is just another kind of "applied micro," and in that sense no more deserving of a place in the core curriculum than, say, labor economics. Yet there's another way to look at it, which is that economists of all specialties should have basic training in macroeconomics, so as to better understand the bearing of monetary and fiscal developments or innovations on their specialized areas of inquiry. The case seems seems relatively easy to make for labor econ itself, for time-series econometrics (which is itself part of most core curricula) and also for international trade. It is perhaps only slightly less easy for IO and public economics. Put another way, I doubt there's a specialist in any field of economics right now who hasn't felt some need to be conversant with macro, and not just with whatever he aor she can recall from undergraduate days.

Still, Peter's is a respectable position--provided, of course, that it doesn't get taken advantage of as a means for simply neglecting macroeconomics altogether, as all some market-oriented programs have been inclined to do in the past, owing in part to their identification of "macroeconomics" with "Keynesian" economics.

[Zac Gochenour]

George Selgin writes "I doubt there's a specialist in any field of economics right now who hasn't felt some need to be conversant with macro," but is this true? Pete's colleague Robin Hanson, for instance, is a specialist in prediction markets. The school where he got his PhD, Caltech, has never offered courses in "macroeconomics" and it is certainly not part of their core curriculum (http://www.hss.caltech.edu/ss/phd/core-courses). To me, this is a perfectly reasonable approach.

In most PhD programs, microeconomic theory and "macroeconomics" are taught concurrently. This is particularly egregious because it suggests that there are really two "economic ways of thinking" - one applicable to "macro" topics and one applicable to "micro" topics, both "foundational" and required for further study in any subfield. Also implied is that these foundational courses are essentially of equal importance.

When I was an undergraduate at GMU I often chatted with grad students about their research, the curriculum, etc. Many complained about the macroeconomics courses and prelim, saying it had no relevance to their research agenda. Some, though, had nothing to complain about: at the time, students studying experimental economics were exempt from the requirement to take macroeconomics. I suspect their careers are no worse off from it. (I understand the exemption is no longer offered, though)

[None]

"This IS macro, but it arrives at the right diagnosis"

Wait, just so that I am clear, macro is ok, but only if it arrives at the same ideological conclusion that you want?

I'm not sure what that is, but it sure is not economics.

[Steve Horwitz]

None,

Why assume the "correctness" of Taylor's diagnosis refers to anything ideological, necessarily? One could, for example, believe the Fed's expansionary policy was a major cause of the current crisis (a "correct diagnosis") yet also believe the solution is to have a better Fed chair or for it to adopt a different policy rule, or any number of things. It's not obvious to me that "correct diagnosis" = "agrees with my ideology."

It's also not obvious to me, given what seems to be your point, how one could EVER agree with a macro diagnosis without it being "ideological."

[LVDH]

What we have here is apparently that what tend to be perceived as opposing "ideological" viewpoints, groups etc. are arriving at a common point and perhaps partly similar conclusions. This may signal scientific progress (though not necessarily). Note also that I was only mentioning "diagnosis" not "remedy". But the fact that these macro models, ideological or not, are used by some important decision makers in this world is in itself a sufficient reason for any economist interested in macro matters to manifest some interest in them.

[Lee Kelly]

One word that should never be used, but only mentioned: "ideology".

[Rafael Roos Guthmann]

Mario Rizzo:
" Curiously, when I was a graduate student at Chicago, the macro course was never called "macro." It was called,"Theory of Employment, Income and the Price Level." "

Well, Microeconomics in Chicago was called Price Theory, wasn't?

[None]

LVDH,

The implication, as far as I can tell, is that you care less about correct methodology and more about someone arriving at the same conclusion as you.

I could be interpreting incorrectly, but I am quite certain that I am not.

[LVDH]

None,

How could you be so quite certain, knowing nothing about me? (This is what is called a prejudice.) I had been a student of methodology and obtained degrees in philosophy long before I decided to turn myself into an economist. While some methodological approaches are clearly questionable or incorrect, I am indeed not convinced there exists a unique correct methodology. The roads to "truth" may be plural, even if I would not unconditionally subscribe to an "Anything Goes" position à la Feyerabend. Regression methods - for instance - can be used for "description" - not only "inference" or "hypothesis testing"... My qualified ecclecticism in matters of method is not inspired by ideology, however. In fact I do not care about ideology, or very little.

[None]

LVDH,

I apologize if I am misinterpreting. In the meantime, let's forget "ideology" which is possibly the source of confusion, and use the word "methodology" instead. Going back to your original comment:

"This IS macro, but it arrives at the right diagnosis."

When I read this, I interpret it as you saying: "even though this is macro, which has a flawed methodology, it arrives at a conclusion that I agree with, so it is ok." (Whether that you agree with that conclusion because of your ideology or not is irrelevant.)

Please correct me so that I can understand better what you initially meant.

[LVDH]

Taylor´s empirical econometric methodology is OK as far as it goes, I would say.