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The Anti-Scientific Revolution in Macroeconomics


Well, now I’m in Dublin to receive the James Joyce Award; life is interesting, although it does tend to get in the way of blogging.

But I thought I could squeeze out a few minutes to talk about something I’ve been thinking about a lot lately: the remarkable extent to which powerful groups, including a fair number of economists, have rejected intellectual progress because it disturbs their ideological preconceptions.

What brings this to mind is the debate over extended unemployment benefits, which I think provides a teachable moment.

There’s a sort of standard view on this issue, based on more or less Keynesian models. According to this view, enhanced UI actually creates jobs when the economy is depressed. Why? Because the economy suffers from an inadequate overall level of demand, and unemployment benefits put money in the hands of people likely to spend it, increasing demand.

You could, I suppose, muster various arguments against this proposition, or at least the wisdom of increasing UI. You might, for example, be worried about budget deficits. I’d argue against such concerns, but it would at least be a more or less comprehensible conversation.

But if you follow right-wing talk — by which I mean not Rush Limbaugh but the Wall Street Journal and famous economists like Robert Barro — you see the notion that aid to the unemployed can create jobs dismissed as self-evidently absurd. You think that you can reduce unemployment by paying people not to work? Hahahaha!

Quite aside from the fact that this ridicule is dead wrong, and has had a malign effect on policy, think about what it represents: it amounts to casually trashing one of the most important discoveries economists have ever made, one of my profession’s main claims to be useful to humanity.

If you read Barro’s piece, what you see is a blithe dismissal of the whole notion that economies can ever suffer from am inadequate level of “aggregate demand” — the scare quotes are his, not mine, meant to suggest that this is a silly, bizarre notion, in conflict with “regular economics.”

You’d never know, either from the WSJ or from people like Barro, why anyone ever felt that regular economics — the economics of supply and demand and all that — was inadequate.

But you see, there are these things we call recessions. And if you believe regular economics is all there is, you should find them very upsetting.

Think, for example, about the Great Recession and its aftermath. Regular economics says that economies should normally get richer each year, as their work force and capital stock grow, and technology advances. But after 2007 the United States and other advanced countries suddenly went into reverse, becoming poorer instead of richer, and for an extended period too:

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So did plagues kill off part of the work force? Did termites eat part of the capital stock? Did technology retrogress? No, no. no. On the last point, has anyone noticed that the iPhone was introduced in 2007, and that the whole smartphone/tablet revolution has more or less coincided with a period of terrible economic performance?

So what did happen? Keynes offered an answer: it is, in fact, possible for economies to suffer from an overall lack of demand. Other people had said things along these lines, but Keynesian economics put it front and center.

This really was an intellectual revolution; indeed, while I’m generally against scientific pretensions, it amounted to a scientific revolution, something like plate tectonics in geology. Suddenly the seemingly inexplicable — what elevates mountain ranges? what explains periods of economic retrogression? — became comprehensible.

And yes, the theory has made successful predictions — surprising predictions that people who didn’t accept the theory regarded as absurd until they came true. I’ve written a lot about what happened (or actually didn’t happen) to inflation and interest rates; go back to 2009 and read what the usual suspects were saying. You claim that the Fed can print vast quantities of money without causing inflation? You claim that the government can run huge deficits without driving up interest rates? Hahahaha.

But even better, in a way, is the relationship between government spending and private spending. Demand-side economics says that under depression conditions government spending won’t compete with private spending — in fact, lower government spending will lead to lower private spending too. Hahahaha! After all, common sense says that the government and the private sector are in competition for scarce resources. Except if we look at the euro zone, where some countries were forced into severe austerity while others weren’t, we see this:

 

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So let me summarize: we had a scientific revolution in economics, one that dramatically increased our comprehension of the world and also gave us crucial practical guidance about what to do in the face of depressions. The broad outlines of the theory devised during that revolution have held up extremely well in the face of experience, while those rejecting the theory because it doesn’t correspond to their notion of common sense have been wrong every step of the way.

Yet a large part of both the political establishment and the economics establishment rejects the whole thing out of hand, because they don’t like the conclusions.

Galileo wept.

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