We’re obviously at the end of an economic era. Clearly there are at least one, maybe several, fundamental, structural flaws deep in the heart of our economic system. Any financial news source from any day of the week will give you evidence of economic stagnation and instability. And any Trumpeteer, Bernie Bro or Brexiter will tell you that all is not well among the ordinary people of the heartland. Clearly something is badly wrong with the actual, real economy.
Meanwhile, in the dusty halls of academia, of governments, and of banks, think tanks and other established and often ancient institutions, a bunch of people, mostly men, who like to think of themselves as smart are charged with fixing whatever it is that has gone wrong. They’re economists, and their ideas, perspective and advice not only strongly influences what governments and central bankers do, but influences how governments and central bankers think about what they do. Economists even frame the choices within which governments and central bankers operate. In a way, their theories help create real, actual economic reality for us all.
Money is important, governments have power, and economists influence what governments do with that power. Economists are therefore very, very important people doing very, very serious and important things that affect the real lives of hundreds of millions of people. This is serious stuff. Just ask them – they’ll tell you.
The thing to know about economists is that, like the magicians in the world of Jonathan Strange and Mr Norrell, there are two kinds of them: Practical Economists and Theoretical Economists. Practical economists are the ones out to change something. They work for governments, banks, central banks, lobby groups, etc. They want to fiddle with the workings of the economic machine to make it better – for somebody, if not for everybody.
Theoretical economists, on the other hand, are above all that. They think of themselves as scientists and see their purpose as a search for Truth. The practical economists, occupied with many other matters, depend on the theoretical economists for their theories. In other words, theoretical economists (specifically, theoretical macroeconomists) create the theory used by practical economists to strongly influence power. Theoretical economists may be relatively unknown, they may be boring, they may be incomprehensible, but they are very, very, very important people.
This is unfortunate, because there are two serious problems facing the community of theoretical macroeconomists these days:
The first problem facing theoretical macroeconomists is that reality is diverging from theory. More specifically, reality is diverging from their theory. In theory, theory and practice are the same, but in practice they’re not. In macroeconomic theory, X should be happening, or Y should be happening. Meanwhile, in practice, financial instability, weak growth, austerity, inequality, income insecurity and many other economic woes blight the lives of billions. In other words, whatever it is that macroeconomists are doing, or think they’re doing, it’s clearly not working.
And it’s not just that theoretical macroeconomists can’t fix the economy – they can’t even predict what’s going to happen! The 2008 financial calamity came out of the blue for most of them. Can you imagine the credibility of weather forecasting if the biggest storm in 75 years hit with almost no warning whatsoever? When an economic theory can’t even predict that, and seems useless at improving the situation, then what’s the point of it? It’s hard not to call bullshit.
Which brings me to the second problem facing theoretical macroeconomists today – the growing rebellion within their ranks. Essentially, theoretical macroeconomists are dividing into two camps, with more and more of them publicly doubting the orthodoxy. Faced with fact after fact that does not conform to their theories, more and more theoretical economists are, to their great credit, doubting those theories. Simply put, the ideas of theoretical macroeconomists affect the lives of millions, and there is currently an earthquake happening in their conceptual field.
The Chief Economist of the World Bank says that much of macroeconomics has become a religion, whose “pseudoscience” is infecting all social disciplines (that’s the Chief Economist of the World Bank). In a NYT article titled ‘How Did Economists Get It So Wrong?’ Paul Krugman questions the very assumptions that underlie conventional macroeconomic theory. Willem Buiter, the Chief Economist of Citigroup, calls most modern macroeconomics “useless“. Former Bank of England economist Charles Goodhart argues that economists need to start paying attention to money again. Olivier Blanchard, former Chief Economist of the IMF, calls the dominant strand of macroeconomic thinking “insular” and “imperialistic”. And on and on it goes, with the recurring theme that macroeconomic theory has become orthodoxy, not science.
In other words, the macroeconomic theories behind the decisions of finance ministers, central bankers and other powerful people and institutions may well be bollox. Looking at financial instability, stagnant demand, tepid growth, austerity, inequality, income insecurity and all the other endemic economic problems of our age, it’s hard not to think that this might explain a lot.
You might think that the debate between orthodox theoretical economists and their colleagues who call bullshit would be dry, boring and filled with talk of phlogistons, cycle theory, DSGE models and other impenetrable concepts, but it’s not always that way. With a kind of morbid fascination at the spectacle of concepts behind many a distinguished career crumbling in the cold, hard light of factual reality, huge entertainment can be had from following the twitter feed of Paul Romer, the Chief Economist of the World Bank, as he appeals to his more orthodox colleagues to face facts. It would almost be funny if weren’t for all the real human pain behind it.
No. Just take facts seriously. It works. https://t.co/0OgEObZNcc
— Paul Romer (@paulmromer) September 14, 2016
If we accept the rapidly growing body of evidence and authority suggesting that many of the core concepts of conventional macroeconomics are bollox, and that economists don’t really know what they’re doing, then the important question becomes ‘What next?’ As conventional macroeconomic theory crumbles in the face of facts, what will replace it?
One of the primary contenders is Modern Monetary Theory, which focuses on money itself (something which, believe it or not, conventional macroeconomic theory doesn’t do). Another possibility is that macroeconomics will learn from complexity and systems theory, and that its models (and, hopefully, their predictive ability) will become more like those used in meteorology and climate science. Anti-economist Steve Keen is working in this direction, influenced by the Financial Instability Hypothesis (FIH) of Hyman Minsky, whatever that is.
But wherever macroeconomics is going, it’s clear that the old order is collapsing. The theoretical orthodoxy that has guided the highest level of economic management for many decades is crumbling. Either economics is an objective science or it’s not. And if economics is not an objective science, then we quickly need an economics that is. Countless livelihoods and lives will be deeply affected by the revolution we are witnessing in theoretical macroeconomics. It may be dry, it may be boring, it may be theoretical, and it may seem incomprehensible.
But it’s hard to think of any discussion that’s more important.