Pieria: How Not to Do Macroeconomics, Part II

I have  new post on Pieria, following up on mainstream macro and secular stagnation. The beginning is a restatement of my critique of EM/a response to Simon Wren-Lewis, but the main nub of the post is (hopefully) a more constructive effort at macroeconomics, from a heterodox perspective:

There are two major heterodox theories which help to understand both the 2008 crisis and the so-called period of ‘secular stagnation’ before and after it happened: Karl Marx’s Tendency of the Rate of Profit to Fall (TRPF), and Hyman Minsky’s Financial Instability Hypothesis (FIH)I expect that neither of these would qualify as ‘precise’ or ‘rigorous’ enough for mainstream economists – and I’ve no doubt the mere mention of Marx will have some reaching for the Black Book of Communism – but the models are relatively simple, offer an understanding of key mechanisms and also make empirically testable predictions. What’s more, they do not merely isolate abstract mechanisms, but form a general explanation of the trends in the global economy over the past few decades (both individually, but even moreso when combined). Marx’s declining RoP serves as a material underpinning for why secular stagnation and financialisation get started, while Minsky’s FIH offers an excellent description of how they evolve.

I have two points that I wanted to add, but thought they would clog up the main post:

First, in my previous post, I referenced Stock-Flow Consistent models as one promising future avenue for fully-fledged macroeconomic modelling, a successor to DSGE. Other candidates might include Agent-Based Modelling, models in econophysics or Steve Keen’s systems dynamics approach. However, let me say that – as far as I’m aware – none of these approaches yet reach the kind of level I’m asking of them. I endorse them on the basis that they have more realistic foundations, and have had fewer intellectual resources poured into them than macroeconomic models, so they warrant further exploration. But for now, I believe macroeconomics should walk before it can run: clearly stated, falsifiable theories, which lean on maths where needed but do not insist on using it no matter what, are better than elaborate, precisely stated theories which are so abstract it’s hard to determine how they are relevant at all, let alone falsify them.

Second, these are just two examples, coloured no doubt by my affiliation with what you might call left-heterodox schools of thought. However, I’m sure Austrian economics is quite compatible with the idea of secular stagnation, since their theory centres around how credit expansion and/or low interest rates cause a misallocation of investment, resulting in unsustainable bubbles. I leave it to those more knowledgeable about Austrian economics than me to explore this in detail.

 

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  1. #1 by Roman Plotnikov on April 30, 2014 - 12:59 pm

    Good post, but I predict that Wren-Lewis will ignore it altogether or evade its message in his rebuttal.

    • #2 by Unlearningecon on May 1, 2014 - 10:56 pm

      Well, he says he wants to engage with the heterodox, so here’s his chance…

  2. #3 by Bastien on May 3, 2014 - 11:06 am

    The most interesting thing about secular stagnation and Summers is that this notion was already known by heterodox economists for many decades. But now that it has been expressed in a kind of loanable funds natural interest rate framework, which requires very tedious mental contortions, mainstream economists are finally paying attention. Not sure it is a good argument in favour of their willingness to engage with heterodox.

    • #4 by Unlearningecon on May 3, 2014 - 1:31 pm

      My initial draft had a rant about this in it: I’m sure it won’t be too long before mainstream models with Piketty’s ‘r>g’ in it appear, using more arbitrary assumptions on top of the optimising framework, most of which contradict the arbitrary assumptions used in models like EM’s. There’s no ex ante understanding, no progress toward a comprehensive model, and no willingness to abandon long-held assumptions like utility and equilibrium.

      Their framework accounts for everything and nothing.

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