I never formally studied any economics at school or university, but in the years since I have become increasingly interested in the subject. I am sure that is evident from many of the posts here on the Stubborn Mule. What I did study was mathematics and, although there can be internal debates within the subject of mathematics, in the end it is usually clear what is right and what is wrong. No such luck in economics, particularly when economists attempt to understand the working of the world from the broadest perspective: macroeconomics. The level of controversy, debate and antagonism in the field of macroeconomics is quite extraordinary.
In July, The Economist’s cover story asked what was wrong with the field of economics. The leader was accompanied by an article entitled The other-worldly philosophers, which narrowed in on macroeconomics. It quotes Willem Buiter of the London School of Economics describing macroeconomics as a “costly waste of time”, while prominent economist Paul Krugman described most macroeconomics of the past 30 years as “spectacularly useless at best, and positively harmful at worst”. The article goes on to explore the tensions between free-market supporting “freshwater economists” and the more interventionist “saltwater economists”. Following a detente of sorts over recent years, the global financial and economic crisis has inflamed the antagonism once more.
macroeconomics is not a science. Its methods are gross and error-prone, and its models of economic reactions bear only a distant relationship to those in the real world. The theoretical apparatus of economics – its ‘laws’ – are mostly imaginative constructs that can rarely be confirmed with any precision, and stem more often from ideologies than from careful observation.
The issue of ideology is a crucial one. Any macroeconomic theory has implications for government policy, particularly monetary and fiscal policy. Further, almost all monetary and fiscal policy, even “doing nothing” has implications for wealth transfer from one segment of society to another. All things being equal, high interest rates are bad for borrowers and good for depositors. Inflation is good for borrowers and bad for lenders (update: this is really an over-simplification: see comments below). Some policies may benefit wage earners, but create costs for businesses, others may help importers but hinder exporters. With so much real money at stake, it is no wonder that ideological biases are so significant.
Once much of this debate would have been carried to the halls of academia, only reaching the rest of us in the form of those ideas which filtered through to influence the government of the day. These days it is all readily accessible online to anyone who is interested and many of the participants engage directly with the public on their blogs. I do not pretend to have all the answers (or even very many answers), so for now I will simply list just a few of the blogs and websites I have come across in my own quest to better understand this contentious field of study.
Bill Mitchell is a professor in economics at the University of Newcastle (Australia). He describes himself as a “modern monetary theorist” and focuses on the mechanics of money. On his blog, he argues forcefully that much of the thinking of mainstream macroeconomics, particular that of a neo-classical bent, has not come to terms with the implications of “fiat money” and are steeped in gold standard thinking. This position leads him to advocate strongly for the importance of government spending, particularly to support full employment, and dismiss concerns about budget deficits threatening government solvency. While this may sound Keynesian, Mitchell dislikes the The General Theory of Employment, Interest, and Money and distances himself from aspects of Keynesian thinking which can itself be caught up in misunderstandings of the mechanics of money. While Mitchell does not shy away from expressing his ideological views, he would also argue that his thinking does indeed begin with careful observation.
With the Nobel Prize for Economics in 2008 and a number of popular books under his belt, Paul Krugman is the best known of the economists in this list. Krugman’s approach to macroeconomics is more firmly in the Keynesian tradition than Mitchell’s and he has been a passionate advocate online and on television for extensive economic stimulus packages, as well as an ardent critic of much of the way that bailout of US banks was handled. Like Mitchell, Krugman dismisses concerns about escalating government debt.
Having been a member of theBank of England’s Monetary Policy Committee, Willem Buiter has direct experience of the real world operation of monetary policy. In his blog he criticises the whole enterprise of macroeconomics, attacking both the neo-classical and the neo-Keynsian schools of thought. Buiter has more time for “heterdox” economic thought that attempts to deal with the messier realities of the economy, such as inefficient markets, illiquidity and irrational behaviour.
Many economists, Krugman included, dismiss the Austrian school of economics as an oddball fringe distraction from the real business of economics. However, the Austrian way of thinking has a surprisingly strong hold on the thinking of a number of people outside the economics profession. I suspect that this is due, in part, to the fact that a number of the school’s classic books such as Hazlitt’s “Economics in One Lesson”, are easily accessible to non-economists. Among the recurring themes of the Austrian school are the evils of fiat money, fractional reserve banking and the intervention of central banks in free markets. While many of their arguments that get them to these stark conclusions initially have superficial appeal, I have not found that they stand up to closer scrutiny. Presumably this is why they are not taken very seriously by most professional economists. Either that or all professional economists are either deluded fools, or swayed by vested interested or both, which I am sure would be the Austrian’s counter-argument. Indeed, another thread running through the Von Mises Institute blog and other Austrian school writings is an acrimonious tendency to ad hominem attacks on their opponents, particularly Krugman.
Written by James D. Hamilton, Professor of Economics at the University of California, San Diego and Menzie Chinn, Professor of Public Affairs and Economics at the University of Wisonsin, this blog has a strong focus on data analysis, which clearly appeals to me. Nevertheless, their attitude towards government debt does show signs of the sort of gold standard thinking that Bill Mitchell criticises.
I have grouped these two blogs together as they seem to share a number of contributors and have a similar style and outlook. Many of the writers are Austrian school fellow travellers and like nothing more than a rant about the evils of fiat money, except perhaps a rant on why the banking system is a giant Ponzi scheme. I primarily visit these sites if I am looking for a bit of an adrenaline boost or an argument.
Steve Keen is another iconoclastic opponent of neo-classical economics. His book Debunking Economics was an attack on the traditional underpinnings of neo-classical macroeconomics. Most of the writings on the blog focus more on his concerns about the growth in private sector debt in Australia and the US. The concerns lead him to his pessimistic view of the prospects for the Australian housing market, a view he is best known for in the mainstream press and one I have discussed elsewhere.