The Muddle of Macroeconomics

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.

In the May issue of The Monthly Magazine, former banker and author of “The Two Trillion Dollar Meltdown”, Charles R Morris wrote of macroeconomics:

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.

Billy Blog

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.

The Conscience of a Liberal

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.

Von Mises Institute

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.

The Daily Reckoning and Money Morning

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’s Debtwatch

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.

Photo credit: p22earl on flickr (cc licence).

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10 thoughts on “The Muddle of Macroeconomics

  1. Ramanan

    Hi Sean,

    This is Ramanan, a frequent commenter on Billy Blog.

    Firstly thanks for your comment on reserve requirements and many more comments. I too didn’t have any background in Economics and my education is in Theoretical Physics. In the last 6 months or so, I have become increasingly interested in Economics and fortunately reached Billy Blog as soon as I started, thanks to Google and discomfort in my stomach.

    I am waiting for his book with Randy Wray and will ship it to India as soon as Amazon releases it. I have been reading a book by Wynne Godley and Marc Lavoie who use the Stock-Flow consistent approach Bill talks of in his blog. Have you seen it ? I got it shipped by express courier as soon as I came to know of this book :). It is really an amazing book. It has given me a framework on how to think about the issues – judge for myself – who is speaking sense and who is speaking garbage etc.

    Coming back to blogs, Bill’s blog is really amazing – he keeps exposing myths one by one with so much patience.

  2. stubbornmule Post author

    Ramanan: welcome to the Mule! I haven’t seen that Godley and Lavoie book. Thanks for pointing it out. Like you, I very much enjoy Bill’s blog.

  3. Ramanan

    Hi Sean,

    Thanks for the welcome. You may find basic ideas of the book in Money, finance and national income determination: An integrated approach by Godley at – The book has the advantage of being very pedagogical and has the expertise of Marc Lavoie as well and is a great improvement. Also, it considers economy in parts, closed with no private sector, economy with no government and then everything together and in the end – open economies. This is great since one can learn economies in part instead of trying to solve everything at one go.

  4. James

    ‘ high interest rates are bad for borrowers and good for depositors.’ I think this is obviously only true for floating rate borrowers and depositors

    ‘Inflation is good for borrowers and bad for lenders.’ Less obviously this is only true for fixed rate borrowers and lenders. For variable rate borrowers the inflationary benefit of a real value reduction in notional being closely offset by the increase in nominal interest rates due to inflation. I accept there are some timing and measurement issues here but this truism gets quoted so often without any qualification I wondered why. I think it could be that until relatively recently US borrowers and investors did so mostly at fixed rates, particularly in the residential mortgage market.

  5. stubbornmule Post author

    James: You make a good point. In fact, even in the case of fixed rate borrowers it is really only inflation that is higher than expected that is particularly good. If inflation is positive but at or below the level that the market was expecting, the fixed rate borrower is not better off as the already paid for the expected rate of inflation. A similar point holds for variable rate borrowers, although as you you say there are timing issues. It depends on what the mechanism is for the variable rate to change.

    I think the same focus on fixed rate borrowing and lending is a big factor in the widespread assumption that steep yield curves are good for banks (who lend long and borrow short) and flat yield curves bad. In fact, since so much lending is either variable rate or hedged, I would argue that this is not really true anymore.

  6. Marco

    Hi Stubborn Mule,

    I just discovered your own blog and I’d say it’s quite good: critical but fair and balanced opinions. Which is way more than one finds in many an economic blog.

    And I couldn’t agree more on the subject of ideology and economics. What you may have missed is a detail: it is on the political arena that decisions are made; those who have more political clout, often get their ideological goals satisfied (and often, too, to the loss of other less-represented players).

    Anyway, a suggestion to your own list: Dean Baker’s Beat the Press. He is an American economist and his comments are based on American media.

    This in itself should not disqualify Beat the Press to Australian readers, though, as I believe the US and Australian policy debates are strikingly parallel.

    Not very strong on data, though.

  7. stubbornmule Post author

    Marco: thanks for the pointer to Beat the Press. I will add it to my reading list, and I can only hope it helps me to sort out this muddle of macroeconomics.

  8. Magpie


    I highly recommend you read the exchange between “pete”, “alfredC” and “Dr. Jeckle & Mr. Heckle” in the comments section of Ross Gittins’

    As Labor spouts its values, gap between rich and poor widens. SMH. December 1, 2010

    It gives the Austrian economists’ perspective on democracy. I’ll let you judge by yourself.

  9. Pingback: Government spending

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