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The Great Challenge of Macroeconomics

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April 18, 2013 – Comments (12)

Good post, completely agreed

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The Great Challenge of Macroeconomics
from PRAGMATIC CAPITALISM by Cullen Roche
http://pragcap.com/the-great-challenge-of-macroeconomics


In a recent post Ezra Klein says that one of the problems with modern macro is that there is not enough historical evidence and experimenting occurring to validate certain views of the world.  He says:

      “The great challenge of macroeconomics is that it does not lend itself to experiments. The builders of early jet aircraft could develop prototypes and send test pilots up to test their results. But policymakers can’t very well take the same chances with their nations’ economies, because the consequences are much greater if they get it wrong. You can risk crashing a prototype jet airplane, but you can’t risk crashing an entire national economy.

      As such, macroeconomists have to rely on natural experiments to understand how the economy really works, examining how different countries pursuing different policies at different times and in different circumstances get different results.”

I don’t agree with the gist of his post.  I think the problem in modern macro is that it is driven largely by ideology and confirmation bias.  A plane does not fly because of ideology or personal biases.  It flies because we know, for a fact, that an object can generate enough thrust to overcome its weight resulting in lift.   Obviously, it’s more complex than that, but it’s not something that’s theoretical or in need of experimentation.  This common understanding of flight creates a basis for understanding within the engineering community.  Engineers don’t debate so much why a plane files, but rather, the optimal way to fly.

In macroeconomics, we do the opposite.  There is no firm set of agreed upon understandings.  No one agrees how the plane flies.  Instead, we mostly just debate the optimal way to fly.  We’re basically just throwing sheets of metal into the sky without actually working an agreed upon foundation for why that piece of metal may or may not fly.  So we do some incredibly silly things.  For instance, it’s preposterous that the money multiplier is taught in school.  It’s preposterous that the concept of a currency issuing nation going bankrupt is still trotted out in economic debates.  These should not even be topics of debate because anyone familiar with the operational realities of money knows they are void of value.

I created Monetary Realism because I recognized this flaw in macroeconomics.  Modern macro needs a firm set of understandings from which to base future experiments.  And yes, the experiments are fine so long as they’re based on a firm understanding of the actual monetary system and how it operates.   But I fear that too many of our experiments over the years have been based on an ideology and political preference as opposed to a firm understanding.   We shouldn’t apologize for that as Ezra Klein does. We should be enraged by it.

The post The Great Challenge of Macroeconomics appeared first on PRAGMATIC CAPITALISM.

12 Comments – Post Your Own

#1) On April 18, 2013 at 5:53 PM, awallejr (85.46) wrote:

Well you also have to consider human behavior is irrelevant to the plane (well human error in flying or making it aside) but not to economics.  Greed, corruption, criminality are very difficult variables to factor but do impact economics and in a big way.

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#2) On April 18, 2013 at 7:31 PM, binve (< 20) wrote:

Actually that is a good analogy:

Understanding the monetary system, how sectoral balances work, etc. are the 'mechanics' of macroeconomics. Just as lift, thrust, drag, air density and compressibility, streamlines,  etc. are the 'mechanics' of flight.

That is not the whole story. There is a human behavioral aspect to macroeconomics (expectations, hoarding, greed, etc.) just as there is a human behavioral aspect to to flight (pilot judgement and training, in flight emergencies, avoiding stall speeds, etc.). They are related but not the same.

Cullen's point is: there is still littel agreement on the mechanics part of macroeconomics because of ideology and confirmation bias. The money multiplier is a good 'story', expect it is completely fictitious, it does not describe accurately how money is created and thus is void of value. Yet people still tout it out as being factual.

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#3) On April 18, 2013 at 7:49 PM, ETFsRule (99.94) wrote:

This is all true, but it doesn't seem very helpful. What's the solution... convince people to abandon their political ideologies? Good luck.

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#4) On April 19, 2013 at 12:18 AM, Melaschasm (55.93) wrote:

Certain economic theories are very solid and generally accepted by all professional economists as being true.  Things like the basics of supply and demand are universally accepted amoung professional economists.  

Even some areas of economics where there is heated political debate are widely accepted as true by professional economists.  The problem in these instances is the benefits of lieing about economics outwiegh the negetives for many politicians.

While it is true that professional economists have many more issues that are not set in stone than physics, that has more to do with economics being less developed as a science than any other factor.

A closer comparison of two different sciences would be economics and weather.  While there is considerable known and widely accepted science in climetology, there is so much which is not known that professional weathermen can not consistently predict the short or the long term future, just like economists struggle to predict what is going to happen next.

 

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#5) On April 19, 2013 at 12:33 AM, whereaminow (< 20) wrote:

The great challenge is understanding that macroenomics does not exist. It's a completely fallacious concept created out of thin air. Once you get that, you no longer have to try to justify its nonsensical prescriptions.

David in Liberty

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#6) On April 19, 2013 at 4:26 PM, portefeuille (99.61) wrote:

I think the S&P 500 index will make it back above the green trend line in the next attempt. maybe next week :)



enlarge

(from here)

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#7) On April 19, 2013 at 4:31 PM, portefeuille (99.61) wrote:

And isn't this a pretty chart? yeay biotech :)



enlarge

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#8) On April 19, 2013 at 4:33 PM, portefeuille (99.61) wrote:

#7 i.e. mining the genome beats mining the crust of the earth :)

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#9) On April 19, 2013 at 5:57 PM, awallejr (85.46) wrote:

Would be nice if it does in chart in #6.  Or that middle trend line could form resistance, afterall May is right around the corner.

The one thing that concerns me about chart in #7 is it seems a bit parabolic for April.

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#10) On April 19, 2013 at 10:34 PM, portefeuille (99.61) wrote:

it seems a bit parabolic for April

The division by GDX makes it look "dramatic". The index (NASDAQ Biotechnology Index) underlying the IBB ETF (the numerator of the ratio shown in the chart in comment #7 above) is still rather well-behaved ...



enlarge

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#11) On April 19, 2013 at 10:36 PM, portefeuille (99.61) wrote:



enlarge

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#12) On April 22, 2013 at 10:52 PM, GraemesPSP (99.49) wrote:

I like Cullen, and he is one of about 20 or so I follow on Seeking Alpha.  But I will admit I've never really understood his economic realism theory.  I think he is very intelligent, and always makes me think.  But quite often I think I disagree. And his quote in the beginning is a classical example, because I couldn't fault it's argument, and didn't follow why he did, but some of what he said after rung hollow but much rung true.

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