Tuesday, July 14, 2009

"Macroeconomists Couldn't Keep Up"

The Free Exchange, the blog at The Economist, offers this excuse to why the vast majority of macroeconomists couldn't see the housing bubble and the crisis that it caused:

"I have a hunch that not a great many macroeconomists paid much attention to all the different kind of credit systems we have. And I can't be sure because I don't keep up with everything they write, but I think maybe the financial markets became much more complicated than they used to be. And as a result, maybe the macroeconomists just couldn't keep up with all of that."

Actually, all you needed to see the problems was Austrian business cycle theory. If macroeconomists had only studied that instead of Lagrange multipliers, then maybe they could have made some predictions relevant to the real world.

1 Comments:

Blogger All-In-All said...

One of the problems is the sheer terminological and definitional differences between most Macro-schools and Austrian economics. To really grasp the ABC Theory, you have to understand prices and market process, the formation and nature of money, time and uncertainty, capital formation, the heterogeneity of capital. Given the diversity on these views between various Austrian streams, it may be that Austrian business cycle theory 'didn't make sense' to these economists because it was talking right past them.

This is sort of like when a conservative criticizes Proudhon as though he were a Communist; differences in formulation among superficially similar theories can lead to great confusion.

Also, a look at the much more complicated regulatory and historical circumstances in the American economy over the last century are required to explain some of the features of the present boom-bust; someone not familiar with an Austrian analysis of these additional phenomena may find credit expansion/inflation to be unpersuasive due to this lack.

But I basically agree, the basic feature of capital misallocation via monetary expansion is a definite feature of the current recession, and responsible for the most widespread or 'macro' features of the recession.

3:01 AM  

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