Is macroeconomics believable?

• Author: Bolch, Ben W.

In January 1997, the annual convention of the American Economic Association included a session entitled "Is There a Core of Practical Macroeconomics That We Should All Believe?"(1) Macroeconomics, which is concerned with large-scale, or aggregate, magnitudes such as total production and employment, is one of two grand divisions of economic theory, the other being microeconomics--the study of individuals, firms, and markets. The convention session highlights the profound distress that macroeconomics; finds itself in today. Imagine the American Chemical Society holding a convention session to consider whether organic chemistry has a believable core, and you will have some idea of the troubles of an academic discipline whose practitioners aspire to offer guidance to central banks, national treasuries, and heads of state. How could a field that held so much promise after World War II have reached the point where its own finest practitioners are called upon to defend the proposition that it has a believable core?

The Individual and the Aggregate(2)

Any account of modern macroeconomics must begin with John Maynard Keynes, who is clearly its founder Keynes's only formal education in economics consisted of several weeks of study under the tutelage of Alfred Marshall, the father of microeconomics as it is stiff taught to undergraduates today. Very much the Victorian, Marshall believed that frugality, rationality, and honor were virtues that society should encourage.(3) Like Adam Smith, Marshall viewed the free-market system as a superior setting for the development of these virtues.

Keynes, however, was almost maniacally bent on overthrowing both Victorian ethics and the view that economic systems are best left to self-regulation. As Robert Skidelsky has shown in a massive two-volume biography (1983 and 1994) and Gertrude Himmelfarb (1985) also has noted, the personal life of Keynes and fellow cognoscenti in the Bloomsbury Group went beyond mere deviance. In an attempt to overthrow the morals of his Victorian predecessors, Keynes and the other denizens of the Bloomsbury Group engaged in an almost unbelievable series of sexual permutations and combinations, the details of which Skidelsky has explored ad nauseam.

While Keynes rejected the macroeconomics of Marshall and the morals of the Victorians, he adhered to the technical utilitarian framework of Marshallian microeconomics. This peculiar mixture of technical Marshallian microeconomics and Keynesian macroeconomics has become today's mainstream economic thought. Julie Nelson and Steven Sheffrin (1991) have pointed out that this combination has produced a kind of schizophrenia in modern economic thought: Marshallian microeconomics lends itself to advocacy of market freedom, whereas Keynesian macroeconomics lends itself to advocacy of government control.

Many other dualisms stem from the belief that the economics of aggregates differs from the economics of individuals. One example is the "paradox of thrift," which Paul Samuelson's best-selling textbook foisted upon several generations of economics undergraduates. According to the paradox, individual saving is "good" but aggregate saving is "bad." I will return to duality problems of this kind. For now it suffices to note that finally, the paradox of thrift has vanished from most undergraduate textbooks.

Why should macroeconomics and microeconomics differ? One of the least cited rationalizations is that crowds often exhibit mamas and madness not found in individuals (Kindleberger 1978). This idea that the whole somehow differs from the sum of its parts, a notion imported into economics from Gestalt psychology, is ingrained in the thinking of many practicing macroeconomists. But even if it is true, it does not entail that aggregate behavior is best understood by the study of an aggregate, as opposed to the study of the constituent parts of the aggregate. As Ludwig von Mises (1963) wrote,

The road to the performance of great things must always lead through the

performance of partial tasks. A cathedral is something other than a heap

of stones joined together. But the only procedure for constructing a

cathedral is to lay one stone upon another. (45)

A second apology for the macro-micro separation likens economics to physics. If physicists find it necessary to appeal to one theoretical structure when attempting to explain subatomic events and to another when dealing with the relatively large-scale phenomena of gears and levers, then why not economists likewise.) Many economists find this explanation more than a little pretentious, recognizing that some economists lust to be like physicists in that they suffer from cases of severe [Pi]-envy (Mirowski 1989). More to the point, physicists themselves strive, perhaps in vain, for unified theories that will eliminate what most theoretical physicists regard as an unattractive scientific condition.(4)

A third rationalization has to do with data stability It is a fundamental principle of statistics that arithmetic means vary less than the individual data points from which they are constructed. But for critics such as F. A. Hayek, aggregates and averages are pseudoscientific constructs that mask the behavior of the individuals they comprise. For example, it is not possible to study the competitive process or entrepreneurial activity by the use of aggregates, because such aggregates mask the all-important interactive elements in those processes.(5) Mises (1963) put it even mom harshly:

An ideal type has nothing at all to do with statistical means and

averages. Most of the characteristics concerned are not open to numerical

determination, and for this reason alone they could not enter into a

calculation of averages. But the main reason is to be seen in something

else. Statistical averages denote the behavior of the members of a class

or type, already constituted by means of a definition or characterization

referring to other marks, with regard to features not regard to in the

definition or characterization. The membership of the class or type must

be known before the statistician can start investigating special features

and use the result of this investigation for the establishment of an

average. (60)

This profound skepticism by members of the Austrian school such as Mises and Hayek contrasts with the hopes of statisticians, for literally centuries, that the relative stability of aggregates would allow the detection of social laws that could not be deduced from the chaos of disaggregated data. For Karl Marx and many of his sympathizers, the use of Adolph Quetelet's doctrine of the "average man" offered hope for the definition of a uniform standard of labor, which was needed for a defensible interpretation of the labor theory of value (Porter 1986, 66 ff.). Averages seem always to be the darling of socialist calculation, because averages are such great levelers: they are often (but incorrectly) interpreted as if they were constants.

Many economists consider the foregoing criticism of aggregates excessive. Mises (1978) himself softened his attack on the use of aggregates and averages when they served the purpose of "helping to open the eyes of the people" (89). Nevertheless, the criticism serves as a constant reminder of the tenuous nature of the aggregates themselves and of the falsity of the view that policies aimed at altering some aggregate necessarily strike everyone in the aggregate equally

It is interesting to speculate on the role that Keynes's moral and ethical beliefs played in this micro-macro bifurcation. As repulsive as the behavior of the Bloomsbury Group might seem to most people, Keynes and his crowd rationalized their behavior as pathbreaking experimentation that an elite needed to carry out in order to broaden the moral perspective of the masses. Like most people, Keynes found the aesthetic liberation from common morals to be heady stuff He wrote: "It was exciting, exhilarating, the beginning of a renaissance, the opening of a new heaven on earth, we were the forerunners of a new dispensation, we were not afraid of anything" (quoted in Himmelfarb 1985, 39).

Paradoxically, although Alfred Marshall's work rested on a solid moral foundation, he was most responsible for defining economics as a discipline separate from the academic study of ethics, because he removed the study of economics at Cambridge from the study of history and moral sciences. His student Keynes, at least in his early career, adopted the philosophy of G. E. Moore ([1902] 1988), which identified the "good" as nonnatural and beyond definition. Indeed, for Moore, aesthetic enjoyments include the greatest "goods" one can find.(6) And, of course, in the days of Keynes youth, it was commonly assumed that aesthetic enjoyment lay within the purview of the upper class. Yet, as Alasdair MacIntyre (1981) points out, intuitional ethical systems such as Moore's afford no grounds for agreement--what is ethical fix you...