Making Ourselves Useless, by Paul Krugman, in NY Times: Simon Wren-Lewis has two posts on macroeconomists that get at a lot of what is concerning me about my profession. To put it bluntly: faced with a severe economic crisis — the very kind of crisis macroeconomics was created to deal with — it often seems as if the profession is determined to make itself useless.
Wren-Lewis’s first post concerns the obsession with microfoundations. As he says, this obsession is at this point deeply embedded in the academic incentive structure:
If you think that only ‘modelling what you can microfound’ is so obviously wrong that it cannot possibly be defended, you obviously have never had a referee’s report which rejected your paper because one of your modelling choices had ‘no clear microfoundations’. One of the most depressing conversations I have is with bright young macroeconomists who say they would love to explore some interesting real world phenomenon, but will not do so because its microfoundations are unclear.
So where does this come from? The “Lucas critique” has been a big deal in the profession for more than a generation. This says that even if you observe a particular relationship in the real world — say, a relationship between inflation and unemployment — this relationship may change when policy changes. So you really want to have a deeper understanding of where the relationship comes from — “microfoundations” — so that you won’t be caught off guard if it does change in response to policy.
And this is fair enough. But what if you have an observed fact about the world — say, downward wage rigidity — that you can’t easily derive from first principles, but seems to be robust in practice? You might think that the right response is to operate on the provisional assumption that this relationship will continue to hold, rather than simply assume it away because it isn’t properly microfounded — and you’d be right, in my view. But the profession, at least in its academic wing, has largely chosen to take the opposite tack, insisting that if it isn’t microfounded — and with all i’s dotted and t’s crossed, no less — then it’s not publishable or, in the end, thinkable.
Now we’re having a crisis that makes perfect sense if you’re willing to accept some real-world behavior that doesn’t arise from intertemporal maxiimization, but none at all if you aren’t — and to a large extent the academic macroeconomics profession has absented itself from useful discussion.
In the second post Wren-Lewis responds to another tired attack on fiscal stimulus, based on basically nothing. As he says, it’s hard to imagine a clearer case for action than what we’re seeing: overwhelming evidence that fiscal policy does in fact work, zero real interest rates. Yet a substantial number of economists seem determined to find reasons not to act. Some of this is ideology, but I suspect that part of this also represents a carryover from academic careerism, where differentiating your product — claiming that the big guys are wrong at something — is part of what you do to get noticed. This kind of petty stuff doesn’t matter when it’s just academic games, but when it clouds the discussion in the face of mass unemployment, it becomes very bad indeed.
My bottom line is that we as a profession faced the crucial test of our lives — and by and large we failed and continue to fail. It’s not a happy story.