Economist Eric Falkenstein thinks a good part of it is:
I went to graduate school to become a macroeconomist and understand business cycles, but became convinced pretty quickly that this problem was not going to be solved any time soon. The current theories today are pretty much the same is when I was in school 20 years ago. There are theories that recessions are caused by monetary shocks, interest rates being too low, insufficient consumption demand, sticky prices, technology shocks, changes in leisure preferences, cyclical investor optimism. None of these explanations are very convincing, which is why economists still have not coalesced around any one explanation. Indeed, if anything it’s worse because back in the Keynesians vs. Monetarist days (say 60s and 70s) you had only two camps, highlighting that neither side was right.
and presents what to my eye is a pretty compelling explanation of why that may always be the case:
If mimicry is the essential driver of the misallocation of resources that inevitably must be corrected, it by definition occurs in places that do not have accurate quantitative signals; indeed, it preys upon areas where the signals are misleading, and so have less skepticism. Safety creates risk in that eager overzealous entrepreneurs, once they figure out what sufficient statistics work on investors, quickly jump on these sectors with not merely excess capacity but business models that never stood a chance.
If that’s the case it’s certainly bad news for economists, generally, and macroeconomists in particular. He’s not just saying that macroeconomics doesn’t live up to its promise. He’s saying it can never do so.
At any rate and IMO at least at the present state of the art while macroeconomics is utterly incapable of predicting “the next big thing”, when it will come, or how big it will be, i.e. when the peak of the next cycle will be, it’s much better at pointing out how we can impede the peak of the next cycle and that, in turn, is bad news for central planners since the things that are most likely to impede the next expansion are in all likelihood the things they most want to do.
Hat tip: Arnold Kling
When I took my Intro to Economics course at U of Illinois twenty years ago, it was a microecomomics course peppered with insults at the futility of macroeconomics. I remember a Political Science professor complaining that the “trouble” with the school’s economics program was that it was servient to the business program and that other schools placed economics within the liberal arts.
It makes one wonder if macro should be split off and placed within another program. Indeed, I’d say there were a few weeks I had of a political science class on Marx that might have qualified as a type of macro-economics (such as the industrial cycle), but I doubt many students had taken any statistics courses.
It is amazing that lots of PhD economists can look at the same data and come to totally different conclusions. I do believe that we should be much more humble about what our particular beliefs tell us. I would prefer to not put too much trust in any particular small group of people.
Steve
I understand the macroeconomics courses at Magic 8 Ball University are terrific.