by Russ Roberts on December 2, 2008

in Economics

Winston Churchill is supposed to have said about Clement Atlee that "he was a modest man, but then again, he has much to be modest about."

I thought of that quote reading this extremely honest and thoughtful post from Greg Mankiw where he makes the case for humility when considering the reliability of the Keynesian approach to macro. I’m feeling a lot of that these days myself and I suspect many other economists are as well. We have much to be modest about when it comes to macro.

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Mark December 2, 2008 at 8:43 am

The problem with macroeconomics in general is with the approach: "Something is broke (unemployment is higher than some governing entity would like) and it needs to be fixed." rather than "There have been changes of which nobody is certain and things require correcting." The former requires top-down meddling, the latter requires adjustments from the bottom up.

Anonymous December 2, 2008 at 8:52 am

Keynesian theory predicts opposite effects of tax and spending increases on private investment.

Any theory of "tax", "spend" and "invest" without further specification of these vague terms can only be nonsense. The same goes for "business management", like it doesn't matter what your business actually produces specifically. These theories are the Capitalist's equivalent of Scientific Socialism.

Unbathed December 2, 2008 at 10:10 am


  • One can get a doctorate in macroeconomics and teach it for a living at a first-rate institution without understanding rudimentary finance, e.g. being unable to say what a futures contract is and how it differs from a forward contract.
  • One can get a degree in finance, certification as a financial engineer, and a position of authority in a centuries-old investment bank without understanding rudimentary macroeconomics, e.g. risk of total outstanding contracts being a large multiple of GDP.
  • Failures due to excessive leverage in finance usually lead to macroeconomic events, i.e. no counterexamples spring to mind.
  • Your search – "unexpected events" inauthor:keynes – did not match any documents.
  • The search "unexpected events" inauthor:hayek appears exactly once in all of Hayek's work, which makes him better than Keynes but no Taleb.

Markets exist in the framework maintained by public policy makers*. Public policy makers' incentives under a checks-and-balances constitutional regime are more like the designers of a MMORPG: design a rules set so that everyone has fun; and not like those of Caligula**: demand that he be worshipped.

* Except in Somalia.

** Though Diogenes would likely claim there is no difference.

Martin Brock December 2, 2008 at 11:48 am

I'm joining the Diogenes Club.

Trumpit December 2, 2008 at 12:49 pm

"we find that both increases in taxes and increases in government spending have a strong negative effect on private investment spending."

As usual, this is meaningless, at least to me. Increase in taxes on whom, the rich or the poor? Does government spending include government investment? If "private investment spending" is already very low, then what is the relevance of a "strong negative effect" on it? Are the authors using .and. in the logic sense when they state that both taxes and government spending are being increased? If you're going to bash Keynes, then you have to do a better job than that.

Trumpit December 2, 2008 at 12:54 pm

Does the fact that if you tax people more who have excess income to invest, that they will invest less of that excess income because they have less money to invest require a study?

Keith December 2, 2008 at 1:53 pm

Quote from Trumpit: "As usual, this is meaningless, at least to me. Increase in taxes on whom, the rich or the poor? Does government spending include government investment?"

What is "rich" and what is "poor"? Either way, the money is confiscated by the government and it isn't available for the rightful owner to use.

What exactly is "government investment"?

Martin Brock December 2, 2008 at 2:10 pm

Increase in taxes on whom, the rich or the poor?

Wrong question. Increase taxes on what, consumption or investment?

Vic December 2, 2008 at 3:14 pm

I think you also have much to do in terms of reevaluating the importance of Austrian economics, which was roundly dismissed by neoclassical economists, including many prominent libertarians.

Consider this amusing post by Tyler Cowen, who essentially gave the case (mockingly) for Austrian econ in 2005. Of course, the joke is on Tyler now:

Consider also that Mankiw only recently realized that Austrian econ existed:

This is rather like a Professor of mathematics who teaches algebra admitting he didn't know of the existence of calculus.

Also consider this post by Gary North, which is devastating in its criticism of the economics profession (rightly so in my opinion):

I just wish guys like you and Don would engage more with the Austrians, because they have some very important contributions to make, and essentially ignored, not just by ivory tower government tenured economists, but by fellow libertarians who have been slipshod in their consideration of the Austrian methodology, and especially the importance of the contributions of Mises.

As for humbleness about Keynesianism, that is far too weak a position. The Keynesian macro economic doctrine is not based on economic law, but on religious dogma that the State is our political salvation.

Greg Ransom December 2, 2008 at 7:05 pm

"Humility" doesn't stop Mankiw from being a standard issue arrogant doorman blocking the way to scientific rivals in the academy.

Compare Mankiw's macro textbook with the textbook by Brian Snowden and Howard R. Vane _Modern Macroeconomics: Its Origins, Development, and Current State_. Ditto with Mankiw's coursework.

Is Harvard opening the doors to Lawrence White, George Selgin, Roger Garrison or Steven Horwitz? Is Mankiw even inviting any of these folks to come speak? No.

dave.s. December 5, 2008 at 12:58 pm

My favorite Churchill-Atlee story is: Churchill was standing at the urinal in the men's room of the House of Commons. Atlee came into the room and stood at the urinal next to Winston's. Churchill looked up at him, zipped up, moved a couple of urinals farther down and resumed his business. "Why Winston, I had no idea you were so modest.", said Atlee. "It's not modesty, Prime Minister. It's only that every time you find something that is large and functions well, you try to nationalize it, and I thought it best not to take a chance!".

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