A Much-Better (but Unfortunately Overlooked) Distinction Between Microeconomics and Macroeconomics

by Don Boudreaux on March 17, 2009

in Complexity & Emergence, Economics, The Economy

Daniel Kuehn's comments on this post prompt me to reprise this post from September 2005:

Micro Contrasted with Macro

Don Boudreaux

Russ Roberts invited me to blog on an unconventional distinction between "microeconomics" and "macroeconomics."  Our GMU colleague Dick Wagner
alerted me to this distinction, and I find it to be far more helpful
than the familiar textbook distinction (which remains, in my view,
still a distinction between Alfred Marshall's approach and John Maynard Keynes's approach).

Dick attributes the distinction to the Swedish economist Erik Lindahl, who spells it out in his book Studies in the Theory of Money and Capital.

The distinction, as I understand it, is this:

Microeconomics
focuses on the actions of individuals; it examines how individuals
respond to incentives, as well as studies the various incentives that
individuals in different circumstances confront.  Gary Becker is a living example of a premier microeconomist.

Macroeconomics
involves tracing out the unintended consequences of various actions and
sets of individual actions.  It studies the logic of the spontaneous,
unintended order (or disorder, as the case may be) that emerges when
each of many individuals respond to the incentives identified and
classified by microeconomics.  On this definition, Hayek  is certainly one of history's greatest macroeconomists.

So a typical microeconomic insight, for example, is the recognition
that a price cap on gasoline reduces suppliers' incentives to supply
and increases the quantities buyers' seek to purchase.  A (confessedly
simple) macroeconomic insight is the recognition that an unintended
consequence of the price cap will be queues at gasoline stations and
black-market dealings in gasoline.

A more elaborate macroeconomic insight is Carl Menger's explanation of how money was not the creation of a conscious mind but, instead, evolved into use.

On these definitions, Hayek was a macroeconomist (even though he emphatically rejected the use of Keynesian and monetarist aggregates).  Behavioral economists — including the John Maynard Keynes who argued that investors are fickle — do what Lindahl called "microeconomics."  Both "micro" and "macro" are important — and understanding people accurately at the "micro" level is useful for doing good work at the "macro" level.

Be Sociable, Share!

Comments

comments

Add a Comment    Share Share    Print    Email

{ 49 comments }

Lee Kelly March 17, 2009 at 6:02 pm

Water is wet, but individual H2O molecules aren't wet.

Constant March 17, 2009 at 6:23 pm

I usually think of all of these as microeconomics.

Don Boudreaux March 17, 2009 at 7:47 pm

Constant,

Yes indeed. Nearly all economists think of both exercises as microeconomics. But the beauty of Lindhahl's distinction is that it allows two very important aspects of economics to be labeled reasonably, according to the object of the analysis ("micro" for individual incentives, and "macro" for how the economy hangs together). Much of what Keynesians (and monetarists) do — what is popularly today called "macroeconomics" — is merely pseudo-economics.

Daniel Kuehn March 17, 2009 at 9:28 pm

Could you explain why Keynesian and monetarists economics is "pseudo-economics"? I didn't quite get that from your post, which was very good.

By the way – the first thing I thought of when I read: "Macroeconomics involves tracing out the unintended consequences of various actions and sets of individual actions" was the so-called paradox of thrift.

I think this is a great definition – but ultimately words like "macroeconomics" and "microeconomics" are probably more useful for organizing ideas into compact course syllabi. The distinction is probably much less important in practice.

John Seater March 17, 2009 at 10:42 pm

I am a professor of macroeconomics. I tell my students that macro is dynamic general equilibrium. That definition certainly describes the way macro has been done since the 1970s, but I think it also captures the intellectual motivation behind macro. All markets have to clear, and both the steady state and the transition to it are interesting and important.

A microeconomist might well say that macro then is just a subset of micro. Said microeconomist would be correct, except I probably would argue that both are just branches of "economics." So what?

In my opinion, the only thing that really distinguishes micro and macro is the set of questions addressed. For some reason, inflation (a price-setting issue), unemployment (a labor market issue), technology shocks (a production function issue), and so on are pretty much studied only by macro people, even though they obviously have micro roots and implications. It also is interesting that quite a few microeconomic advances were proposed by macroeconomists for the purpose of understanding macroeconomic issues – the permanent income/life cycle hypothesis, the transactions and cash-in-advance theories of money demand, some of the search models of unemployment, search models of the origins of the medium of exchange, theories of sticky prices, implicit contracts, rational expectations, rational learning, and so on. The two sub-disciplines stimulate and inform each other.

The old distinctions made in the days of Keynesianism and Monetarism were artificial consequences of very imperfect understanding of many aspects of economics, and we should just drop them.

Stormy Dragon March 17, 2009 at 11:35 pm

I prefer P. J. O'Rourke's definition:

One thing economists do know is that the study of economics is divided into two fields, "microeconomics" and "macroeconomics". Micro is the study of individual economic behavior, and macro is the study of how economies behave as a whole. That is, microeconomics concerns things economists are specifically wrong about, while macroeconomics concerns things economists are wrong about generally. Or to be more technical, microeconomics is about money you don't have and macroeconomics is about money the government is out of. These two concerns seem hopelessly meshed in real life, and therefore I've tangled them together in this book.

SheetWise March 17, 2009 at 11:36 pm

"Much of what Keynesians (and monetarists) do — what is popularly today called "macroeconomics" — is merely pseudo-economics."

I like the analogy of a poker game.

I can take any individual player, and assume that he is playing to maximize his individual wealth. His decisions may be bad, mediocre, or great. Uneducated, educated, or brilliant. A loser, even, or a winner. He's still trying to maximize his wealth. That's micro.

If I put this player in a game with one other player, I can make the same assumption about both. But after time, one of them won't realize the wealth they're chasing. One will either be outwitted, or random fluctuations will reward the less skilled player.

If I put a dozen players together, and make the same assumption, I'll get the same results. The only difference is that after a sufficient number of transactions I'll be able to tell you which players are losers, which ones are even, and which ones are winners. That's macro. The problem is that they believe it's static.

If macro-man simply wants to observe, that's fine. We're done. But macro-man never stops there — they invariably want to tweak the rules to inject "fairness".

In a game, I can guarantee you that any change in the rules will be met by a change in the play — but only by the brightest players. There will be chaos below until the bad and mediocre players catch up.

These changes can happen in a heartbeat, as we're seeing.

The brightest players are only interested in the rules, and macro-man is only interested in changing the rules. It's a good marriage.

Macro-man is chasing a moving target, pretending he understands what he sees, injecting "fairness" where possible, enabling the brightest to exploit regulated markets, and confounded that his experiment didn't work.

If the rules are fair — micro-man is macro-man. But that's not what I see.

Ike March 18, 2009 at 12:27 am

Microeconomics is chemistry.

Macroeconomics is alchemy.

Andrew_M_Garland March 18, 2009 at 12:30 am

macro economics n. (Compare to "micro economics") The study of overall statistics about income, debt, production, and employment. You would think that statistics are dull, but macro economics is a center of intellectual ferment. Motto: "We just don't know, but we are willing to guess". Critics say that it is history confused by mathematics, or mathematics splattered by history.

Macro economics is noted for the gigantic cost of the occasional government experiments carried out with fanfare in times of crisis. Experiments in good times are never advertised or acknowledged, for fear of being held responsible for yet again ruining a good thing.

(Continued at The Political Dictionary)

SheetWise March 18, 2009 at 1:49 am

Ike –

;)

Daniel Kuehn March 18, 2009 at 5:28 am

Sheetwise -
I'm sorry, but all I got out of your poker analogy is "macroeconomics poorly done is not a valuable discipline". I'm in agreement on that one, I suppose – but I'm not too sure where that leaves us. You don't think microeconomics is subject to the same kind of pitfalls that must be avoided?

On "fairness" – I suppose I like many others support policies that fall under that "fair but inefficient" rubric that I'm sure make people groan on this site: a progressive income tax, a minimum wage, countercyclical fiscal policy as a response to recessions where monetary policy has run it's course.

But here's the thing – I don't think I or anyone who supports these policies is ignorant of the inefficiencies that they introduce. That's the real point. The problem isn't if you support "fairness policies". The problem is if you support them without being aware of their implications. If economics teaches us nothing else, it is that life is a series of tradeoffs. I recognize that these are often tradeoffs between "fairness" (or my idea of it) and efficiency – and sometimes that tradeoff is worth making. As long as you recognize the implications of those "fairness" policies, I'm not sure why that makes you a bad economist.

Daniel Kuehn March 18, 2009 at 5:31 am

I should qualify that last comment – I don't think I or any other economist or person with economic training who supports these policies is ignorant of the inefficiencies they introduce.

I'm under no illusion that all politicians who support these policies are aware that there's no free lunch. Hopefully a lot of them realize it, but I don't think we can guarantee all of them do.

Gil March 18, 2009 at 8:04 am

Wow Daniel Kuehn, you been posting here a short while and already got a blog article devoted to you! Nice.

Daniel Kuehn March 18, 2009 at 9:00 am

Gil – it goes to show you, if you badger Don Boudreaux long enough he'll dedicate a post to you! Commenters – take note!

Don – I hope I didn't offend you the other day on the Vulgar Keynesianism post. I didn't mean to. I feel that the only Keynes I've seen on this blog so far is a caricature of the man – I still hold to that. But I do appreciate what you do here. It's an intriguing blog. Probably won't be posting too much today, personally.

Charlie March 18, 2009 at 9:39 am

"Much of what Keynesians (and monetarists) do — what is popularly today called "macroeconomics" — is merely pseudo-economics."

I can't help but conjure up the image of a witch doctor arguing, "medical practice is using spells and potions to banish spirits causing sickness in bodies, most of what is today called medical practice is merely pseudoscience propagated by a lack of understanding of how spirits affect the body."

Isn't that a bad definition the witch doctor gave? Shouldn't our definitions describe how words are actually used? Take some objective measure, nobels won for macro, clark medals, citation indexes…is it really useful to throw all of that out and call it pseudo-science?

Maybe Austrian economists should stop calling themselves economists. Why cling on to the words of economics if you don't want to use them as economists actually use them? Would a witch doctor self-identify with "doctor" or "medical professional"? Maybe we should create "austrionomics," as it seems nonsensical to say economics is pseudo-science, I'm an economist. Rather, Austrians could say economics is pseudo-science, I am an austrionist. But at the point where we are no longer using words to mean what other people think they mean, language loses most of its value.

*I should note, it isn't the definitions Don gave that are the problem, it's the implication that a Keynesian or monetarist shouldn't be called a macroeconomist. It seems so ridiculously different than what people understand "macroeconomist" to mean, that rather than try to redefine the word, Don should just create new words.

Daniel Kuehn March 18, 2009 at 9:54 am

I think Austrian economics has some really interesting insights to offer – it is "economics" – I just have a hard time understanding their virulent rejection of anybody that disagrees with them. There are sharp disagreements between monetarists and Keynesians, but they still see each other as being in the same discipline!

Try reading articles on http://www.mises.org. Every other day they harp on Keynes's homo-erotic proclivities or some other perceived character flaw, as if it's germaine to the discussion. It's really bizarre. That's the kind of stuff I have a problem with.

I also find it very interesting that Austrian sites and blogs spend SO MUCH time talking about Keynes. Almost as much time as they spend talking about Hayek. They see him as some sort of arch-enemy that must be repeatedly denounced, rather than as a colleague that they happen to disagree with.

Evan March 18, 2009 at 10:58 am

"If macro-man simply wants to observe, that's fine. We're done. But macro-man never stops there — they invariably want to tweak the rules to inject "fairness"."

It seems that as long as you're discussing economic policy, there needs to be some discourse about what's appropriate, and different conceptions of fairness will play into that. If microeconomists want to simply observe, that's fine too, but if they want to prescribe particular policies about the market or criticize those with which they disagree, they're going to have to recognize that a bare assertion of the mechanism does not constitute an argument for any particular use of it.

As Lee Kelly said in the other post,

"Methodological reductionism is good practice (metaphycisal reductionism not so much)."

I take it that anything in the realm of policy, while certainly not metaphysical, should bear the "meta-" prefix as compared to microeconomics or any other theoretical observation that may inform it.

SheetWise March 18, 2009 at 11:55 am

"Try reading articles on http://www.mises.org. Every other day they harp on Keynes's homo-erotic proclivities or some other perceived character flaw, as if it's germaine to the discussion. It's really bizarre. That's the kind of stuff I have a problem with."

Posted by: Daniel Kuehn

Do you just make this stuff up? Or could it be that you don't actually read the articles on mises.org. Perhaps you could provide some links, mises.org archives can be searched.

L Burke Files March 18, 2009 at 12:59 pm

Keynes was a very odd man, I am being nice. It is worth reading a biography of him to get a sense from where his ideas came and glimpse into his mind. I helps to get a sense of the origin of his ideas. I do believe him to be the Manchurian Economist..

Andrew_M_Garland March 18, 2009 at 2:31 pm


Keynes, Digger of Holes

Keynes was a colorful guy. The link discusses his comment about digging holes to achieve new wealth, and an event where he dirtied some towels to create work and wealth. Of course, you have to put money in the holes first, or maybe under the towels. Funny thing.

The old joke says "that idea plus 10 cents will buy a cup of coffee". That was before monetary policy created $1 cups of coffee.

Keynes says that if you give people $1,000 they will spend it and "create" $2,000. I say, just give me the thousand, and I don't care what other people do with it. Isn't that closer to the fiscal policy of the government?

When an idea leads directly to a crazy result, what should we think about that idea? Maybe laugh at it until the proponent explains in detail how it works. If you believe Obama, Keynes, and their proclaimed multiplier of 1.5 on government spending, then it would be valuable to counterfeit as much money as possible. You don't have to borrow counterfeit money, or pay it back. It is ideal for Keynesian projects.

Let's Counterfeit Our Way to Wealth

Daniel Kuehn March 18, 2009 at 2:50 pm

Sheetwise – I posted a comment with several links to mises.org a while ago… not sure why it hasn't gone up. Don't want you to think I shrank from the challenge.

Charlie March 18, 2009 at 5:30 pm

"I think Austrian economics has some really interesting insights to offer – it is "economics""

I am just trying to point out that it is silly for Austrians to say Austrian economics is science and other economics is pseudo-science. It is silly to define macroeconomics as Austrian macro and say what we normally consider macroeconomics is really pseudo-science.

Economics and macroeconomics already have definitions. It's ridiculous to say I don't like the textbook definition, I think it should be… A word is defined by what people understand when they hear it. If Don wants a word for macroeconomists that never study aggregates, he should create a new word or term.

Sam Grove March 18, 2009 at 8:00 pm

There is science and there is engineering.

Science endeavors to provide understanding of how it works.

Engineering tries to make it work in a certain way.

This is fine in the physical sciences, not so good in the social sciences.

Is economics about understanding how the market works?

Or is it about how to make it work in a particular way?

Why is the political class so attached to Keynesian economics?

Daniel Kuehn March 18, 2009 at 8:57 pm

I could care less about the political class.

Keynesianism is interesting and compelling to me because of it's ability to explain the real world.

Guilt by association isn't much of a retort, Sam.

I wouldn't write off economic and social engineering so quickly, personally. But I don't engage in that myself – I'm a researcher not a policy-maker or policy implementer.

SheetWise March 18, 2009 at 10:24 pm

"Sheetwise – I posted a comment with several links to mises.org a while ago… not sure why it hasn't gone up. Don't want you to think I shrank from the challenge."

–Daniel Kuehn

Apparently it's not working. Why don't you go ahead and re-post it.

SheetWise March 18, 2009 at 10:40 pm

"Keynesianism is interesting and compelling to me because of it's ability to explain the real world."

The only definition of the "real world" I know of is unfettered individual actors. That's a world we haven't seen in quite a while.

If your definition of "real world" is the myriad of conflicting special interests propped up and oppressed by power brokers within the government — that's not an ability to explain, that's simply an ability to rationalize.

But, of course, that's not what Keynes really meant.

Sam Grove March 19, 2009 at 12:17 am

I wouldn't write off economic and social engineering so quickly, personally.

I thought not.

There is always the question though: If we are to have social engineering, who will be the engineers, and who will be engineered?

An even more interesting question than what impact the engineering will have on the engineered is what impact will the power to engineer society and economy have on the engineers?

Sam Grove March 19, 2009 at 12:19 am

I could care less about the political class.

I wish we didn't have to care about them at all, but they do have great impact on the rest of us.

Why is the political class so attached to Keynesian economics?

Is it not, nonetheless, an interesting question?

Andrew_M_Garland March 19, 2009 at 1:19 am

To Sam Grove,

Politicians like Keynes because Keynes said that taxing or borrowing money, then spending it on anything they want, is better for the society than almost anything else. That justifies politicians and anything they want.

As long as one person needs a job, or one industrial machine (or even a kitchen toaster) is being unused, Keynes' theories justify taxing and spending.

SheetWise March 19, 2009 at 1:53 am

I agree Sam Grove. Daniel Kuehn says –

"I could care less about the political class."

To some of us this is compelling, a world where the political class simply goes away.

But to a Keynsian — let alone an unabashed Keynsian — what would be left? Would they simply become Monday morning quarterbacks? They've been playing the role of either armchair quarterback or apologists for the last 75 years they've been calling the plays. The concepts of correlation and prediction are foreign to their concepts of forecast and fortune telling.

I see nothing new in the near future.

SheetWise March 19, 2009 at 2:07 am

"Sheetwise – I posted a comment with several links to mises.org a while ago… not sure why it hasn't gone up. Don't want you to think I shrank from the challenge."

–Daniel Kuehn

Please re-post it. I understand you have a lost post, and may not have kept a copy — but since you know that mises.org "Every other day [harps] on Keynes", and that they "harp on Keynes's (sic) homo-erotic proclivities or some other perceived character flaw", it shouldn't take more than a two day search to validate your claim.

Daniel Kuehn March 19, 2009 at 7:18 am

I validated my claim and feel no need to revalidate it.

Webmaster? Don? Is there anyway to track this down?

Go to mises.org, search on "Keynes". Every other article that came up had some attack on Keynes's character or intelligence that had nothing to do with any argument that he made. When they did summarize his argument it bore no resemblance to The General Theory or anything else he wrote. And the most striking thing is how MUCH they mentioned him – it seems like they talk about him as much as hayek or mises.

The reference to his homosexuality was on the first page that came up after searching on "Keynes". Some other gems included that the author thought he would be a great apologist for Stalin's gulags, and that he sought the destruction of Western civilization.

I really feel no need to search through all that again.

Happy searching.

Daniel Kuehn March 19, 2009 at 7:23 am

Just look on this blog, though – Don mentions "Keynes" or "Keynesianism" in his posts when what he's really talking about are big-spending politicians. Ask him why doesn't he just reference big-spending politicians.

It's a very odd obsession – I'm not sure I understand it. You guys mention Keynes more than self-proclaimed Keynesian bloggers, like Paul Krugman (his whipping boy being Bush, of course).

Daniel Kuehn March 19, 2009 at 9:29 am

Andrew -
RE: "Politicians like Keynes because Keynes said that taxing or borrowing money, then spending it on anything they want, is better for the society than almost anything else. That justifies politicians and anything they want."

You have a very, very, very odd understanding of what Keynes said. This is why I hate the caricatures provided on places like mises.org. They are entirely unhelpful. If this is REALLY what you're defining as Keynesianism, then I'm not a Keynesian either.

This is a political approach to things – and when I say "I don't care about the political class" I mean "I don't care how they define Keynes". Because ultimately I'm talking about the Keynes of the general theory, as well as the admittedly alternative directions that economists have taken "Keynesianism" since then. I could care less what big-spending politicians think they know about Keynesianism.

Do I think politicians are unimportant? Of course not! They impact every area of our lives. That's not what I was saying.

Daniel Kuehn March 19, 2009 at 9:35 am

Sheetwise -
RE: "The only definition of the "real world" I know of is unfettered individual actors. That's a world we haven't seen in quite a while."

Wait a minute – if "that's a world we haven't seen in quite a while", in what sense is it "real"????

RE: "If your definition of "real world" is the myriad of conflicting special interests propped up and oppressed by power brokers within the government — that's not an ability to explain, that's simply an ability to rationalize."

Well, the "real world" includes more than just that, but I guess that's included. Public choice theory (another GMU favorite) tries to explain "the conflicting special interests propped up and oppressed by power brokers" all the time. There's nothing inherently wrong with trying to explain it, is there? I think you're being a little melodramatic, though. Yes we prop up and subsidize and oppress and overregulate a hell of a lot of things in our economy. But let's be serious – you can take the world – reality – as given, and there's a lot more going on than just that.

Evan March 19, 2009 at 10:04 am

Sam Grove said: "Is economics about understanding how the market works?

Or is it about how to make it work in a particular way?"

I get the sense of severe blindspots for interdisciplinary concerns here. The way I see it,

1. If a Keynesian or an Austrian speaks about how the market functions, they're doing economics.

2. If a Keynesian says, "the government should do thus and such" or if an Austrian says, "the government should stay out of thus and such", then they're doing policy, and they're trying to make the market work in a particular way.

3. It's not bad (in fact it's good) for economists to make policy statements. But one should neither reduce a call for politics to get involved with the market to mere politics, nor reduce a call for politics to stay out of the markets as mere economics. They're both political claims, and just because the Austrian claim is a negative doesn't mean that it doesn't go beyond the bounds of descriptive economics and into prescriptive political theory.

4. That doesn't mean that you have to think the Keynesian position is any less wrong, or that the Austrian position is any less right. It just means that to paint Keynesianism as abandoning the principles of economics because they advocate a different understanding of political economy (and you do advocate your own understanding of political economy… you are not some blank political slate) is silly.

…and finally:

5. This is a simple is/ought distinction that you all should have learned as undergrads.

Daniel Kuehn March 19, 2009 at 10:08 am

Well said Evan. Thank you.

I feel like we've known each other for years!

Daniel Kuehn March 19, 2009 at 10:13 am

Well said Evan! Thank you!

I feel like we've known each other for years!

SheetWise March 19, 2009 at 11:11 am

"If a Keynesian says, 'the government should do thus and such' or if an Austrian says, 'the government should stay out of thus and such', then they're doing policy, and they're trying to make the market work in a particular way."

– Evan

If I understand you correctly, you're saying that if one group proposes that the government should commit violence, and another group proposes that they should not — these two positions are simply a policy dispute.

Does morality ever enter into the equation?

Daniel Kuehn March 19, 2009 at 11:18 am

Sheetwise -
I think he's saying that yes, of course it is a policy dispute. A policy dispute which will be decided, in part, by morality.

This is the general point:

Keynes says that if government does a certain thing, a certain thing will happen in the economy. Hayek says that if the government does that thing, something else will happen in the economy. Who is describing the situation most accurately is an ECONOMIC question and fundamentally a scientific question.

Whether that government action is right, wrong, advisable, constitutional, meritorious, or feasible is a POLICY question. Economic answers DO inform policy questions (as does morality), but too many people on this blog seem to be conflating the two.

And my additional complaint (which Evan doesn't make) is that people aren't even really understanding Keynes's or Keynesians' ECONOMICS to begin with, on top of conflating Keynesian ECONOMICS with the POLICY of some lawmakers.

L Burke Files March 19, 2009 at 11:21 am

From Andrew…

"If you believe Obama, Keynes, and their proclaimed multiplier of 1.5 on government spending, then it would be valuable to counterfeit as much money as possible. You don't have to borrow counterfeit money, or pay it back. It is ideal for Keynesian projects."

Man you are good! Just after your post, the Fed did just that.

Keep up the good insight, but call me before your post so I can do some "informed" trading.

Daniel Kuehn March 19, 2009 at 11:23 am

The same mistake is also made when people say that Keynes was a fascist because of what he said about the Nazis. He said in the introduction to the German translation of the General Theory that implementation of his theories are probably more in tune with a totalitarian state like Nazi Germany, than with a democracy. I'm taking that on http://www.mises.org's word (they like to cite this one a lot) – I've never read the introduction to the German translation.

OK – it's a pretty crazy statement. Now – in Keynes's defense the Holocaust hadn't really taken off at that point. We can't assume that he would have said the same thing about the Nazis in the 1940s that he did in the 1930s. But besides all that, the point was that Keynes was saying a totalitarian state could more easily implement the things he talked about in the General Theory.

But the General Theory itself is not a totalitarian tract by any stretch of the imagination! It just says what to expect when a government does certain things. To point out that a totalitarian government would have an easier time doing those things is just an observation – it's not advocacy of totalitarianism.

I think it's akin to Bush's statement that "life would be a lot easier if this were a dictatorship – as long as I'm the dictator". Yes – it probably would be easier for him to get his initiatives through if he were a dictator. Does that mean that Bush somehow abandoned the idea of a democratic republic? I'm a pretty big critic of his administration, but even I wouldn't go that far.

Anyway – I hope this adds more light than heat. I think Evan raises some interesting and important points about the difference between economic policy and economic science.

SheetWise March 19, 2009 at 11:26 am

Wait a minute – if 'that's a world we haven't seen in quite a while', in what sense is it 'real'????

– Daniel Kuehn

I'm sorry Daniel, I felt safe using the collective "we" since the topic was policy. As individual actors, many people live in the real world. It's a dangerous game to be free, so few people do it publicly.

Daniel Kuehn March 19, 2009 at 11:37 am

Huh?
Sheetwise you're really confusing me now.

If people in the real world aren't free and independent, it's worth theorizing about that, right? My argument was that while there are a lot of infringements on our freedom, there's still quite a big of independent economic agency in our economy! There's no point in being melodramatic and pretending there isn't. There's also no point in pretending that we are perfectly or entirely free and independent.

Keynesianism is convincing to me because it takes THAT world, the real world, as it is and provides a reasonably good explanation of how it works, IMHO.

Evan March 19, 2009 at 11:38 am

From Sheetwise Does morality ever enter into the equation?

Yes. I'm on the edge of my seat and biting my nails in anticipation of why someone might think this was at all in question, or that it might in any way affect the point I was making.

Sam Grove March 19, 2009 at 12:31 pm

2. If a Keynesian says, "the government should do thus and such" or if an Austrian says, "the government should stay out of thus and such", then they're doing policy, and they're trying to make the market work in a particular way.

Of course they were not doing so in confronting a clean slate of creating an economic system, but rather in a system of extensive political entanglement with the economy.

So any discussion of political activity is policy related, by definition.

Both economic schools are descriptive as to the effects of particular policy actions.

The Austrian school actually takes a position on human freedom.

What has Keynes said on that subject?

Daniel Kuehn March 19, 2009 at 1:04 pm

Sam -

Keynes is a liberal, a fan of human freedom who also sees a role for the state in the economy… I think that sums it up pretty well, but you'd have to ask him. And I think he's written a lot on that throughout his life, so I don't think we can assume that he always held the same position on the question.

The point is – that's not his economics. The Austrian school of economics does not take a normative position on human freedom. Perhaps the "Austrian school of thought" more broadly does, or perhaps "Austrian school adherents" do, but the Austrian school of economics – as a corpus of economic theory – is just an explanation of the implications of human freedom.

Sam Grove March 19, 2009 at 5:09 pm

a fan of human freedom who also sees a role for the state in the economy

In my comprehension, there is contradiction there.

Perhaps because modern liberals do not properly account for incentives in the political market. Their theoretical model seems to view politics as transparent on the negative side.

They seem to be "intentions" based.

SheetWise March 19, 2009 at 8:20 pm

"Huh?
Sheetwise you're really confusing me now."

– Daniel Kuehn

Yes, we do disagree on the meaning of the real world. To me it is the one I choose to inhabit, and choose to interact with. To you, I believe, it is the world that surrounds you, and that you are a part of.

In my real world, the State is simply a nuisance. In your real world, the State has power.

My obsession with economics is about understanding the enemy, it's not about proposing any grand ideas.

"Keynesianism is convincing to me because it takes THAT world, the real world, as it is and provides a reasonably good explanation of how it works, IMHO."

THAT world, as you state it, is a world created by the State. Your observation that Keynesianism provides a reasonably good explanation of how it works strikes me as a tautology.

There's no mystery about why the State is drawn to Keynes.

You strike me as a Statist. I'm not. Maybe we can leave it at that.

Previous post:

Next post: