Why macro is nonsense

by Russ Roberts on June 7, 2009

in Economics

Macroeconomics is mostly ex-post storytelling. If you decide the economy is doing badly, it's because we haven't spent enough of the stimulus (HT: Billy). If you think it's doing well, it's because (as some of my friends explain it to me) the stimulus is already working building confidence. No science here.

UPDATE: Nice example from Dave of the "it's already working" story. Notice from the story that it is impossible to distinguish between "Bernanke saved the country" and "the fiscal stimulus saved the country even though we've spent so little." Not science.

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Ozornik June 7, 2009 at 11:59 pm

Don’t be afraid, take ‘mostly’ away, and you’d be The Author of The Maxim.

“Macroeconomics is an ex-post storytelling”.

Indeed. Not a science, just storytelling. Nice contraption to earn a tenure, and once in a while a Nobel. Paycheck from NYT op-eds to follow.

Dave June 8, 2009 at 12:22 am

Here is a good example of the latter type of storytelling, which is nonsense:

It’s no longer “sell the collapse” but much more “buy the dips”; this is the essential ingredient needed to stave off bank runs and to keep markets from spiraling downward in self-fulfilling collapse.

How did the Obama team pull this off? In part, it was with the huge fiscal stimulus enacted in February. While increased government spending feeds through into the economy only slowly, the big push to spend demonstrated that the government was willing to borrow heavily to offset any likely fall in spending by households and firms. This in turn reassured everyone that the economy could not decline too far or too fast.

vikingvista June 8, 2009 at 2:40 am

The collective Left is inconsistent. Just be careful that you aren't wrongfully attributing inconsistency to individuals within the collective.

It would be nice though for the Obama administration to give criteria now for determining in the future if their policies are NOT working. But no prior politicians have been so confident, so I see no reason why this one would be any less slippery.

Lee Kelly June 8, 2009 at 2:41 am

The logical problem is not unique to macroeconomics, it's just more severe than in Physics, Chemistry, or Biology.

All science is story-telling. Calling an ex-post explanation a story is not a criticism, because even a true story is just a story. There mere fact that it is ex-post is not a criticism of the explanation either, but an ad hominem, that is, an attack on the person for using the wrong method. But remember the genetic fallacy–the source of an idea does not determine its truth.

You may think a person is wrong for ex-post story-telling, but that wrongness is not necessarily transmitted to the stories they tell.

BoscoH June 8, 2009 at 2:51 am

Here's another for you, although from a different point of view.

The Federal Reserve announced a $1.2 trillion plan three months ago designed to push down mortgage rates and breathe life into the housing market.

But this and other big government spending programs are turning out to have the opposite effect. Rates for mortgages and U.S. Treasury debt are now marching higher as nervous bond investors fret about a resurgence of inflation.

Of course it's all storytelling. Seth Godin, in All Marketers are Liars runs with the thesis that marketing is about selling a story. But there is responsibility to truth in telling stories. If your brand pushes a story that isn't true and inevitably gets caught, your brand is finished. The Republicans did it with wars and the TSA. The Democrats seem hell bent on doing it with interference into private business and management of the economy.

muirgeo June 8, 2009 at 2:51 am

Yes and the libertarians have their own ex-post storytelling but with even more imagination. History now written with our countries two greatest economic calamities following decidedly libertarian era's. But of course they weren't completely libertarian so no blame will be admitted to. But their story-telling doesn't stop there. As they tell the tale one would think the macro principals so awful as they are would deepen the initial calamity. But all the libertarians are left to complain of is that the recovery from their mess took too long. So somehow all this shows their position to be the superior one… apparently based on science? That's a tall tale!

S Andrews June 8, 2009 at 3:16 am

History now written with our countries two greatest economic calamities following decidedly libertarian era's.

"Following" is the keyword. It is important that you acknowledge that it never happened "during". But I stop to wonder which two greatest crisis you are talking about?

The great depression of course came during the "progressive" era. But there have been plenty of depressions from the creation of the union until now. Inflationary depression of the late 1960s and 1970s comes to mind.

Gil June 8, 2009 at 3:29 am

"Inflationary depression of the late 1960s and 1970s comes to mind." – S Andrews.

Puh-leeease! Plenty of Libertarians are presuming the current economic mediocrity will be 'the one'. The one where societies will collapse as this economic downturn was the last straw. Somehow this is hard to believe as there aren't huge lines of people waiting for soup.

dg lesvic June 8, 2009 at 3:52 am

Prof Roberts says,

"Macroeconomics is mostly ex-post storytelling."

That is a description not just of macro but empirical economics. And what is wrong with macro is what is wrong with empirical economics.

For real economics is not about visible events but the invisible cause and effect relations among them, not about a visible but Invisible Hand, not what is seen but unseen, not observed but conceived and deduced, prior to observation of historical facts.

Jeff June 8, 2009 at 3:56 am

Why macro is nonsense [...] Macroeconomics is mostly ex-post storytelling.

Heh. Ain't that the truth? It's invariably an instance of the historical fallacy, the fallacy of composition, or the fallacy of decomposition.

Now here's a question that really confounds me: why do people fall for it?

vidyohs June 8, 2009 at 7:10 am

As one who has no formal training in economics, it seems to me after participating on this Cafe for a couple of years now, that macroeconomics (and I have wanted to say this before but there has never really been an appropriate time until now), is like describing exactly how cows eat, digest food, and expel wastes but while only viewing them from a distance of two miles away and through weak binoculars. In such a situation it is impossible to actually see and understand the individual activities of any particular cow. So the individual cow becomes unimportant to the explanation or theory, and the theory concentrates on the activities of the herd.

Or put another way, macroeconomics is like a rich guy who, inherited, trying to describe wealth creation but having never seen anything but a bank vault filled with coin and bills. He has no idea how it got there, he just knows it did.

With that in mind, I agree with Russ and dg lesvic, macroeconomics to me is nothing but story telling (with a good deal of the author in the story).

Macroeconomics in short, IMHO, bears the same burden of blindness that socialism does, it doesn't recognize or value the activities of the individual. Recognizing the individual just upsets the theory.

John Galt June 8, 2009 at 9:13 am

"If you think it's doing well, it's because (as some of my friends explain it to me) the stimulus is already working building confidence."

Or, in other words, all we ever really needed was a media that inspires confidence instead of contriving endless scenarios of doom???

I've had it up to here with all this manipulation crap. It's insidious.

Daniel Kuehn June 8, 2009 at 9:33 am

Don, BoscoH, and Dave -
It may just be me, but I think that's an NY Times and an Associated press article, not macroeconomics. At best it's "financial analysis" or something like that.

It's one thing for macroeconomists (at least in the case of Dave's link) to present their analysis in the newspaper in an "unscientific way". Are you seriously telling me you're judging the discipline of macroeconomics with that? That's a little weak, I think.

muirgeo is exactly right – the libertarian take on these things, from my experience, rarely even attempts to test their theories against the data – talk about unscientific! Now, not everyone would claim it's supposed to be scientific, I know (ie – Lee Kelly, dg lesvic). But I'm certainly more convinced, not by a random news analysis, but the real macroeconomic science that does go in other venues. And I'm not just talking "Keynesianism" here – I'm talking about the full gamut of macroeconomists that rigorously test their theories with the data.

I'm not sure who Don's "some of my friends" are, but I haven't heard anyone saying that the stimulus is working yet… I'm sure they're out there, but it seems to be an extreme minority opinion.

Daniel Kuehn June 8, 2009 at 9:37 am

Sorry – Russ, not Don

Daniel Kuehn June 8, 2009 at 9:40 am

vidyohs -
RE: "Macroeconomics in short, IMHO, bears the same burden of blindness that socialism does, it doesn't recognize or value the activities of the individual."

This is an easy misconception reading posts like this. Cafe Hayek likes to bluster about macroeconomics, but when they don't talk about things like the massive "microfoundations" movement, the behavioralist theories behind Keynes's writings, etc. of course you come to the conclusion that it ignores the individual.

Macroeconomics is a field that studies a specific subject… how in the world is that analagous to a political/social ideology?????

Randy June 8, 2009 at 10:00 am

Vidyohs,

"…the same burden of blindness that socialism does…"

Agreed. Macro is infested with politics. It is therefore unreliable.

Daniel Kuehn June 8, 2009 at 10:05 am

Randy -
RE: "Agreed. Macro is infested with politics. It is therefore unreliable."

I'd be interested in seeing one work of macroeconomic science – i.e. an article from a reputable journal or something like that – that you think is primarily influenced by politics, and evidence of why it is. Not a blog post by a known partisan. Not an op-ed. An actual work of macroeconomics.

If macroeconomics is infested with politics, it shouldn't be hard for you to find.

I eagerly await your response to put my concerns to rest.

This kind of reaction is as dangerous as creationist anti-science reactions. If it's so obvious to you you can give me an example of macroeconomics that is infested with politics.

Daniel Kuehn June 8, 2009 at 10:06 am

In fact, Randy, I'd be interested in you naming me off the top of your head a single influential macroeconomics article, period.

Seth June 8, 2009 at 10:09 am

Russ – I agree that macro is nonsense, but not because its not science. I'm not sure much of anything is science (even much of science), but I don't think that's the test for nonsense.

Are there more convincing reasons why macro is nonsense?

In the business world I see an analogue of this when managers hurt a business by managing to semi-fictional, mathematical represenations of the business in the form of line items on the income statement rather than managing things that impact those line items like interactions with customers, making good long-term value decisions and holding people accountable for doing their jobs.

Greg Ransom June 8, 2009 at 10:24 am

"Macroeconomics is mostly ex-post storytelling."

Darwinian biology is mostly ex-post storytelling.

Geology is mostly ex-post storytelling.

This is some of our awesome science.

The problem with macro is elsewhere.

vidyohs June 8, 2009 at 10:24 am

Disingenious Kuehn,

What is there about, "the same burden of blindness", that you do not understand?

I would expect even you to understand that it doesn't matter that one is economical and the other religious/political when "they share the same burden of blindness".

This is as far as I go towards the mulberry bush.

Daniel Kuehn June 8, 2009 at 10:26 am

vidyohs -
So you have no thoughts on the microfoundations or behavioralists dealings with the individual… are you only interested in the focus on the individual of theories that you agree with or something?

Daniel Kuehn June 8, 2009 at 10:27 am

vidyohs -
What's the point of not calling people by their name? I don't get that. It's very elementary school playground of you.

vidyohs June 8, 2009 at 10:39 am

Greg Ransome,

Excellent and significant perspective, thanks.

Going back to my analogy about cows above, I still have the opinion that the problem with macroeconomics is in that it looks at the herd and not the cow.

In other words since economics, market, trade, and creativity begin at the street level by individuals, and that activity and wealth percolates up, one can not concoct a meaningful theory if one only looks at the "up".

This is where, IMHO, macroeconomics differ from geology and/or biology, both fields bore down to the very unique and specific.

From what I have learned from the past two years here, it seems to me that macro is all about "up", the herd if you will.

Along with that is my own theory is that macro theory doesn't do a whole for me down here at the street.

Randy June 8, 2009 at 10:44 am

Daniel,

"This kind of reaction is as dangerous as creationist anti-science reactions."

Of course its dangerous. Why do you think I do it? The point of counter-propaganda is to destroy the power structure supported by the existing propaganda. The Progressive power structure uses the idea of macroeconomics as a science in order to seize ever greater power over people's lives (they had to take my wealth in order to save it). They use the idea, so the idea must be destroyed. If you wish to continue it, and you obviously do, then the burden of proof is on you.

vidyohs June 8, 2009 at 10:51 am

What's the point? Well perhaps it is because you asked me a very specific question about "burden of blindness" and I gave you a very specific answer and yet you do not acknowledge that, and you come back to me on some kind of new tangent. Thus re-establishing in my mind once again that the nickname "Disingenious Kuehn" is accurate and well earned, very well earned.

Perhaps when you get back on course and tell us what it is about "burden of blindness", as I used in my original post and in my followup explanation, that you do not understand, we might then pursue the questions in your diversionary query about microfoundations etc.

Daniel Kuehn June 8, 2009 at 10:53 am

Randy -
When I said "dangerous", I meant it is dangerous to truth and rational thinking… not dangerous to some imagined progressive power structure.

However, you do seem convinced of this. Can you give me an example of a macro article where the conclusions are driven by politics rather than the scientific method?

RE: "If you wish to continue it, and you obviously do, then the burden of proof is on you."

I didn't make the claim, so I don't think it is. You're trying to falsify the idea that macroeconomics is scientific. If it's "infested" it should be easy to find. Find my the black swan, Randy. Find me an example of macroeconomics where politics dictate the conclusions rather than the data or the math. Or admit you're just describing a world that you imagine is true.

Daniel Kuehn June 8, 2009 at 10:57 am

vidyohs -
RE: "Well perhaps it is because you asked me a very specific question about "burden of blindness" and I gave you a very specific answer and yet you do not acknowledge that, and you come back to me on some kind of new tangent."

Not a tangent – I asked you two questions and I acknowledge you gave the answer to one of them (the socialism analogy question).

You were extremely concerned that macroeconomics that didn't pay attention to individuals. I gave you to specific examples where macroeconomics DOES deal with individuals – the microfoundations literature and the behavioralist literature.

My conclusion would have been that you would be less concerned now that those examples were brought to your attention because you were concerned about paying attention to the individual before. I'm surprised you consider it a "diversionary query", when it was a direct example of macroeconomics based on individuals.

Sam Grove June 8, 2009 at 10:57 am

History now written with our countries two greatest economic calamities following decidedly libertarian era's.

According to Wikipedia, the Progressive Era lasted from about 1890 to 1921.

The impact of the Progressive Era was to alter the nature of government to a progressive course which means that we've had a more or less "progressive" type of government for the past 120 years. At no time in the past century and beyond, could the U.S. government be described as "libertarian".

Such efforts are merely "progressive" the propaganda tactic of ad hominem attack to blame libertarian thought for the failures of "progressive" actions.

Randy June 8, 2009 at 11:11 am

Daniel,

"You're trying to falsify the idea that macroeconomics is scientific."

Perhaps there is a purely scientific form of macroeconomics practiced by some obscure sect. So what? Macroeconomics as it applies to my life is a form of propaganda in the service of politicians who use it to rationalize their confiscations. So, is your interest in my observation to protect the purists? They don't need protecting. They are perfectly safe in their caves pouring over their aggregates.

Daniel Kuehn June 8, 2009 at 11:12 am

Randy -
So is that a forfeit?

You seemed so eager to dish the accusations, I would have imagined you'd have some reason to believe what you're telling us. I suppose it's just a "sense of the way things are" that you have. So be it.

dg lesvic June 8, 2009 at 11:29 am

Daniel,

You wrote,

"I eagerly await your response to put my concerns to rest."

I'd like to put all of them to rest.

Randy June 8, 2009 at 11:35 am

Daniel,

Yes, it is my sense of the way things are, and I trust my senses. I certainly don't trust politicians, and your pointing to an obscure sect of pure science macroeconomists hardly removes politics from the field.

Forfeit? Not hardly. The game has only just begun.

Daniel Kuehn June 8, 2009 at 11:40 am

Randy -
What is this "obscure set of pure scientists" you keep refering to?

I don't know of any professional macroeconomist whose macroeconomic work is primarily informed by their politics. Even very clear partisans, like the oft mentioned Krugman, only bring their politics into their popular publications. What Krugman journal article or analytic book (ie – not his "Conscience of a Liberal") is driven by politics??? This man – this raving liberal – worked in the Reagan administration for godsake. The point is that it's not an "obscure sect". Macroeconomists do above the board empirical work.

Politicians may not – but intially you were talking about macroeconomists, not politicians.

Randy June 8, 2009 at 11:47 am

P.S. It occurs to me, Daniel, that you are actually on my side in this. That is, that you would like to see macroeconomics purged of politics. Perhaps you even resent the fact that the politicians are using and corrupting what you believe to be a pure and wonderful thing. If so, more power to you. Tell the bastards where to get off.

S Andrews June 8, 2009 at 11:49 am

Even very clear partisans, like the oft mentioned Krugman, only bring their politics into their popular publications. What Krugman journal article or analytic book (ie – not his "Conscience of a Liberal") is driven by politics???

How many politicians/bureaucrats read his "analytic" journal article? How many read his articles and interviews in popular news journals or tv reports? Who cares about the drivel he writes about in his analytic book. You are just spitting out nonstop nonsense. I had recognized you for a disingenuous commenter from early on, and I am happy to see that others are seeing the light now.

Randy June 8, 2009 at 11:49 am

Daniel,

"Politicians may not – but intially you were talking about macroeconomists, not politicians."

I'm talking about both. Macroeconomics is corrupted by politics.

Daniel Kuehn June 8, 2009 at 11:56 am

S Andrews -
RE: "How many politicians/bureaucrats read his "analytic" journal article? How many read his articles and interviews in popular news journals or tv reports?"

On your first question, lots. Maybe not your senator or representative, but "bureaucrats" in the Fed, the CBO, the Treasury, etc. absolutely do. You don't get a Nobel Prize for being unfamiliar.

As for news, his blog, and TV reports – I'm not saying these venues are misleading or bad or anything. I'm just saying neither Krugman nor anyone else does macroeconomic analysis in these venues. It's disingenuous for Russ to post a one paragraph blog post as some kind of condemnation of how macroeconomics is done. When they go through these venues they take their scientific conclusions from their real macroeconomic analysis work, make it more digestable, add their opinions, etc. etc.. It's FINE that policymakers, politicians, etc. make decisions using these venues, but that doesn't mean that macroeconomic analysis is done in these venues. Does that make sense???

I'm just saying don't judge an academic discipline by blog posts and op-eds. That doesn't mean I'm saying blog posts and op-eds by macroeconomists or on macroeconomic subjects are dishonest!!!!!

Sam Grove June 8, 2009 at 12:03 pm

Which is to say that the events of economic study are subject to interpretation.

What are the premises?

I suspect I may have some argument with the premises of "mainstream" economics. Does anyone know where these are elucidated? Summarily, that is.

S Andrews June 8, 2009 at 12:15 pm

On your first question, lots.

I have spoken with a congressman who served 10 terms in congress. None of them read a thing from "analytic" economic journals. Period.

I didn't need to ask the congressman, just watch Bernanke's testimony in congress or senate, the ignorance just oozes out the politicians.

Daniel Kuehn June 8, 2009 at 12:15 pm

Sam -
The premises are usually laid out in each work. I don't think there's a book of mainstream macroeconomic premises out there.

Daniel Kuehn June 8, 2009 at 12:17 pm

S Andrews -
RE: "I have spoken with a congressman who served 10 terms in congress. None of them read a thing from "analytic" economic journals. Period."

Which is _exactly_ why I said senators and congressmen don't.

D. Watson June 8, 2009 at 12:31 pm

Austrian economics is story telling. There is no reliance on rigorous empirics to test either its results or assumptions (though anecdotal evidence – more story telling – is always welcome). It is simply The Truth. While I sympathize with its stories and believe there is much it gets right, it is what it is. To reject macroeconomics (even Keynesian macro) for being the same thing, only a different story, leaves one open to too many criticisms.

What is The Road to Serfdom, but story telling? "Once upon a time this happened in Germany. The same is happening here. Beware."

Schumpeter's creative destruction is a story of brave entrepreneurs clashing it out.

The Law of Unintended Consequences may be one of our greatest stories yet. If only more people learned it by heart as we have!

We repeat the stories again and again ritualistically here at Cafe Hayek. The stories are convincing. They are founded on good understanding and reasonable if imperfect models of human nature and interaction. … They're still stories, and proud to be that way, I might add, avoiding the errors of the more mathematically "rigorous" economic theories.

Seth June 8, 2009 at 12:36 pm

Daniel – This discussion is over my head, but just curious about something.

Would the Romer's use of a coefficient as a multiplier of intended impact of stimulus spending on economcy be considered a use of macroeconomics used for political purposes?

Daniel Kuehn June 8, 2009 at 12:37 pm

D. Watson -
RE: "The Law of Unintended Consequences may be one of our greatest stories yet. If only more people learned it by heart as we have!"

I've always found the treatment of the idea of "unintended consequences" very interesting. Austrians insist that Keynesians ignore them and tell a convoluted story… Keynesians insist that Austrians ignore them and tell an oversimplified story. I think the obvious answer is both pay attention to them, they just assign different priorities to various unintended consequences.

I had to laugh when you called unintended consequences "our greatest story". One of the reasons why people like those "mathematically rigorous" models so much is that they identify unintended consequences a lot more clearly than talking through basic logical axioms, the way Austrian theory does.

Daniel Kuehn June 8, 2009 at 12:41 pm

Seth -
I don't see why. Obviously the multiplier on THIS stimulus is just an estimate, and I have no idea how much pressure there is on the Council of Economic Advisors regarding the production of those estimates.

But if you look at Romer's estimation of the multiplier from past stimuluses, that's not politics is it? She estimates how big it is using data and common empirical methods, and she publishes it and opens it up for critique.

RE: "macroeconomics used for political purposes?"

OK… I think this discussion is getting a little muddled. Of course macroeconomics can be used in political discussions and for political purposes. So what? The concern is not if politics is infested with macroeconomics, but that macroeconomics is infested with politics (to borrow Randy's original phrase). If macroeconomics is politicized, it becomes unreliable. If politics becomes infested with macroeconomics, maybe we can start having a serious discussion!

BoscoH June 8, 2009 at 12:50 pm

According to Daniel, observable changes in mortgage rates after Fed action is "financial analysis", not macro economics. Is it "financial analysis" because it played out opposite what the economists who promoted such action predicted?

MnM June 8, 2009 at 12:57 pm

Ah, yes. Back to the ole math vs. logic debate.

**looks around, backs out slowly**

I'm outta here.

Daniel Kuehn June 8, 2009 at 12:58 pm

BoscoH -
What in the world are you talking about???

It's not macroeconomics because simply pointing out changes in mortgage rates and describing what might be behind it is just an ad hoc, probably insightful, unscientific way of sharing your thoughts.

A careful study where changes in variables of interest in response to other variables of interest while attempting to run through and eliminate other potential factors driving the primary variable interest IS macroeconomics.

S Andrews June 8, 2009 at 1:22 pm

Which is _exactly_ why I said senators and congressmen don't.

Which is _exactly_ why I said the following @ Jun 8, 2009 12:15:20 PM

"I didn't need to ask the congressman, just watch Bernanke's testimony in congress or _senate_, the ignorance just oozes out the politicians."

These are the same goons who serve the senate banking and finance committees.

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