John Quiggin at Crooked Timber wrote a very interesting article last month, Macroeconomics Made Easy? In it, he discusses a new book by Kartik Athreya, Big ideas in Macroeconomics: A Nontechnical View. Athreya is a “freshwater” economist, which basically means that he’s a conservative who doesn’t believe that recessions are caused by a lack of demand. I’m being mean, but Quiggin is actually rather nice to Athreya and his book. That doesn’t mean that I’m wrong, however.
Back in 2010, Athreya wrote an article called “Economics Is Hard.” He attacked people like Paul Krugman and Brad DeLong as being the “patron saints of the ‘Macroeconomic Policy is Easy: Only Idiots Don’t Think So’ movement.” His point was then that “real” economics is about teasing out aggregate behavior based upon individual actions. Now this is what statistics does and no one feels the need to run around complaining that lay people use concepts like means and standard deviations.
In order to back up his argument, Athreya seems to have written his book where he discusses what sounds like a lot of interesting economic concepts. And according to Quiggin, it is really well written. But it is not what we normally talk about in terms of economics, because it is highly theoretical. What we talk about is what might be called “practical economics.” And it is in this distinction that Quiggin thinks he might have found how all those very intelligent and learned freshwater economists could spout such rubbish:
I’ve seen this in a lot of academic fields—most notably climate change science, although the problem is nothing like it is in economics. The freshwater folk are so focused on the intricacies of their models that they don’t really care that they have little relationship to what is going on in the real world with its real markets. As Quiggin says, “[I]t’s OK to assume full employment, and ignore inflation, but not to omit rigorous microfoundations for your model.” That is: it is fine to make assumptions that render your models useless, as long as they are built on first principles.
That would all be fine and noble academic work. There is no doubt that such work does increase our understanding of economic systems. The problem is that people who think in this very limited way also want to be taken seriously in the policy debate. But when it comes to actual people who depend upon having useful results—people at the Federal Reserve and the Congressional Budget Office and Goldman Sachs—they use Keynesian models. They do not use these freshwater models because they can’t assume full employment; they can’t ignore inflation.
But the total practical uselessness of the freshwater economists’ models does not make them irrelevant to politics. Politicians who want to push policies for totally different reasons (for example, enriching the rich at the expense of the poor) are more than happy to use these economic theories. And all too many freshwater economists like Greg Mankiw and Ken Rogoff are more than willing to help out. This seems to be because they are political ideologues first and foremost. So at least Kartik Athreya is being honest: his economics is hard and mostly useless on the macro-scale. His work for the Richmond Fed is, after all, microeconomics, not macroeconomics. But why he thinks he should be talking about macroeconomics is unclear to me. The point seems to be to define actual macroeconomics out of existence so that we are all forced to bow down to the freshwater folks and believe in the faith-based ideology of expansionary austerity and other freshwater fantasies.