Increasing Marginal Utility

A blog so good it violates the law of diminishing marginal utility.

Are there macroeconomic solutions to macroeconomic problems?

A slogan among Austrian economists is “there are macroeconomic problems, but only micro economic solutions.” I first heard it from Pete Boettke, as apparently has Nick Snow, but in researching this post I found out either Roger Garrison or Jerry O’Driscoll said it originally (read the comments).

When the phrase was first uttered, it had some force. Macroeconomics was the study of economy-wide aggregates. Meaning, instead of studying specific economic transactions took place, a bunch of things get counted and perhaps averaged. These things include the unemployment rate and GDP, so they should have relevance to anyone. From the 1940s-1970s, all macroeconomics did was look at shifts in these variables (e.g. a spike in the unemployment rate) and try to make generalizations and to understand their behavior.

The slogan says that we can’t just look at the relationships between aggregates without understanding the underlying microeconomics to them. This is entirely correct.

In fact, Robert Lucas also made the same point and won a Nobel Memorial Prize for it. Since then, the profession works hard to establish “microfoundations” to their arguments. Meaning, if they have an explanation of unemployment, it must be the result of individuals’ behavior.

The question is, why do Austrians still insist on reiterating this point? There can be two explanations.

One, they are just making the Lucas Critique all over again. It’s fine, but irrelevant, because regardless of what economists say publicly, papers need microfoundations to get published and taken seriously. Yes, Christina Romer might say that we need more aggregate demand, but that doesn’t mean she’s fallen into old ways of thinking susceptible to the Lucas Critique. She’s using models with microfoundations to come to the conclusion that we need more stimulus. I don’t agree with her, but it’s not like she forgot there are individuals out there who are facing microeconomic problems.

Two, they could mean that we cannot use macroeconomic tools like stimulus of QE2 to get the economy going again. This is a complete non-sequitur. There are reasons to be skeptical about how the money gets spent and how expansionary policy can ever lead to “neutral” outcomes, but the extent to which those things are important is an empirical question. Mainstream economists want to use the macroeconomic tools to solve the macroeconomic problems through microeconomic mechanisms (e.g. getting around wage stickiness).

Perhaps we should be very skeptical that the government can in fact accomplish such solutions. But I can’t help but think that stating “there are macroeconomic problems, but only microeconomic solutions” is a question-begging rhetorical device implying that no fiscal stimulus and no monetary stimulus can ever work. And if pressed that macroeconomic tools can be used to generate microeconomic solutions, those who state the slogan can just retreat by saying they were just making the Lucas Critique.

I am reminded of one criticism of postmodern philosophers by Sokal and Bricmont in Fashionable Nonsense. Many philosophers would cite modern scientific research and make a broad, sweeping statement that had two possible interpretations. One interpretation would have enormous implications of how we understand the world and ourselves, but it would be based on an incorrect understanding of the science involved. The other interpretation had trivial implications, but the science was right. Sokal and Bricmont argued that these philosophers used the first interpretation to get it published and gain the interest and attention of the profession, but used the other as an escape route if anyone questioned the science.

“There are macroeconomic problems, but only micro economic solutions” is an extremely effective rhetorical device against someone who has studied economics, but not at an advanced level, because many of such people are only halfway aware of microfoundations, if at all. I don’t think that it was a conscious decision by Austrians to make this rhetorical slight-of-hand, as perhaps the postmodern philosophers did. The slogan was just a good way to attack the profession until the rise of New Keynesian economics. But to use it today is no more than chasing windmills. We need better slogans if we want to convince the profession that we are not ignorant of the last thirty years of macroeconomics.

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3 responses to “Are there macroeconomic solutions to macroeconomic problems?

  1. Pingback: The Evidence that Austrians Need to Take QE3 Seriously « Increasing Marginal Utility

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