So You Think You’ve Understood Macro…

Warning: this post actually isn’t “for everybody”.

Teaching macro is hard enough. Teaching macro to non-economists is all but impossible, because things get really messy really quickly – and I cannot emphasize how messy, and how quickly. The simplest way to teach macro to non-economists is to say that macroeconomics attempts the impossible – it tries to analyze too many variables at the same time in a gloriously inadequate framework, with not enough attention being given to how to understand, measure and forecast risk uncertainty.

And that’s before we’ve even touched the concept of time and inherent unknowability!1

Shackle went on to write that what the market equilibrium conception showed was a world of perfect knowledge frozen in time. It thereby negated itself as being of any use in a world where knowledge of the future is impossible and time moves in one direction. In such a world the action of human beings must be in part based on reason and in part on imagination—specifically, imagination with respect to what various individuals imagine the future might be or even should be. Shackle wrote that neoclassical economics rested on a teleological or pre-determined future and thus left no space for human choice which was inherently tied up with a human being’s capacity to freely imagine what might be in store in the future.

https://en.wikipedia.org/wiki/G._L._S._Shackle#Equilibrium_versus_time

I’m going to sound very woo-woo when I say this, but if at the end of your macro semester you think you’ve understood the subject, then both you and your prof haven’t done a very good job. Macro is hard, and the macroeconomy is inherently unknowable, and yes, I’m willing to die on this hill.

But that does not mean it is not worth studying! Quite the contrary, in fact: it is precisely this reason – the inherent unknowable nature of macro – that makes it so fascinating to study.2

And if you are somewhat familiar with macro – say you’ve spent a semester or so studying it, maybe a bit more – then a good way to check if you have “understood” the subject is to read this lovely little essay by Trevor Chow. (Please, be warned, if you have not had a course in theoretical macro, this essay will make very little sense, and you absolutely should not read it. )

Description: The goal is to bring you up to speed from knowing nothing about business cycle macroeconomics till you know everything you want to know about it at an intermediate macro level within a single post. We’ll mess around with the notion of goods and money market equilibrium to see where it takes us, though if you want to get to the interesting stuff and already know enough about IS-LM etc, feel free to skip to Part 4 and onwards. This is probably, even more than my growth series, the hardest I’ve tried at making things accessible and clear, so please do get in touch if you think there are things which are underexplained or could be rewritten. And check out Miles Kimball and Nick Rowe, whose ideas I borrow very generously from in this post.

https://tmychow.com/blog/2021/03/29/the-fallacy-of-composition

It’s very simply written, and is easily understandable – and trust me, that is hard to do when it comes to macro. It covers a lot of useful concepts, and there is a lot of back and forth between various schools of thought in macroeconomics.

My favorite excerpt was this one:

Macroeconomics is itself quite difficult, because even in the simplest business cycle models we are interested in all sorts of things: output, consumption, investment, the real interest rate, the nominal interest rate, prices, the money supply and inflation. Squeezing all of this into a static model is nigh impossible. Although I do think the canonical IS-LM model can be a bit deceptive with respect to interest rates, the idea of reconciling the goods and money markets is a useful approach. And by putting the IS-LM model through its paces, we’ve already illustrated some important ideas:

That the short run is a monetary question and not one of price adjustment
That there can be indeterminacy or unstable equilibria with bad monetary regimes
That liquidity traps and debt deflation can cause problems, but liquidity traps are really expectations traps
That there are good reasons for the Taylor rule and the Taylor principle

https://tmychow.com/blog/2021/03/29/the-fallacy-of-composition

Again, let me reiterate my basic point: if you are left with the feeling that you “get” macro, beware. Read more, and keep asking how you might be wrong in your understanding of the subject. And excellent places to begin would be Frank Knight and GLS Shackle – even the Wikipedia articles are more than enough to get started!

Bonus reading material: Snowdown and Vane.3

I’ve said it before, and I’ll say it again: macro is hard!

  1. I’m genuinely curious: if you’ve been taught a course in theoretical macro, did G.L.S. Shackle ever come up for discussion?[]
  2. Quite like studying theology, no?[]
  3. These prices make no sense whatsoever. Pah.[]

One thought on “So You Think You’ve Understood Macro…

  1. My usual comment on the subject is that a course in macro is a tour of either a cemetery or a construction site.

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