Robert Skidelsky has a rather "J’Accuse!" piece over at Project Syndicate insisting that economists are the idiots savants of the modern world for their concentration on mere mathematical models and that they don’t look up enough at the real world. This is perhaps even a valid criticism of a certain form of macroeconomics but it’s most certainly not true of the wider profession. Recent Nobels, for example, have gone to people explaining why voluntary cooperation can preserve commons resources, how market bubbles exist in the absence of complete markets, the mysteries of dual facing markets and even how humans punish selfish behaviour. These are empirical studies, pieced together by looking at what people, we homo sapiens, actually do. This is not ivory tower mathematics.
One economist who has done sterling work in examining globalisation, the great economic event of our lifetimes, is Branko Milanovic and he’s not entirely sure about Skidelky’s approach:
The bottom line is, in my opinion, that Schumpeter’s positon is at least ambiguous. He was at the same time a great admirer of the very abstract general equilibrium approach, and his own practice of economics paid no attention to it at all.
Skidelsky himself is here:
Today’s professional economists, by contrast, have studied almost nothing but economics. They don’t even read the classics of their own discipline. Economic history comes, if at all, from data sets. Philosophy, which could teach them about the limits of the economic method, is a closed book. Mathematics, demanding and seductive, has monopolized their mental horizons. The economists are the idiots savants of our time.
As I say, this might be reasonable enough about a certain sort of macroeconomics. At which point we’ve got Paul Krugman insisting that actually, macro got things right. Sadly though, he seems to have got this wrong:
Look, we had a more or less standard model of macroeconomics when interest rates are near zero — IS-LM in some form. This model said and says that (a) monetary policy is ineffective under these conditions (b) fiscal multipliers are positive and large — in particular, fiscal contraction is strongly contractionary. And these predictions have been borne out! Huge monetary expansion didn’t raise inflation; extreme austerity was strongly correlated with severe economic downturns.
In other words, policy had exactly the effects it was “supposed to.”
No, that isn’t what happened at all. The reactions to the Great Recession were actually an extremely good test (and we can add in Japan, a slightly different case, for good measure) of this very assertion. For what happened is that those places which did QE and other monetary easing (like a depreciating exchange rate) early on, the UK and US, performed markedly better than places which did not like the eurozone. Sure, this still leaves open the idea that fiscal policy would have been more effective. But the idea that monetary policy is not effective at that zero bound is exactly what we did test and we found out that it is not true. Not because the recoveries were immediate in the UK or US or anything, but simply the difference in performance between those two and the eurozone.
Now, policymakers chose not to believe this. They chose to believe that monetary policy could do the job absent fiscal support, because for several reasons they refused to use fiscal policy to promote jobs; they chose to believe in the confidence fairy to justify attacks on the welfare state, because that’s what they wanted to do.
That’s also not a fair description of the UK experience. The argument was not about some confidence fairy. The idea of expansionary fiscal austerity was based upon the idea that, with that floating and thus depreciating exchange rate, it would be possible to produce more monetary stimulus than fiscal austerity and thus have an overall expansionary policy while still getting the budget deficit under control. And we can argue until the cows come home about whether it was the best policy or not but compared to no monetary loosening as in the eurozone it definitely worked better. And Britain also had history to guide it–we did the same in 1932 and 33. Cut the budget deficit, devalued the pound 25% by coming off the gold standard and the economy revived within 18 months.
What we’ve learned therefore is not that the standard Keynesian description of monetary policy having no effect at the zero bound is true. Rather, the opposite, that the pre-Keynesian idea that it can still, even if in unconventional forms, have an effect is true. Again, this still does not rule out fiscal policy being a better answer–but it does rather kill off the idea that it’s the only possible effective solution. Quite the opposite of what Krugman is arguing here.