Monday, October 04, 2010

Is Macroeconomics Nonsense?

In 2009, I argued that we need to completely reconceive the field of macroeconomics. Well, Peter Smith, in Quadtrant, argues that macroeconomics is outright nonsense. If you go back to my earlier posting, I'm not sure I would agree, but he nevertheless makes some pretty valid points. Insofar as macroeconomics = Keynesianism, it is, of course, utter nonsense. But there can and should be a non-Keynesian macroeconomics. I say this because, in the way I conceive of what macroeconomics should be, to argue against macroeconomics would be like arguing that there is no such thing as a cell, that there is only biochemistry. Why might Smith think this way? Well, from the perspective of a biochemical, the idea that there might in fact be a cell could sound like utter nonsense. The theory of the cell isn't what it nonsense, though -- it's the theory that any given biochemical ought to be in charge of it that's nonsense (for all the reasons Hayek gave for why controlling or even sensibly regulating an economy is at all possible).

Smith goes on to criticize GDP, which I think needs criticism. GDP hides what really happens in an economy. I have given the example (which I read or heard somewhere -- I wish I could remember where) of two countries, A and B, which each produce Good X at the rate of 1 unit a year. The difference between the two, though, is that each year A destroys each X it produces, while B accumulates X. Both have the exact same GDP, but after 5 years, A will have 1X, while B will have 5X and, thus, be wealthier (a point Smith makes with his example of the government-built library). What doesn't seem to be taken into consideration is what happens to each good once it is produced and "consumed." The true nature of wealth seems to never be considered -- or to have even been properly theorized. Which is undoubtedly why we have people arguing that we need to "redistribute the wealth" -- a task which is quite literally impossible -- when in fact what they mean is they want to "redistribute riches." There is a difference between riches and wealth. Riches can certainly be redistributed, but wealth can either be created or destroyed (but never redistributed). That difference needs to be properly theorized as well.


pce said...

When I was a TA for a principles of macro class in Australia 20 years ago, the instructor started with input-output matrix rather than Y=C+I+G.
Its not perfect but at least its a start in getting across the intricacies of the economy. (And almost as vacuous as the Keynesian aggregation is the neoclassical notion of a one-good aggregate production function)

Troy Camplin said...

Yeah, I'm not a fan of neoclassical economics with its nonsense about equilibrium.