DeLong from last year with two questions: Why do good macroeconomists seemingly find "patently unrealistic" theories acceptable? And why don't they feel they need to make their theories consistent with the evidence described and collected by economic historians?
Again, I feel the answer has to involve the strategies and attitudes towards empirical facts, knowledge and data that economists too frequently allow. The types of arguments and challenges economists face in seminars and from referees and editors make it necessary to be consistent with current theoretical fads and remove the need to take into account certain types of evidence and arguments. Provided you know the right incantations and spells ("this is just an as if theory," "these are standard assumptions," etc.), then I'm confident you can ward off even the economic history bootcamp that DeLong proposes.
First, it does not seem to me that it is the case that nobody really believes
these just-so stories. Ed Prescott of Arizona State University really does
believe that large-scale recessions are caused by economy-wide episodes
of the forgetting of the technological and organizational knowledge that
underpins total factor productivity—with the exception of episodes like
the Great Depression, which Prescott says was caused by the extraordinary
pro-labor pro-union policies of Herbert Hoover that pushed real wages far
above equilibrium values. Casey Mulligan of the University of Chicago
really does appear to believe that large falls in the employment-to-
population ratio are best seen as “great vacations”—and as the side-effects
of destructive government policies like those in place today, which are
leading workers to quit their jobs so they can get higher government
subsidies to refinance their mortgages. (I know; I find it incredible too.)
Things that strike Kocherlakota as “patently unrealistic” are not viewed as
such by many of his modern macroeconomic peers and colleagues. Why
not? Why do they find these just-so stories satisfactory?
Second, whether modern macroeconomics attributes our current
difficulties either to causes that I agree with Kocherlakota are “patently
unrealistic” or simply confesses ignorance, why do they have such a
different view than we economic historians do? Whether they have
rejected our interpretations and understandings or simply have built up or
failed to build up their own in ignorance of what we have done, why have
they not taken and used our work?
The second question is particularly disturbing to me. There is, after all, no
place for economic theory of any flavor to come from than from economic
history. Someone observes some instructive case or some anecdotal or
empirical regularity, says “this is interesting; let's build a model of this,”
and economic theory is off and running. Theory is crystalized history—it
can be nothing more. After the initial crystalization it does develop on its
own according to its own intellectual imperatives and processes, true, but
the seed is still there. What happened to the seed?
This situation is personally and professionally dismaying. I do not say that
the macroeconomic model-building of the past generation has been
pointless. I don’t think that it has been pointless. But I do think that the
assembled modern macroeconomists need to be rounded up, on pain of
loss of tenure, and sent to a year-long boot camp with the assembled
monetary historians of the world as their drill sergeants. They need to
listen to and learn from Dick Sylla about Cornelius Buller’s bank
rescue of 1825 and Charlie Calomiris about the Overend, Gurney crisis
and Michael Bordo about the first bankruptcy of Baring brothers and
Barry Eichengreen and Christy Romer and Ben Bernanke about the Great
Depression.
If modern macreconomics does not reconnect—if they do not realize just
what their theories are crystallized out of, and what the point of the
enterprise is—then they will indeed wither and die.
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