Brad DeLong continues his trend of being unhappy with modern macroeconomics:
The most interesting moment at a recent conference held in Bretton Woods, New Hampshire – site of the 1945 conference that created today’s global economic architecture – came when Financial Times columnist Martin Wolf quizzed former United States Treasury Secretary Larry Summers, President Barack Obama’s ex-assistant for economic policy. "[Doesn’t] what has happened in the past few years,” Wolf asked, “simply suggest that [academic] economists did not understand what was going on?”
Here is the most interesting part of Summers’ long answer: “There is a lot in [Walter] Bagehot that is about the crisis we just went through. There is more in [Hyman] Minsky, and perhaps more still in [Charles] Kindleberger.” That may sound obscure to a non-economist, but it was a devastating indictment. ...
Asked to name where to turn to understand what was going on in 2008, Summers cited three dead men, a book written 33 years ago, and another written the century before last.
It's a good piece, and Krugman assents, so let's turn the mic over to Kindleberger to find out why he thought macroeconomics suffered, during his 1985 AEA Presidential address:
In a recent paper, unpublished I believe, George Stigler discussed "the imperialism of economics," which, he claims, is invading and colonizing political science-through public choice theory and the economic theory of democracy-law, and perhaps especially sociology, where our soon-to-be president-elect, Gary Becker (1981), has extended the reach of economics into questions of the family, marriage, procreation, crime, and other subjects usually dealt with by the sociologist. "Imperialism" suggests super- and subordination, with economics on top, and raises the question whether as a profession we are not flirting with vainglory.
My interest has long been in trade, and I observe that economics imports from, as well as exports to, its sister social sciences. In public choice, we can perhaps explain after the event whose interest was served by a particular decision, but we need political science to be able to forecast which interest is likely to be served, whether that of the executive, the legislature, the bureaucracy, some pressure group-and which pressure group or, in the odd instance, the voters. Individuals act in their own interest, let us grant, but a more general motive of emulation may be drawn from sociology as Adam Smith was aware in the Wealth of Nations (1776, p. 717), as well as in The Theory of Moral Sentiments (1759 (1808), I, p. 113). I want today to borrow one or two ideas from political philosophy, and to conduct a conversation with a new, impressive, and growing breed of political scientists working on international economic questions...
In reading recent books on macroeconomic policy by leading governmental economists under both Democratic and Republican administrations, the late Arthur Okun (1981) and Herbert Stein (1984), I have been struck by how little attention the authors paid to international repercussion.
What Kindleberger is saying is that we can't examine the macroeconomy as if it were a machine that occasionally needs a tuneup. It's not. It's the product of political interactions that are designed to benefit some groups over others, and it takes place in an international context. To the extent that modern economics is a big utility-maximization problem, as if reaching the Pareto-frontier was the goal of public policy, modern economics is irrelevant. What Kindleberger is saying, then, is that ceteris is generally not paribus. Pretending that it is corrupts your whole analysis. Or, to put it into econometrics terms, ignoring international context and political systems creates a huge omitted variable bias in economics.
In a sense, I view my role (and that of other IPE people) in the intellectual universe as explaining to economists why their theories are either wrong or irrelevant. Showing how the variables they omit are causally significant. Unlike Krugman, it isn't surprising to me, or probably anyone in IPE, that the ECB is pursuing contractionary monetary policy when unemployment in Spain is 21%. The ECB isn't interested in the least in Spanish unemployment. It's interested in protecting finance in the European core. I don't need to subscribe to a pop psychology of masochism -- "pain caucus" -- to explain why we didn't get a bigger stimulus package. I don't need to vilify bankers to explain why we massively skewed public policy in ways that led to the financial crisis.
Economists sometimes mention politics, usually in reference to why their pet models don't work, but they rarely consider that pragmatic study of the economy outside of the political and social context it exists in makes little sense. The original political economists -- Hume, Mill, Marx -- understood this, as did the more recent political economists that Summers recommended to Wolf -- Minsky and Kindleberger. What Summers is really saying to Wolf is that the only interesting or useful economists are political economists. The interesting question is not whether Keynesian mechanics are better than Austrian mechanics, or whether saltwater fish is more nutritious than freshwater fish. The interesting question is who is driving the vehicle, and where they're taking it. Trying to locate the precise fiscal multiplier in a liquidity trap is thus like arranging your living room for party with no invited guests: an interesting exercise, perhaps, but really what's the point?
Similarly, it's silly to study a national macroeconomy outside of its international context. I'm not just talking about trade and foreign investment as substantive topics; I'm talking about how all domestic economic policies are conditioned by international circumstances. To ignore them is to discard major explanatory variables. Again, the early political economists realized this... it was the primary concern of Smith, Ricardo, Marx, and others. Kindleberger realized it. Some contemporary economists do -- including Krugman on his best days and DeLong most of the time, Eichengreen is obviously great -- but many do not.
I don't writes this as someone who dislikes economics as a discipline. I studied it in undergrad, and I still like it a lot. I think there's a lot of value in developing models that work in a first-best world, even if we're never in a first-best world. It is nice to know the landscape of the possible, and economic theory can help us understand preference formation, among other things. Economics has given us a lot of tools -- theoretical and methodological -- that can be applied in ways that help us advance our political understanding. But I chose to study IPE (rather than economics) in graduate school because I wanted to know how the world works, not how it could work. I share DeLong's interest in the history of thought in political economy (in fact, much of that interest was sparked by reading his blog while an undergrad), so when I decided to go to grad school I ruled out econ departments almost immediately for the reasons he describes. But I don't think the problem is solely a lack of teaching of economic history; it's that economics cast aside politics with the marginal revolution, and never got it back.