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Macro models

Source: TW

I talk about the toy models of macro economists. Here is an illustration. This toy model of inflation vs unemployment does not capture demographics, does not capture the effect of foreign trade on inflation (US inflation was kept low for decades by China suppressing wages) and many more such parameters that influence inflation. Krugman himself failed to see “supply chain constraints” as a parameter (not part of his toy model!) so missed the 2021-22 inflationary surge.

You can draw dangerously wrong conclusions with these toy models. The global financial crisis of 2008-9 was a classic case where mainstream macro failed.

Another example: decades of low Japanese inflation meant that macro economists totally ignored extremely high debt combined with very poor demographics, which operate in a feedback loop. Krugman made his famous policy prescription to Japan to print like crazy to escape deflation, and he completely ignored the rising debt. This only made Japan’s structural debt-demographics problem worse.

These toy models come with ample doses of prestige-driven arrogance. We tend to look at the prestige of big name universities and econ Nobel Prizes (yes, not a “real one” but prestigious all the same) and think academic macro economists are doing something profound and important to the world. I say the discipline is mostly useless.

Macro needs a new foundation. I believe that the notion of conservation laws (known as “accounting identities” in economics) where things must balance is a critical part of the foundation. Symmetry of capability is another key notion. And we must ignore prestige.