Should-Read: Ryan Avent: The Hole at the Heart of Economics

Should-Read: Ryan Avent: The Hole at the Heart of Economics: “For many of the most important questions within economics…

…economists have chosen to act like institutions simply do not exist. Consider, as an example, the debate over fiscal stimulus. Economists have spilt vast amounts of ink over the last eight years…. What factors affect the multiplier on fiscal stimulus?… When is fiscal stimulus a necessary complement to monetary stimulus? How does government debt affect long-run economic growth (and how does fiscal stimulus affect government indebtedness)?… The crucial question regarding whether or not to use fiscal stimulus was a completely different one—which is more corrosive to the legitimacy of the institutions which make the prosperity of a liberal, global economy possible: a long economic slump, or a short-term stimulus so large that it inevitably leads to spending on low-return projects or lines the pockets of government-friendly firms? We were all tying ourselves in knots working out whether the multiplier on infrastructure spending was 0.7 or 1.2 or 2.5, when what we ought to have been asking was: what course of action is most likely to avert a crisis of institutional legitimacy that will leave everyone much worse off….

These sorts of macroinstitutional questions… [are] very hard…. It seems reasonable to argue that bail-outs for banks amid broad woes for workers led to a loss of confidence in the system. But what is that “confidence in the system”? How does it work? What is the relationship between an individual’s confidence and the public’s as a whole? How is it cultivated? How does it interact with other institutions, macro and micro? Can we measure it? But lacking the tools or theory to think through something does not mean that something isn’t important. It certainly doesn’t mean that academic economists should pour massively more effort into research describing the smallest details of models which assume macroinstitutions aren’t important…. Big-picture books by Daron Acemoglu and James Robinson, Thomas Piketty, and Branko Milanovic move gingerly in the right direction. Much more is needed…