Must-Read: Paul Krugman: The State of Macro Is Sad

Must-Read: Let me add +∞ to one of the things Paul Krugman says here: every paper should be required to come with a five-page discussion by Olivier Blanchard.

Paul Krugman: The State of Macro Is Sad:

Olivier Blanchard has a characteristically informed, lucid essay…

What strikes me is just how sad a portrait he offers of the state of macroeconomic theory…. A modeling approach is truly useful… [when we find] surprising successful predictions…. The theory of a natural rate of unemployment got a big boost when the Phillips curve turned into clockwise spirals, as predicted, during the stagflation of the 1970s…. Economists who knew and still took seriously good old-fashioned Hicksian IS-LM type analysis made some strong predictions after the financial crisis that were very much at odds with what lay commentators, and quite a few economists, were saying… [and] that came to pass. Those of us who knew our Hicks, directly or indirectly, seem to have had a real advantage over those who didn’t.

Can you say anything comparable about DSGE?… DSGE… crowd[ed] out the stuff that actually did work…. DSGE [was] substituting for, [and] in fact, preventing the [successful] ad hoc approach. And most macro papers aren’t published along with insightful discussions by Olivier Blanchard! There is a real loss and cost here. So what is the gain from this style of modeling? Olivier offers some awfully weak tea:

DSGE models can fulfill an important need in macroeconomics, that of offering a core structure around which to build and organize discussions.

Really? That’s the point of a paradigm that has taken over the field? It sounds, by the way, exactly like the defenses I heard of academic Marxism when I was young: never mind whether it’s right, it provides a framework. Now, I don’t know how to reform all of this. There is a huge amount of sunk intellectual capital in this modeling approach. But at the very least we should admit to ourselves how very sad the whole story has become.

I remember my… second, I think, year of graduate school, when Olivier was teaching Econ 2410. He covered one of Ed Prescott’s papers on… a Wednesday, I think. And Prescott came through Cambridge presenting the paper the following Monday. In terms of the quality of the presentation–whether people after attending it understood (a) what the important conclusions of the paper were, (b) what the relationship was between the assumptions and the modeling strategy on the one hand and the important conclusions on the other, and (c) why the subject was interesting–there was no comparison. Now if only I could remember which Prescott paper it was… I would have to see a copy of the 1982-83 and 1983-84 2410 syllabus to know for sure…