Paul Romer: The Trouble With Macroeconomics

“… Macroeconomics, he argues, is like a science that has not only stalled for three decades, but has actually gone backwards in its ability to understand reality.

In the late 1970s, as the old certainties of Keynesianism collapsed, a new generation of economists moved the discipline on to the terrain of super-abstract equations. Their assumption was that the economy tends towards equilibrium, and that only unpredictable shocks from outside the system can disturb it. Since the shocks come from outside, for the purposes of these mathematical models, the economist has to imagine what they might be. In The Trouble With Macroeconomics, Romer mocks these imaginary disruptions …

Romer is a doyen of the profession, and from the heart of the US academic mainstream. His attack on some of the most esteemed and influential economists of our time is a big thing …

… Romer, scathingly, calls this “post-real” economics, and suggests a horribly simple explanation for its popularity: human frailty … over-confidence, “an unusually monolithic community”, near-religious group loyalties, a tendency to disregard results that don’t match the theory – and too little consideration of the risks of being wrong.

This is not just a problem for economics. Romer says the parallels between bad physics and bad economics suggest there might be a “general failure mode” in any discipline that becomes over-reliant on maths. Basically, the kudos goes to people at the cutting edge of designing mathematical models, not to those whose models match reality. If Romer is right, there are big implications for the way governments and central banks make policy. Instead of abstract models, you would need something much closer to reality – and, with the rise of computer simulation technologies, that is close at hand.

… In an agent-based model, you don’t try to work out whether a million people will, on aggregate, buy more bread or less bread. You create a million digital “people” and unleash them in world with digital bread and digital money.”

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Paul Romer – The Trouble With Macroeconomics