Is Macroeconomics Really Economics?

The world probably would have been much better off had macroeconomics never been devised. Although I have in mind Keynesian macroeconomics above all, I include other types of macro models as well. I even include, somewhat reluctantly, the whole quantity theory approach descended from David Hume to the Friedmanites, now known as monetarism.

One of monetarism’s aspects that bothered me long before I became an Austrian (of sorts) is its oversimplification of aggregate economic activity. Resting their analysis on (a more or less elaborated version of) the Fisherian equation of exchange, monetarists maintain that changes in nominal aggregate demand (hence movements in either real output or the price level) occur in response to changes in the money stock (absent offsetting changes in the demand for money). To me this idea seemed to be a claim that the money-stock tail can and does wag the aggregate economic dog; that, more specifically, in a situation of sub-capacity real output (“recession” or “depression”), increases in money stock—and only such increases—drive increases in real output and employment.

Because I believed, and still believe, that changes in aggregate output and employment may occur also as a result of changes in other variables (e.g., investors’ perceptions of the future security of their private property rights [“regime uncertainty”]), monetarism always seemed to me to claim an implausibly high degree of explanatory power, some of which might be concealed by spurious empirical correlations between money and total output à la Friedman and Schwartz.

In short, among its many other deficiencies, as spelled out by Mises and his followers, monetarism’s most fundamental flaw is identical to the most fundamental flaw of Keynesian, Post-Keynesian, New Classical, and other theories advanced by macroeconomists during the past seventy or eighty years: not only does the theory leave out critical variables, but it is too simple, being expressed in huge, all-encompassing aggregates that conceal the real economic action taking place within the economic order.

I have written a related lament at greater length and in more detail in my little article titled “Recession and Recovery: Six Fundamental Errors of the Current Orthodoxy.”