The Civil War in Macroeconomics

By Claus Vistesen

Paul Krugman never shies away from a strong headline in his column at the New York Times (I suppose that is in part what they pay him for). His latest evocation of the civil war in macroeconomics might just be pushing it, but in principle I think Krugman is right to have a go at micro foundations. I have criticised the concept myself for ignoring the potential for research paradigms that are purely macroeconomic in nature. In this sense, the fact that Krugman puts his weight behind this critique is important. It is time that pure macro theories are given the same attention as micro founded models in explaining macroeconomic phenomena. The state of play up until now where pure macroeconomic analysis has been (is) discarded as inferior, non-rigorous, undergraduate analysis is quite simply no good. 

A more fundamental methodological problem is that micro foundations as a hitherto unassailable core of the way advanced macroeconomics is researched and presented to the world is now showing serious cracks. This is a problem.

Anyone with basic knowledge of scientific methodology will know, eg from reading Popper and his student Lakatos, that while a paradigm may survive a number of auxiliary hypotheses being falsified there are always core hypotheses to which the paradigm must link its survival. If these are successfully attacked and falsified, the paradigm must fall. 

The ongoing failings of a rigid and static focus on micro foundations that were developed and presented in the 1970s is beginning to look like a terminal failure of a “hard” core hypothesis. Krugman for example is pretty clear that we are now at a fork in the road. 

Can you live (…) the notion that not everything you put in your model has microfoundations? If you can, you’re a saltwater economist, in some sense a Keynesian. If you can’t, you’re part of what has gone wrong with the field.

Krugman obviously has several axes to grind here and the shadenfreude literally dripping off of the pages on his blog. But make no mistake of the importance of the discourse Krugman is molding here. If the challenge to micro foundations were to be considered and accepted as a genuine issue, macroeconomic textbooks would literally have to be re-written. Indeed the way, the field is taught would need a complete re-structuring. What may have started as a civil war could quickly escalate into a full blown nuclear, MAD-like, conflict between the Freshwater and Saltwater economists.

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