Macroeconomics is not as young a field as you might believe. Even in Roman times, emperors used monetary policy to influence credit, prices, and demand. Yet for all humanity’s experience, we still make huge blunders. Why?
The reason has to do with the inexactitude of macroeconomics. Unlike the hard sciences, macroeconomics has no airtight laws (with the possible exception of the law of supply and demand). It’s not that economists have failed to use logic and rigor in their analyses. Rather, the problem is that no economy, not even North Korea, is a controlled system.
The lack of a controlled system leads to two big complications: 1) it’s impossible to implement any policy to perfection, and 2) it’s impossible to say definitively whether a policy worked. Both complications stem from the diversity and enormity of the economy. No policymaker can control – or even know – every factor that might affect the outcome of a decision, and so there’s no way to separate the effect of a decision from every other factor.
This inexactitude gives policymakers, politicians, and pundits huge latitude to interpret economic trends. If their favored policies don’t fulfill their promises, they can always claim that other factors intervened. Perhaps not surprisingly, very few notable macroeconomists have publicly changed their fundamental views on policy as a result of new data. The left-leaning folks who favor government intervention can stick with Keynes, and the right-leaning folks who gravitate towards a more libertarian system can stick with Hayek. A brief study by Justin Wolfers of the University of Michigan confirms that ideology is correlated with the interpretation of policy outcomes among economists, too.
Of course, economists don’t ignore data entirely. On the contrary – they’ll grab at any evidence that might support their prejudices. This happens even at the extremes of the economic spectrum, where evidence can be scant. Marc Weisbrot of the Center for Economic and Policy Research touts the achievements of Hugo Chávez’s socialist rule in Venezuela, while Anders Åslund of the Peterson Institute for International Economics lauds the post-Soviet countries that embraced austerity and laissez-faire markets. It’s as close to their respective economic utopias as either will ever get, but it’s enough to keep their dreams alive.
Indeed, no macroeconomic dream ever seems to die. As a result, we still see apparently obvious errors in policy, like the misbegotten fiscal regime that David Cameron is inflicting on the United Kingdom. In fact, he and his colleagues wanted to institute the same policies even during a boom; they had only one prescription regardless of the patient’s diagnosis.
Undoubtedly, Cameron and his crew will wait until the British economy finally turns around and then claim success. If it doesn’t, they’ll blame the global economy or protest that their policies were not implemented correctly. People like me will ridicule them, even if we’re wrong. And macroeconomics will gain nothing from the experience.