Big Ideas in Macroeconomics book review, Part 1: Overview

I finally got around to finishing Big Ideas in Macroeconomics, by Kartik Athreya. Certain people were not happy earlier this year when I wrote about the book before without actually reading it, so I read it quite thoroughly, and am now prepared to offer my thoughts in a multi-part review.

First, what is Big Ideas in Macroeconomics? It's an overview of modern macro. It has no equations and only a couple of graphs, but it's written in a dense, highly technical tone that will make it pretty opaque to any reader who is not either A) already familiar with most of the topics, or B) very smart.

Who should read this book? If you've taken graduate-level econ courses, Big Ideas will be a review, but it may point you toward a couple of important theory papers that you've overlooked; Athreya is very well-read. So I'd say skim it for the lit-review value. If you haven't taken grad-level econ, but you want to understand modern macro, then my recommendation is to first read a textbook (e.g. this one), and then maybe skim Big Ideas for interesting paper references. If you're mostly just interested in the policy kind of stuff and informal ideas that you can read about in blogs - in other words, if you follow macro debates just for fun - skip Athreya's book; it'll be too dense, and you'll just get bored and quit.

If you're one of those few people who wants to understand macro by poring through dense literary tomes (Keynes, Hayek, Minsky), but who flees at the sight of a single equation, then I guess Big Ideas could be just the book for you. But to be frank, I don't think you'll really understand modern macro by reading this book. Maybe it's possible to write a book that teaches modern macro without equations - macro's answer to the Feynman Lectures? - but Athreya has not written it here.

Anyway, on to the substance of Big Ideas.

Deep within my cultural memory is buried a legend - the legend of the Scholastics. The legend goes like this: At the dawn of the modern age, when European rationalists and scientists began to unleash an explosion of creativity and free thought, there were a tribe of very smart, very learned people called the Scholastics, who devoted all their mental powers to defending the old Medieval understanding of the Universe. They produced exhaustive treatises defending old dogmas, and honed their logical thinking to a fine edge, but in the end they could not stand in the way of progress and were swept away. Deep within my cultural memory lies the boyish fantasy of confronting and defeating a Scholastic in an intellectual confrontation, in the name of a new scientific revolution. The 14-year-old in me still wants to be a fictionalized, Hollywood-ized version of Descartes, Galileo, or Francis Bacon, fighting for rationality, enlightenment, etc. etc.

(You can blame my parents for this. When I was 14, they packed me off to "philosophy camp".)

But anyway, this is the bias I have to overcome when thinking about Big Ideas in Macroeconomics. It definitely has the feel of a Scholastic apologia. The book is clearly intended as a response to the outside criticisms of academic macroeconomics that have proliferated since the 2008 crisis and recession. Some of the critics are bloggers like Paul Krugman or writers like John Quiggin, who criticize macro in the public sphere; others are economists like Dan Hamermesh, who had this to say in 2011:

The economics profession is not in disrepute. Macroeconomics is in disrepute. The micro stuff that people like myself and most of us do has contributed tremendously and continues to contribute. Our thoughts have had enormous influence. It just happens that macroeconomics, firstly, has been done terribly and, secondly, in terms of academic macroeconomics, these guys are absolutely useless, most of them. Ask your brother-in-law. I’m sure he thinks, as do 90% of us, that most of what the macro guys do in academia is just worthless rubbish. Worthless, useless, uninteresting rubbish, catering to a very few people in their own little cliques.

Ouch. Actually, I had never read that particular quote until I came across it in Big Ideas (Athreya is obviously very well-read). It's a much meaner version of what I tried to say in this editorial, and it's a meaner version of what you'll hear from a ton of non-macro economists in private discussions. The basic idea is that the macro field is not doing well, and pretty much everyone outside the field seems to know it.

A good number of people within the macro field agree, of course. But not all. Athreya is in the camp that thinks macro is basically doing fine. Big Ideas is his answer to the critics.

A lot of Athreya's rebuttal comes in the form of education. Athreya seems to believe that most of macro's critics just don't know enough about the field. He uses this Ariel Rubinstein quote to explain why he thinks outsiders shouldn't criticize macro:

"To criticize something, you need to know it intimately; the best way to know it intimately is to do it yourself. Once you have done that, you do not want to criticize it yourself."

Rubinstein, though tongue-in-cheek, does have a point - uninformed criticisms are likely to be poor. By Bayes' Rule, this means that Athreya is being rather charitable to the critics of macroeconomics when he assumes that poor critics are likely to be uneducated (rather than educated but politically motivated or just plain stupid).

But does this mean "outside" criticisms of macro should be discarded, just because they come from outside? Athreya does acknowledge, two pages later, that this process can lead to "capture" of critics - if the only legitimate critics of something are people who do it for a living, then the set of potential legitimate critics is pre-selected for people who will not want to be critics. (Athreya fails to mention a second, more cynical kind of "capture", which is that internal critics of a field are automatically "pissing where they sleep".)

This matters for society, because they're the ones who pay macroeconomists' salaries. Granted, it's not a large burden - if there are 3000 macroeconomics profs and govt. researchers in America and they earn an average of $150,000 each, then that's less than half a billion dollars total each year (the cost of two or three F-35s), for a field that has a shot at preventing trillions of dollars in lost output. But it's still something. Athreya's dismissal of outside criticism implies that only macroeconomists should be able to tell society how much it should spend on macroeconomists. At some point, society balks and stops forking over the cash - as it has with particle physics. Macroeconomics is much cheaper than particle physics, so we're probably not near that point, but it's something Athreya should think about.

Athreya also fails to deal with another reason for outside criticism - the need for "skin in the game" when it comes to policy advice. Macroeconomists are usually well-off people with good job skills, often with tenure, who won't really suffer if they give the government bad advice for dealing with recessions (though inflation would probably hurt them). There is also an externality, due to the fact that the marginal impact of a policy recommendation probably depends on how many other people are making the same recommendation. That means politicians need to be skeptical of academic macro (as, in fact, they usually are). If macroeconomists are just goofing around and having fun making unrealistic models and then giving policy advice based on those models, then outsiders are needed to point this out.

So I think Athreya shouldn't have been quite so dismissive of the idea of outside criticism. And though I like the idea of "rebuttal by education", I'm a bit pessimistic that it can really be accomplished.

Anyway, in Part 2, I'll talk about Athreya's philosophy of science...stay tuned!