Asad Zaman, Sidika Basci: “New Directions in Macroeconomics”, International Econometric Review, Vol 12, Issue 1, p1-23 — Article excerpted below (Section 1 only) provides introduction to new directions for 21st century macroeconomics, and invites submissions in outlined areas to our journal – International Econometric Review. We are broadening the focus of the journal to include all innovative areas in economics – micro, macro, or econometrics. We are particularly interested in attracting heterodox submissions.
ABSTRACT: The glaring failure of modern macroeconomics to predict the Global Financial Crisis, and to provide remedies for the Great Recession which followed, has led to renewed interest in alternative approaches to Macroeconomics. There is huge amount of ongoing work aimed at creating a Macroeconomics for the 21st Century. The task is of the highest priority, as failures of economic theory have led to misery for millions. Wrong measures of GDP, and cost-benefit calculation which fail to account for environmental costs, and prioritize private profits over social welfare, have created a climate catastrophe which threatens to destroy the planet. In accordance with the importance of this task, we are expanding the scope of this journal, to cover all new approaches to economics, which fall outside of the boxes of conventional macro, micro, and econometrics of the 20th Century. This article outlines seven broad categories of research directions, and four different methodological principles which fall outside the boundaries of the conventional approach, and offer promise for building a Macroeconomics for the 21st Century. We hope to invite contributions in these areas for future issues.
1. HISTORICAL CONTEXT OF CURRENT CRISIS
There is widespread awareness of the catastrophic failures of modern macroeconomic theories, especially in the wake of the Global Financial Crisis of 2007. For instance, Krugman (2009) wrote that the profession as a whole went astray because they mistook the beauty of mathematics for truth”. Paul Romer (2016), recent Nobel Laureate, wrote “The Trouble with Macroeconomics” which contains a devastating critique of modern macroeconomics. In particular, Romer writes that modern macro got started when Lucas and Sargent wrote that predictions based on Keynesian economics “were wildly incorrect, and that the doctrine on which they were based is fundamentally flawed”. But after three decades of research, during which the profession has gone backwards, losing hard-won insights into the nature of the economy, exactly the same criticism can be leveled at modern macro theories — they give wildly incorrect predictions and are based on fundamentally flawed doctrines, beyond the possibility of repair. Economists were unable to forecast the Global Financial Crisis, and were unable to take policy actions to prevent the Great Recession which followed. This created levels of homelessness and hunger not seen in the USA since World War 2. The general public noticed this failure. The Queen of England went to London School of Economics to ask “why no one could see it coming”. In an unprecedented move, the US Congress appointed Subcommittee for Investigations and Oversight to hold hearings on “Building a Science of Economics for the Real World”; see Solow (2010). The committee was charged with investigating the failure of economics profession to predict the crisis. Even worse, “generally accepted economic models inclined the Nation’s policy makers to dismiss the notion that a crisis was possible”.Not only did economists fail to predict the crisis, many economists and practitioners who issued warnings were silenced and dismissed, because the possibility of a crisis did not exist in macroeconomic models then in use. Sadly, these models continue to be the mainstream macroeconomic models being studied and taught all over the world today, even though better alternatives are available. We will use the general label “21st Century Economics” to refer to these alternatives, and describe them in this introductory article.
In a blog post on “What Went Wrong”, Paul Romer (2020) describes how economic theorists became central to policy making in the USA in the 1970’s. He argues that this experiment of turning over policy to economists has been a disastrous failure, and economic theory-based policies have resulted in low growth and lowered life expectancies. In this brief outline and survey, we will discuss the many dimensions where radical changes are required in methodology and approach to fundamental economic questions. This is merely and outline and a sketch, not a detailed argument. Our goal is to encourage submissions to this journal in the areas discussed, so as to create the basis for a change towards “21st Century Economics”. In future issues, we will adopt this as a subtitle, to signal a change in editorial policies and subject matter for this journal.