Disaggregation

7 December 2011 at 12:03 pm Peter G. Klein 6 comments

| Peter Klein |

The idea that mainstream macroeconomic thinking focuses at too high a level of aggregation is a frequent complaint on this blog (e.g., here, here, here, and here). Our recent Strategic Organization paper hammers home this point. The level of aggregation is of course a fundamental difference between Keynesian and Austrian theorizing about economic fluctuations. But Keynesian economists don’t seem to recognize this.

The other day I posted a snarky blog entry at The Beacon, responding to a Krugman smear of Hayek (yawn). Today Mario Rizzo pens a more thoughtful response, emphasizing exactly this level-of-analysis issue:

I think the real issue is this. Hayek’s approach attacks, root-and-branch, the macroeconomic way of thinking. It is not simply a challenge to a particular theory of the determinants of mass unemployment, inflation, business cycles and the like. Hayek is not accepting the rules of the game or the parameters of the sub-discipline of modern macroeconomics. Hayek does not want to argue that the government expenditure multiplier is 0.5 instead of 2.0, for example. He does not want to discuss just how much fiscal stimulus should be undertaken and what form it should assume.

In short, he does not want to focus on aggregate spending and aggregate consequences. Hayek’s approach says: Let us pierce the veil of aggregates and look at the distortive effects on relative prices and relative output produced by boom-time credit expansions. Let us look at the distortive effects that booms leave us as we work our way through a recession. Let us concentrate on sustainable lines of expenditure both during the boom and during the road out from the bust.

Entry filed under: - Klein -, Austrian Economics, Bailout / Financial Crisis, History of Economic and Management Thought.

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6 Comments Add your own

1. David Hoopes | 7 December 2011 at 12:46 pm

I encourage any and all O&M readers to routinely follow Mario and the other excellent bloggers at Marginal Revolution (see Coordination Problem too). I appreciate Mario’s anger at Krugman. For whatever reason Krugman insists on marginalizing any and all who don’t follow the party line he chooses to follow. I think Mario does a nice job of getting to the central issue. The building blocks of Keynsian macroeconomics are incorrect. Anything built on this foundation is also incorrect.
2. Jason | 8 December 2011 at 5:24 am

If Rizzo is correct, then Krugman must also be correct. After all, macroeconomics from Keynes to Solow to Friedman to Lucas to today’s DSGE approach all use aggregation routinely. How much of an influence could Hayek possibly have on macroeconomics if he didn’t subscribe to aggregation?
3. David Hoopes | 8 December 2011 at 1:37 pm

No one says there can be no aggregation. “The idea that mainstream macroeconomic thinking focuses at too high a level of aggregation is a frequent complaint on this blog.” Too high is the term. Over at Coordination Problem they have a good discussion about this (the aggregation issue and Hayek’s influence on macroeconomics).

http://www.coordinationproblem.org/2011/12/rizzo-on-hayek-vs-keynes.html
4. Jason | 13 December 2011 at 1:57 am

“Too high” just means Hayek’s call for less aggregation (or disaggregation if you will) fell on the deaf ears of modern macroeconomists. As Krugman said, he had very little influence on macroeconomics,

It is fine to argue that Hayek having limited influence on macroeconomics was bad for macroeconomics, but it is another thing to dispute that he had a limited influence.
5. Peter Klein | 13 December 2011 at 5:28 pm

Jason, FWIW, I agree with your last paragraph. I think some of Hayek’s defenders overstate his influence on mainstream economics, which I take to be pretty small. Of course I take this as a criticism of mainstream economics, not Hayek.
6. David Hoopes | 15 December 2011 at 11:14 pm

I suppose the more important issue is how can Hayek’s insights be better communicated to a larger audience. This comes up routinely at the Coordination Problem blog.