In terms reminiscent of Malibu Barbie's "math is hard," now comes Paul Krugman from the New York Times to say that "Macroeconomics is Hard."What, you didn't see it? That's because it didn't happen. DeLong evidently doesn't have the balls to mock Krugman the way he does junior members of the profession (who stress essentially the same thing); see here.
Here is what Krugman has to say:
The thing is, no amount of experience meeting a payroll helps you understand issues that are critically affected by the way things add up at a macro level. Businesses are open systems; the world economy is a closed system, with feedback effects that are crucial but play no role in ordinary business experience. In particular, an individual businessman, no matter how brilliant, never has to worry about the fact that total income equals total spending, so that if some people spend less, either someone else must spend more, or aggregate income must fall.Every macroeconomic theorist is going to agree with Krugman that identifying, accounting for, and anticipating "feedback effects" is what makes macro hard. These feedback effects are sometimes called "general equilibrium effects" in the literature. Coming to grips with these feedback effects is the whole point behind dynamic general equilibrium modeling.
My only quibble with Krugman's statement above is that he implicitly suggests that these feedback effects work solely, or predominantly, via spending decisions. One could have alternatively written:
In particular, an individual businessman, no matter how brilliant, never has to worry about the fact that total production equals total spending equals total income, so that if some people produce less, either someone else must produce more, or aggregate income must fall.Don't say something like this in public though (you'll get accused of worshipping at the idol of JB Say). But on a more serious note, one might also expect feedback effects to operate via prices, credit limits, participation decisions, etc., etc.
I must confess though...I do find something odd about Krugman's position here. That is, he feels compelled here to discount the views of individual businessmen; such views, while informed, are necessarily "local" in nature--they are not necessarily useful for understanding or interpreting what is happening at the macro level.
Unless, that is, their views happen to support your own pet hypothesis (er, knowledge of truth, excuse me); see here: It's Demand, Stupid. To quote:
I’ve said this before, but Catherine Rampell has a very nice chart making the point: if you ask businesses — as opposed to their lobbyists — what their problem is, you find no hint of the stories the usual suspects are telling you about government interference, political uncertainty, etc.. Businesses aren’t hiring because of poor sales, period, end of story.Yes...end of story. The science is settled. Well done, Paulo.
But I guess this is why Krugman labels his column "The Conscience of a Liberal," instead of "The Thoughts of a Scientist."