If IS-LM is a monetary model, then while you prefer a different model, that does not seem crucial to distinguishing what kind of economists have an explanation for 2% inflation since 1990. I am left uncertain as to whether you regard IS-LM as a non-monetary model (I assumed it was – after all, the LM curve defines money market equilibria). For instance, macroeconomists who understand monetary theory can easily explain why inflation has averaged 2% since 1990, whereas non-economists and economists with non-monetary models have no explanation at all. I prefer to think in terms of money supply and money demand when trying to explain movements in nominal aggregates. Just seeking some clarification on the following: Remember that next time someone asks you, “why can’t we have nice things?” In other areas of the country, it could easily be the reverse. It was southern Orange County (Trump country) that opposed the nice new airport the more Democratic northern part of the county supported the project. Krugman’s also right that data are not enough we need to combine data with theory to make sense of the world. This idea is sometimes called the “macro foundations of microeconomics.” Then she might notice that immigration also increases the demand for labor, indeed at roughly the same rate that the supply of labor rises. A macroeconomist would notice that America has similar wage levels to Canada, despite roughly 10 times as much immigration. Of course this isn’t actually a prediction of micro, but it’s an easy trap to fall into (read commenter Ben Cole). More immigrants means more supply of labor, which means lower wages. Thus you might (wrongly) assume from micro that immigration would reduce wages. In contrast, health care is about barriers to entry, information asymmetries, moral hazard, adverse selection, intellectual property rights, cross-subsidization, mandates, and many other market imperfections.Ī macro perspective often gives a more complete picture of the economy. The law of large numbers allows certain parts of macro (inflation, business cycles, etc.) to actually be better understood than some parts of micro (health care, antitrust, etc.) Inflation is simply about money supply and money demand. As an analogy, macrophysics (earthquake prediction, weather forecasting, etc.) is less precise than microphysics (a rocket’s trajectory through outer space.) But less complexity is the only sense in which micro is more “scientific”. Microeconomics might be a bit more successful in some ways, as the problems being considered are often less complex. Minimum wages? Who knows if they reduce employment? Health care economics? A huge mess, where economists cannot even reach a consensus on the key issues that need to be focused on. As soon as you move to imperfect competition, micro is just as ambiguous as macro. But most markets are not perfectly competitive. Microeconomists have one highly successful model-perfect competition. It seems to be based on 5 factors (human capital, physical capital, technology, natural resources, and good institutions.) Yes, the final one is a bit vague, but probably involves relatively free markets, property rights, non-excessive taxes, etc. Macroeconomics is also pretty good at explaining long run growth. So why can’t we predict business cycles? For the same reason that microeconomists cannot predict individual prices-economic theory (such as rational expectations and the EMH) suggests that many types of predictions are almost impossible. These theories are not perfect (hysteresis is not well understood), but they are pretty good. In the long run, wages and prices adjust and the economy goes back to the natural rate. The combination of nominal shocks and sticky wages/prices results in short term movements in employment and output that are highly correlated with short run movements in NGDP. Macroeconomists also have a pretty good model of the business cycle. And no, the following does not constitute an “explanation”: Rapid increases in the money supply are often inflationary, but not when interest rates are near zero. He emphasizes the fact that IS-LM allowed him to avoid falling into the trap of expecting QE to lead to high inflation. Krugman spends a lot of time on the IS-LM model, which he finds useful and I do not. I think Krugman’s basically right, although I’d emphasize some different points. The limits of empiricism, vital though it is Paul Krugman has an interesting post, where he pushes back against the conventional view that micro is more successful than macro.
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