My big reveal as macro-economics analyst: It's a load of COBBLERS

These guys have got about to where chemists were when they were arguing about Phlogiston

Keynes or any other of these might even be right but they're clearly not agreeing with each other. My own (and entirely unoriginal) view is that we've just not got the evidence base to be able to tell. Recessions are, to me, a symptom, not a disease. Just as there are many ways of getting cirrhosis of the liver so there are many ways of getting a recession: and how you cure that recession depends on what the cause was. So, all of the above might at times be true and none of them true all the time.

Our problem is that we've potentially at least multiple causes and not enough examples to be able to decisively allocate some or all of them to one cause or the other. For example, I've allocated the current US recession to that housing bust: that's the Austrian story about capital misallocation. But even I don't think that the falling over of the financial system had nothing to do with it. It's too complicated for the evidence we have to hand to enable us to be certain.

The second is about monetary policy and again, this current recession is a good example. Milton Friedman's real academic bones were not made with his shouting about free markets, not at all. Rather, his masterly (with Anna Schwartz) Monetary History of the United States is the jewel in his crown, wherein he laid the blame for the Great Depression firmly at the feet of the Federal Reserve. Without getting too complicated about it he agreed that there's many ways you can come to be in a recession. But if you then let the money supply contract (which would be a side effect of letting all the banks fall over) then you are, whatever else you do, going to turn that recession into a general deflation and thus a depression, a vast contraction of economic activity.

This is part of the reason the banks got bailed out this time around (although the shareholders should have lost more than they did as it happened). It's also the explanation for things like quantitative easing. Yes, there are more detailed reasons as well but as Ben Bernanke (head of the Fed a few years back) publicly said to his ghost: “Milton, you were right, and we're not going to let it happen again”. We're not, that is, going to allow the money supply to start shrinking.

This is now the standard view in Anglo economic circles. Maybe we want to end QE at some point soon, maybe it has pushed up asset prices, all sorts of things. But whatever the hell you do or don't do, don't let the money supply collapse, Dear God, anything but that.

So perhaps this is one of those things that all macroeconomists do agree upon? Sadly, no, for as we can also see at present the European Central Bank isn't doing anything of this sort. They actually raised interest rates in the middle of the recession: just like the Fed did in the 1930s. They've not done any QE (easy enough to do, unsterilised bond purchases in the jargon) and I've seen one Bundesbank member in recent weeks stating something so deluded that I hope I was on drugs and he wasn't. This statement was that the eurozone currently has a loose monetary policy.

Eh? An entire economic bloc has no aggregate economic growth at all (neither real nor nominal), half that bloc has deflation, half the bloc has a falling aggregate money supply and all of it has positive interest rates and this, this is a loose monetary policy?

For those who don't follow these arguments generally, that Bundesbank guy's statement is akin to the “See, the sky's A Flat Minor” brought on by an excess of PCP. And we might note that those places that have followed the generally Anglo idea (Don't Let The Money Supply Collapse!) have done OK, not great, but OK, while those that haven't - like Greece, Spain and Portugal (soon to be joined by Italy) - are somewhere halfway around the U-bend.

My point is not that any of these specific macroeconomic ideas are correct or incorrect though. Rather, I'm pointing to the fact that there's still such disagreement over the very basics of macroeonomics: it's simply not a sound science with a generally agreed corpus of knowledge.

Microeconomics is rather different. Here there is general agreement across a number of basic points. Demand curves slope downwards (people like to have more of things as they become cheaper); rent control is the best way of destroying urban housing short of aerial bombing; tax something, tax anything, and you'll get less of it.

Yes, even here there are exceptions: if a demand curve slopes upwards then it's a Giffen Good. Think of the basic foodstuff in a subsistence economy. If that price rises then people might actually demand more of it: they're already spending 80% of their income on food (that's probably about right for a subsistence economy) so they're budget constrained purely and solely on their food bill.

If the basic calorie provider becomes more expensive then they might well abandon all other expenditure upon food entirely and buy only that basic in order to ensure enough calories. This has actually been observed for wheat noodles in North China and rice in South China (the respective stodges for those areas). We might also assume that it happens to maize in sub-Saharan Africa, tortillas perhaps in rural Mexico, potatoes maybe in 19th century Ireland and so on. But we're still accepting the general principle as being applicable and looking upon the exceptions as being just that, interesting exceptions due to specific circumstances.

We're not - as we are in macroeconomics - still arguing about whether the sky has a colour or a sound.

I tend to be of the opinion that we should work on getting those microeconomic bits right: the price system, the bits that the price system doesn't deal with (and there are many, externalities, pollution, public goods) incentives and then let the macroeconomy run along as it sees fit.

But even if you want to do more than that it's worth remembering that macroeconomics itself is about where chemistry was when they were still arguing over the existence of phlogiston. It's even possible that one or other sets of theories is correct (my own intuition, prejudice, is that all have interesting insights but none is fully correct) it's just that we really don't know which one as yet.

Or the TL;DR version. Macroeconomics is a pretty shit guide to the world because we humans are still pretty shit at macroeonomics. ®