Is the Fundamental Science of Macroeconomics Sound?

Abstract

Recently, Ben Bernanke has argued that in the events leading up to the financial crisis, mistakes were made, but they were primarily engineering or management mistakes, not mistakes in the fundamental science of macroeconomics, which he sees as sound. This paper argues that Bernanke is wrong and that standard macroeconomics has not recognized, and still does not recognize, the limits of science and of formal modeling when studying something as complex as the macro economy. This failure to recognize, and adequately convey to policy makers, the limits of our scientific understanding of the macro economy, has led standard macroeconomics to combine fundamental science and policy applications in ways that undermine both. This paper advocates a classical methodological approach, which Keynes followed as well, that strictly separates fundamental science from policy analysis. Policy does not directly follow from models; it follows from reasoned analysis which uses models, but which combines models with institutional knowledge, intuition, and common sense. JEL classification: A11, B22, E0, E60

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