“There is no such thing as macroeconomics.”

by Jerry O’Driscoll

Not my words, but those of Armen Alchian, as reported by William Allen in Econ Journal Watch.  Allen has written his memoirs and a history of UCLAs economics department in “A Life Among the Econ, Particularly at UCLA.” To a great extent, it is the story of Alchian and the core group around him in the 1950s, 60s and 70s.  Allen was co-author with Alchian of University Economics, an influential undergraduate textbook that inspired Paul Heyne’s Economic Way of Thinking.

My own way of thinking was influenced as much by the UCLA tradition as by Mises and Hayek. Mises and Hayek had an important influence on that tradition, however. An emphasis on decision making under uncertainty and incomplete information was its hallmark. All social phenomena could be analyzed by economics, and the economic analysis was micro.

Alchian didn’t deny there were aggregate economic phenomena, only that theory must be microeconomic.  In substance, that was Hayek’s view.

Graduate macro classes had as much micro in them as designated micro class. Alchian wrote many of the macro prelim questions, wrongly attributed by students to Axel Leijonhufvud.

Among the luminaries who came and stayed in this period were Harold Demsetz and Robert Clower.  Among those who came and left were James Buchanan, Sam Peltzman and Thomas Sowell. My dissertation committee consisted of Leijonhufvud (Chair), Peltzman and Sowell.

24 thoughts on ““There is no such thing as macroeconomics.”

  1. Actually, from a human perspective, there is indeed no such thing as macroeconomics, because we can never get the kind of “outside view” — that is, the view from a higher level of complexity — that would be necessary to understand the macro patterns. Think of it this way: from the perspective of a cellular amino acid, there is no such thing as “cell.” But from our more complex vantage point, the patterns of physico-chemical interactions that make up a cell are obvious. A intelligent amino acid could study the cell, but its information would only ever be partial, and it could never understand the whole, to see the larger patterns. The amino acid could readily study the chemical interactions that constitute the various biochemical cycles, and even understand those cycles (think of such cycles as equivalent to firms, institutions, etc.), but the big cellular picture would remain mostly a mystery. The best one could do is figure out that some sort of process is going on, note the history of such processes, and make educated guesses as to what on aggregate may be going on in the larger system. All of this is, as Hayek said, because the parts of a system cannot understand the system of which they are a part. One can understand only less complex systems than oneself, but only partially understand systems of equal or greater complexity. The economy is made up of humans interacting, and thus is more complex than humans are. And since our fellow humans are as complex as we are, we can only partially understand human behavior and psychology. To the extent that we will ever be able to understand the economy from a macro perspective, then, it will be to the extent that we figure out the rules common to each level of complexity, meaning those same rules would apply to levels more complex than us. The knowledge of it would thus be fairly general and abstract. Indeed, from the human perspective, there is no such thing as macro.

  2. Thanks Jerry –

    Do you have any sense of how a guy like Roger Farmer fits into the UCLA macro community? I don’t know that much about the department, personally – except for what I’ve read here and in EJW, and I know he arrived later than Alchian’s heyday. Just curious if you have a sense of him or thoughts on him. I don’t mean to go on a tangent – not my point or purpose – he’s just someone I’ve been interested in and wasn’t sure whether he’s adopted or reacted to any of these Alchian/Demsetz/Leijonhufvud UCLA sensibilities.

  3. Economic theory must be microeconomic? That seems like unnecessary methodological puritanism. So long as macroeconomics does not contradict microeconomics, what is the problem? But even then, it should not be taken for granted that when micro- and macroeconomics conflict, that it is not the former at fault — that would be a rather uncritical attitude toward micro.

  4. Lee Kelly: “So long as macroeconomics does not contradict microeconomics, what is the problem?”

    And I think people aren’t careful enough in assessing this in a lot of cases.

    You’ll have general glut deniers, for example. That’s fine to take as a position – you’ll get people disagreeing with you but you’re free to defend it. But I think you’d be wrong to assert that a general glut defies microeconomics (some take this leap, some don’t).

  5. Daniel,

    As I recall, Farmer organized a conference in honor of Leijonhufvud and edited the papers. Consequently, I view him as a link to part of the UCLA tradition. I don’t think that anyone there is following in Alchian’s footsteps. The department is now pretty conventional.

  6. I may have misunderstood Troy’s comment, but it seems pretty clear to me that we can see macro patterns. We can “see” the global division of labor and trade patterns and how they change. We can “see” how different sectors rise and fall – giving rise to the need for resource transfers across sectors.
    This is so obvious that I think I must have
    misunderstood. I thought the whole point of Hayek’s Nobel speech was that we could see macro patterns, its just that we cannot do this in a “scientific way” ie by building math models of aggregates and estimating econometric versions.

  7. paul e.

    Those are examples of the “partial patterns” I mention above. We can get indications of what is happening, but we can never model the entire picture. That’s why building math models of aggregates and estimating econometric versions cannot work. This is much like, to use my example above, the amino acid being able to “see” the cell membranes and the ribosomes and various protein complexes, and even understanding processes like RNA and protein construction. Yes, those things can be seen and understood, but the amino acid cannot actually put it all together, as it is too complex relative to itself. We can see various patterns contained within the macro system, but we cannot really see how they form a complex whole if we are of equal or less complexity than the system we are interested in studying.

    We are in a similar position in studying the mind — which is obviously of equal complexity as us. We can study the action and processes of the brain and understand it, but we cannot fully understand the nature of the mind to which it gives rise. We can understand aspects of it, but never the entire thing.

    Hayek believed this to be true, and so does every complexity theorist I have read. One can see transient patterns in the system of greater or equal complexity, but the whole picture is necessarily indecipherable as a whole.

  8. Ben Klein can be numbered in this group too. As a strategy student in the early 90s I just missed Alchian. But, was lucky enough to take classes with Demsetz and Klein. At the time UCLA business school professor & org theorist Bill Ouchi was big into organizational economics (his edited volume with Jay Barney included classic papers by Alchian, Demsetz, Klein, Williamson, Jensen & Meckling….). The readings from Demsetz and Klein’s class are about the only readings I’ve kept all this time (a lot of was hard to find elsewhere).

  9. Yes Ben Klein was a full-time faculty member when I was there. I took he I.O. sequence from him.

  10. The standard key insight of macroeconomics as commonly practiced seems to be, doesn’t it?, that the marginal substitution relationships for a bunch a reason don’t apply or can’t explain aggregate phenomena. Hayek wouldn’t have agreed to that.

    Bu there is a different way of interpreting Hayek, at leat the Hayek from “Economics and Knowledge” onwards : that all microeconomic relationships are basically tautologies and what really matters are the phenomena beyond them…

  11. Bogdan,

    I think you should probably have another look at “Economics and Knowledge.” What he said, I think, was that the empirical bit in microeconomics is all about knowledge. Any microeconomic theorem going beyond the individual to talk about exchange and the market process is premised on some empirical assumptions, which are often implicit. The most important of those assumptions are generally about knowledge: who learns what when.

  12. I agree that making “the knowledge problem” a problem of microeconomics is one possible interpretation of that essay and that having another look at it is surely worth while.

    But one can find the same idea, I think, in the way Hayek frames his business cycle theory in “Monetary Theory and the Trade Cycle” : the problem of business cycle theory, as he puts it, is to explain why the microeconomic based equilibrium somehow fail to behave as expected during aggregate pheonomena such as recessions and depressions. In this case, of course, his answer was the special role money plays in modern economies. But I think it is fair to say that one can distinguish even in Hayek between something like microeconomics and macroeconomics, even though – to quote him again from a different work – the later is a lower level of aggregation than the Keyensian led type of macroeconomics.

  13. Bogdan,

    If I have understood, then I agree with all that you have just said.

    Roger Garrison taught me that there are macroeconomic questions, but only microeconomic answers. I think that’s probably the same basic idea Alchian was getting at when he said “There is no such thing as macroeconomics.” Nobody denies that economists need to think about inflation, unemployment, trade cycles, and so on. But your analyses of them should be, in some sense, “microeconomic.” For “Austrians” and related thinkers, the relevant micro will not normally be a representative-agent model. That last point is probably a detail, however, compared to some of the old-timey “Keynesian” models that were once tossed about.

  14. What Roger Koppl said about what Roger Garrison said is a pretty succinct way of saying what I said.

    In a completely unrelated note, you Austrian economists need to get different names. How many of you can be named Roger and Peter? 🙂

  15. Carl Sagan once said, “To make an apple pie from scratch, you first have to create the universe.”

    I think that’s the step missed by people who put much faith in macro models and other types of math models.

    Does anyone know who said, “There are macroeconomic problems, but only micro economic solutions?”

  16. I was basically curious about if you ever considered replacing the layout of your blog? Its very well written; I really like what youve got to say. But maybe you could create a a bit more in the way of written content so people might connect to it better. Youve got a great deal of text for only having one or two photographs. Maybe you could space it out better?

  17. I interviewed Bill Allen about his EJW piece on the history of UCLA Economics. The podcast is here: http://econjwatch.org/podcast/wr-allen-on-ucla-economics

    I went through the UCLA econ PhD program 5 years after Jerry did, and have similar recollections. I too wrote under Leijonhufvud. I would add the name of Jack Hirschleifer to the list of faculty whose courses influenced my thinking.

    Consistent with what Jerry said, Leijonhufvud spent half of his macro course on Walras vs. Marshall. Leijonfufvud and Demsetz had Hayek on their reading lists. Alchian was presumably influenced by Mises on property rights.

    The end of the “golden era” at UCLA came, in my view, when Alchian stopped teaching the first micro course, which happened around 1980.

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