Continuing the discussion, Australian economist John Quiggin is leading a seminar on bringing Keynesian economics back into the mainstream. I've made some comments there, and I'm going to gather them up here, but wander by Crooked Timber and read the articles, or read them on Quiggin's own blog.
Wile E. Coyote moment
Having glanced at some of Smith’s links, my impression is that academic macroeconomics is creeping up on its Wile E. Coyote moment. It’s just to the point where it is standing on air and is starting to look down…
The Trolls of Galbraith
I think Galbraith’s focus on corruption may be part of the solution; I don’t think one can do internet sociology without recognizing the existence and influence of trolls, and perhaps this is also true of economics.
An Attitude Towards Macro
I think what has been discovered is another version of the intractability of the calculation problem: it is not, so far, possible to predict economic behavior at the level of a whole society because human wants and needs, beyond some basics, are incalculable. It is like user interface design rather than software engineering: beyond some rules of thumb, there is no way of predicting how users will interact with an interface. Instead, interface designers design, test, and refine solutions.
Which suggests a different attitude towards macroeconomics: that it be treated as the study of the economic reaction to public and private organizations and mass consciousness, rather than as an attempt to predict economic behavior independent of these things. Look for responses, rather than assuming they can be predicted. It also suggests an inversion of the usual economic model of individual and society: rather than assuming that each individual solves the problems of economic decision making independently, assume that a major part of economic decision-making is undertaken by group and organizational processes and proceed from there.