Here is the title, “Goldman Sachs Model Evokes Blood-Sucking Leeches” and here is the point:
Macroeconomics really is stuck in the Dark Ages.
These are the opening statements:
Take ‘fiscal stimulus,’ for example, the idea that the government can step in to fill the void when the private sector isn’t spending and boost economic growth in the process.
Economists have been debating the pros and cons of fiscal stimulus since the 1930s, when John Maynard Keynes diagnosed the problem as one of inadequate private investment and prescribed public spending, financed by borrowing, as the cure.
The discussion hasn’t advanced very much in eight decades. Sure, economists have devised elegant mathematical models that purport to show that $1 of government purchases translates into — take your pick — no increase in gross domestic product (the multiplier is zero, according to Harvard’s Robert Barro) or $1.50 of GDP (a multiplier of 1.5, according to Berkeley’s Christina Romer, who was chairman of President Obama’s Council of Economic Advisers when the $814 billion stimulus was crafted in 2009). They haven’t really proven anything.
And here is the conclusion:
As I said before, we entered the 21st century with macroeconomics still looking for an Age of Enlightenment.
Five thousand years ago in ancient Egypt, medics used leeches to suck the blood of ill patients, believing the practice could cure everything from fevers to food poisoning.
Today’s physicians have largely forsaken bloodsuckers for modern medicine.
It’s about time macroeconomics emerged from the Dark Ages as well.
And this is the article itself by Caroline Baum at Bloomberg.
You have heard plenty from me over the years about what a wasteland Keynesian economics creates. But the size of the catastrophe it has now led to, and the absence of any other genuine explanation for its undeniable failure to move our economies forward, at last means we are seeing the beginning of the end of one of the most damaging experiments in the history of economics. It is not at the level of Marxist-damage but given the years it will now take to reverse the problems we have deliberately created for ourselves there is little doubt that the cost of this theory will be in the trillions across the globe.
The classical economics that Keynesian economics replaced, with the Law of Markets – economic theory’s Law of Gravity – at its very core, will need to find its way back. Amongst many things, the Law of Markets was designed to explain why increases in aggregate demand do not lead to increases in production and employment. In its own way we do have experiments in economics and this experiment with aggregate demand has been one of the worst.
The basics in understanding the classical theory of the cycle may be found as part of my Ludwig von Mises Memorial Lecture which I gave just one year ago this month. Its title was “Why Your Grandfather’s Economics was Better than Yours” and that economics really was better. The presentation can be found here. It is back to the economics that are described in this presentation that we are now heading.