The Current State of Macroeconomics: Is It Time for a New Approach?

Abstract

The purpose of this paper is to assess the current state of macroeconomics and determine whether the subject is a useful tool both in public and private planning decisions. First, I discuss briefly the history of and assess the keynesian and neoclassical macroeconomic models and their counterpart, econometrics, by examining the empirical record of forecasting and structural stability of the various models. Second, I examine the alternative methodology of the Austrian school, that uses logical deduction from assumed true axioms rather than the scientific method in deriving economic theory. My general conclusion is that mainstream Keynesian and neoclassical economic theory, combined with econometric analysis, has not provided very much, if any, useful information to either public or private planners. While the Austrian approach seems at the outset to be an attractive alternative to the mainstream economic schools of thought, it is faced with the difficulty of determining how its so-called “self evident” axioms are true. Some Austrians trace their methodology back to Aristotle, who said that self evident propositions are based on empiricism. The problem of establishing which axioms are self evident needs to be solved before Austrian economics is able to gain wide spread acceptance among the economics community.