Macroeconomic Policy as an Epistemic Problem

Abstract

Mainstream macroeconomic theory understands the economy as a phenomenon tractable by analysis adequately enough to be manageable by macroeconomic policy guided by this analysis. We explore why this epistemological approach of the economy has remained dominant in mainstream economics despite recurrent policy failures, contradictory theories and inconclusive revisions of both theories and policies. We identify a relationship of ‘epistemic entanglement’ between economics as a discipline and policymaking that has consolidated a reductionist analysis of the economy as well as the subsequent expectation for clear prescriptions on how policymakers can effectively steer the economy in a desired direction. We argue that this reductionist analysis misrepresents the micro-macro relationship, and it is responsible for recurrent patterns of both economists and policymakers overlooking diverse and intractable micro-adaptations to policy interventions that tend to result in undesired, unforeseen and unintended consequences over time. As such, this entangled relationship has contributed to macroeconomic instability.

Keywords: macroeconomic policy, macroeconomics, macroeconomic theory, methodology of economics, monetarism, Keynesianism, Hayek, heterodox economics

JEL Classification: A11, A14, B22, B40, D01, E00, E14, E52, E61, E65, E71