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Non-Bullshit Macroeconomics

By Annavajhula J.C. Bose, PhD

Department of Economics, SRCC

Some years ago, Paul Roemer (the winner of Nobel Prize for his endogenous growth theory) had said that macroeconomics is all bullshit. Period.

Do you know that he was referring to the RBC theory and its mathematical construct DSGE as complete dead-ends of neoclassical economics?

The real-business-cycle (RBC) theory dominated the mainstream macroeconomic classrooms for several decades before the 2008 Financial Meltdown. According to this theory, macroeconomics is a branch of microeconomics. But it could say nothing relevant about either the financial crisis or its aftermath. Its proponents neither warned the people of the coming of the crisis nor were they able to prescribe remedies on how to overcome the Great Recession. The macro-quants of this theory used highly abstract, computer-driven, complex mathematical models (dynamic stochastic general equilibrium--DSGE--models) far removed from reality. They were merely playing intellectual computer games without any policy relevance for the actual economy.

In the RBC theory, everyone in the society is represented by a single representative agent who is a rational utility maximiser. There is no fallacy of composition or aggregation problem in terms of what is true for one individual is not necessarily true for the society. And the economy and its constituent markets are always in perfect equilibrium except if technological change takes people by surprise. Aggregate demand equals aggregate supply, with prices adjusting instantaneously. There is no unemployment but you can choose not to work because you prefer to watch television rather than flip hamburgers at McDonald's, so to say! You are in a free country, after all. Aren’t you? This being the wilful academic madness, short-term palliatives like quantitative easing, or lowering taxes (a la the Arthur Laffer curve) have not jumpstarted an economic boom in the shitty (shrinking) economies.

And so, in case you crave, as I do on behalf of the ordinary masses, for political, social and economic stability, then the ideal point of departure for us would be to first have a close look at the German, Scandinavian or Swiss models of capitalism. Their "economies are still characterized by the virtues of discipline, thrift, concern for the environment, free college education, universal health care, less inequality, a more vibrant democracy, with a sprinkling of the old-fashioned Protestant ethic. Unemployment/underemployment there is not a problem, the social safety net is tighter, people are less anxious and are able to lead a more dignified life."

In order to be in such a nice social democratic capitalism, we have to say goodbye to the empty RBC theory, and revisit Keynesian insights and innovations and reinvent Keynes "for our times". In other words, a no-bullshit macroeconomic intellectual foundation is required. This footing has already come from John Komlos from the World Economics Association. For a more advanced treatment of reinventing social democracy in developing countries such as India, get to know and read Amit Bhaduri.

There are certain dazzling elements in Keynes' theory which are anathema to the undemocratic neoclassicals as also right-wing politicians ‘who do not understand economics’ (to borrow from the luminous Subramanian Swamy who had also fortunately said that economics is a macro subject).

Keynes did not assume humans to be rational economic agents. Both investors and consumers are subject to "animal spirits". This means that they are influenced by emotion. That is, they are prone to psychological swings of optimism and pessimism. There is herding behaviour. That, in turn, means these moods are contagious (like the Covid-19 second wave). As such, for Keynes, aggregate or effective demand is not a stable function of prices. It is unstable like the Great Recession of 2008 had demonstrated. Consumer confidence and expectations can swing wildly. This implies that aggregate demand fluctuates for psychological reasons causing GNP and unemployment to vary with it. To be sure, the demand for basic necessities does not vary much due to animal spirits, but the demand for business investments and big-ticket consumer items does. Expectations also play a role in aggregate demand: as long as prices are expected to decrease, consumers will not buy consumer durables but will wait until prices stop falling. Money illusion and sticky wages do not fit into the neoclassical thinking. Nominal wages are inflexible downward for psychological reasons. Workers are accustomed to their nominal income and declining wages are resisted vehemently, often violently. The price of labour is not flexible like prices in the product market. As wages fail to adjust within the relevant time frame, there can be involuntary unemployment. Thus, aggregate demand can persist indefinitely below full-employment level.

There is a large a role for government to get out of this mess, but the neoclassicals take it as a limitation on individual freedom. GNP is made up of personal consumption (C), investment of firms (I), government expenditures (G), and exports minus imports (X-M). C will not increase because unemployment remains high and confidence is low. Businesses have excess capacity as they lack enough demand for their products, and so they will not increase I. X will not increase either as the whole world is in depression. Therefore, only G can increase demand and GNP. In this milieu, it is irresponsible to let the market continue to flounder. When the private sector fails to spend enough and a gap exists between the actual and potential output, the public sector should make up the difference through deficit spending. Public spending, particularly on infrastructure, will have a magnified effect through the spending multiplier, and that is the way of breaking out of the downward spiral of unemployment and deflation, and reestablishing a new full-employment equilibrium.

In Keynesian theory, the amount of money matters to aggregate real output unlike money playing a passive role by determining only the price level. In normal times, expansionary monetary policy helps the economy recover from a recession through interest rate lowering, which incentivizes consumers to buy more durable goods on credit and makes it also lucrative for businesses to borrow (leverage) in order to invest in new equipment, thereby increasing economic activity and lowering unemployment. But expansionary monetary policy does not work in times of a financial panic. If consumers are overextended and have too much of debt relative to income and are trying to deleverage and lower their debt burden, then lowering the interest rate is not effective. Similarly, if businesses have excess capacity and sluggish demand for their products, they are not going to invest in new plants and equipment even with lower interest rates. That is exactly why monetary policy was ineffective in 2008 and thereafter. The American economy was in a liquidity trap during 2009-16 with the nominal interest rate reaching zero. The central bank cannot, therefore, lower the nominal interest rate any further. The new central bank policy of quantitative easing that pumped trillions of dollars into the financial sector led to banks investing in stock market causing asset price inflation rather than to investments in the real economy! Only fiscal policy can impact aggregate demand as it is effective because it does not work through the interest rate. It depends on direct government increase of aggregate demand.

In Keynesianism, fiscal policy is countercyclical—expansionary in downturns but contractionary in upswings. Keynes, the Master, did not want government debt to accumulate. It should borrow and spend during recessions, and it should pay it back by increasing taxes or by cutting back government expenditures in order to limit aggregate demand toward the peak of the business cycle. In the American context, this fine tuning became impractical in practice and government debt continued to accumulate in conjunction with lowering of tax rates of the top income earners on the fictitious supply-sided economic argumentation that it induces economic growth thereby benefiting the rest of population.

By contrast, government debt is small in countries such as Sweden, New Zealand, Australia, Norway, Switzerland, and South Korea, and European economies have particularly done well despite higher taxes. There is substantial real-world evidence that high taxes coupled with social spending fosters economic welfare. Lower taxes are not crucial in creating incentives among the super-rich, while transfer payments provide social services, free college education, and universal health care, and thus increase the productivity of lower income groups. The high-tax-rate European countries rank near the top of surveys on the quality of life unlike the US. Thus, by fostering equality in disposable income, taxes increase efficiency in a number of ways. Europeans work less, have longer vacations, and are less harried; they are subject to less uncertainty and less criminal activity; they have fewer slums and dysfunctional schools and eliminate the need for such high levels of indebtedness among the young. The cost of college education in most European countries is borne by the society at large so that the burden is spread out and graduates leave university with zero debt unlike in the US. In light of this, the neoclassical economic assertions in Econ 101 textbooks that “taxation subtracts from incomes, reduces private spending, and affects private saving”, and also “affects investment and potential output”, are biased, stereotyped imaginary ideological crap.

To conclude, like the way the American economist cum political scientist John Roemer was involved, when he was young, in the study-circle meetings of “non-bullshit Marxism”, it is imperative now to remove the ideological fog of the neoclassicals in the subject matter of macroeconomics.

It is a shameless shame, though, that the bullshit RBC theory continues to be taught to the young people despite the Financial Crisis (2007-2010) even as most policy makers (including in India) are stuck with the dysfunctional supply-sided economic vision, even in the before-and-after context of the first wave Covid-19 based economic compression. As Steve Keen had remarked, the most important thing that the global financial crisis has done for economic theory is to show that neoclassical/neoliberal economics is mad, bad and dangerous.

What do you say? Yes or No?

Many students around the world have already rebelled against the stubborn neoclassical intellectual disability to deal with the real world. So, will you in India bear with the vulgarization of macroeconomics as a branch of microeconomics (perfectly competitive)? Or, will you embrace John Roemer’s “Kantian optimisation”—that is, a society where people optimize based on cooperative values rooted in social solidarity rather than on individualistic “homo economicus”?

Do read John Komlos. Tell your librarian to get his book. He has much more in store for you than my bare minimal introduction to him here.


Jacinda Swanson. 2007. The Economy and Its Relation to Politics: Robert Dahl, Neoclassical Economics, and Democracy. Polity. 39 (2). Chicago Journals.

John Komlos. 2019. Foundations of Real-World Economics: What Every Economics Student Needs to Know. Routledge.

Kevin Drum. 2016. Famous Economist Roemer Says Macroeconomics is All Bullshit.


Maya Adereth’s Interview with Amit Bhaduri: Development, Growth, Power, in Phenomenal World. November 25. 2020. https://www.phenomenalworld.org

Neelam Pandey. 2020. PM Modi should make me finance minister, he doesn’t understand economics: Subramanian Swamy. The Print. January 10.

Robert Skidelsky. 2010. Keynes: The Return of the Master. Penguin.

Steve Keen. 2009. Debtwatch. March 24.

Timothy Taylor. 2021. An Interview with John Roemer on Inequality of Opportunity. Conversable Economist. January 14.

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