"Nobody Really Knows How The Economy Works."

Mainstream economics is replete with ideas that “everyone knows” to be true, but that are actually arrant nonsense.

From Jeremy B. Rudd, "Why Do We Think That Inflation Expectations Matter for Inflation? (And Should We?)", Federal Reserve Board (September 23, 2021).

Macroeconomics is not a science, despite the fact that is uses a lot of math and data to look like one.

I explored going to graduate school in economics after law school. Life got in the way. But misgivings about the soundness of macroeconomics as a discipline (which would have been part of my studies even if I focused primarily on something else) also limited my enthusiasm.

This isn't to say that we don't need economists. Lots of very important economic decisions have to be made every day. It is better, on balance, to make those decisions with the best available information than based upon amateur whim. But any macroeconomic prediction needs to be taken with a huge grain of salt.

Nobody Really Knows How the Economy Works. A Fed Paper Is the Latest Sign. Many experts are rethinking longstanding core ideas, including the importance of inflation expectations. . . .

It reflects a broader rethinking of core ideas about how the economy works and how policymakers, especially at central banks, try to manage things. This shift has also included debates about the relationship between unemployment and inflation, how deficit spending affects the economy, and much more. . . .

It is vivid evidence that macroeconomics, despite the thousands of highly intelligent people over centuries who have tried to figure it out, remains, to an uncomfortable degree, a black box. The ways that millions of people bounce off one another — buying and selling, lending and borrowing, intersecting with governments and central banks and businesses and everything else around us — amount to a system so complex that no human fully comprehends it.

"Macroeconomics behaves like we’re doing physics after the quantum revolution, that we really understand at a fundamental level the forces around us,” said Adam Posen, president of the Peterson Institute for International Economics, in an interview. “We’re really at the level of Galileo and Copernicus,” just figuring out the basics of how the universe works." . . . 

Mr. Posen, a former Bank of England policymaker, says there remains a simple and hard-to-dispute idea about inflation expectations supported by lots of history: that if people distrust a country’s monetary system, inflation shocks can spiral upward. Economic policy credibility matters. But that isn’t the same as assuming that some survey or bond market measure of what will happen to inflation in the distant future is particularly meaningful for forecasting the near future.

“It has been a noble lie that has become a critical part of the catechism of global monetary policy, that long-term inflation expectations are not just interesting but are a decisive determinant of real-time inflation,” said Paul McCulley, a former Pimco chief economist, commenting on Mr. Rudd’s paper.

This isn’t the only way in which basic precepts underlying economic policy are shifting beneath economists’ feet.

Particularly prominently, for years central bankers believed there was a tight relationship between the unemployment rate and inflation, known as the Phillips Curve. Over the course of the 2000s, though, that relationship appeared to weaken and become a less reliable guideline for how to set policy.

From the New York Times.