Arnold Kling suggests that business cycles are a real (non-monetary) phenomenon and that at the heart are errors about what goods or services to produce or what human of physical capital investments to undertake.

I think that in the last 18 months, an unusually high number of people have had their plans go awry. They wish they had made different choices in terms of their education and occupations. Digging out from these mistakes is going to take a long time. A lot of recalculation needs to get done, and the problem is really daunting.

I don’t think that fiscal and monetary policy solve this calculation problem. At best, they substitute the errors of fumbling central planner for the errors of fumbling individuals.

I am sensitive to this perspective. Its elegant and compelling to see real micro problems at the heart of macro fluctuations. There are several problems, however:

  1. How do you get to unemployment from here. If people are retooling I see a huge demand for retraining. Or them accepting very low wages in a new industry but why persistent unemployment. Why doesn’t the labor market clear.
  2. How you get from here to monetary induced contractions.  Maybe there is still debate over whether the Fed can stop a recession or at what costs. However, how do you get from here to the Fed being able to start a recession. The experience of the early eighties seems to clearly show us that the Fed can.
  3. How do we get the Great Depression from here?

Ultimately these are the challenges that I think sink most attempts at a real macro theory.