It’s commonplace today that governments should try to promote prosperity by building their economic policy around a family of “general theories” developed in the 1930s, known today as “macroeconomics.” Over the past century, this field has legitimized centralizing a wide range of governments’ spending decisions and central banks’ policies, even when it raised deficits and debts. However, it turns out that macroeconomics is no “science.” It has only been wearing its mask. 

　　Economists secure their status in modern governments by producing many numbers that ostensibly give concrete, empirical form to an economy’s success or failure. As governments came to rely on these aggregate statistics, a subsidized macroeconomic mythology, often drawing on misleading jargon, offered rationalizations for government intervention, missing the fact that such policies—intentionally or not—were weakening financial markets and preventing continuous access to credit.

　　Words shape thoughts. The aggregate statistics of macroeconomics have distorted our discourse for too long, and it is time now to bring back on-the-ground experience and its language, using these to shape policies. Reliable access to credit matches talent and capital, holding both accountable, has proven to be the best way to restore and sustain high standards of living, while also dispersing political power. On the other hand, when government becomes one of the main financial intermediaries, economists and statisticians can compute any national aggregates they wish, using meaningless numbers to dig societies into deeper mazes of confusion and error. 

　　In countries with increasingly reliable access to credit, there is a better way to measure the strength of the economy: the total enterprise values added to the value of the government’s total outstanding debt—all measured in a stable unit of account.

　　The Emergence of Macroeconomics

　　Economists and politicians invoke John Keynes’ 1936 General Theory as providing the foundations of macroeconomics, justifying deficit spending and increasing national debt to restore confidence and stabilize the economy. Keynes’s General Theory, however, was neither “general” nor “theory,” but an obscure, not thought through, new jargon-filled, fact-free mish-mash. And Keynes himself retracted his views and jargon in subsequent exchanges with critics. Economists later translated part of Keynes’ prose—the book does not discuss any specific events or data either—into trivial algebra, claiming that the solution of a few equations with a few variables offers guidance to restore sustainable standards of living everywhere. Later, macroeconomists used more complex math, which still sidestepped political institutions, “accountability,” and any real understanding of financial markets. Nevertheless, using the obscure jargon, governments legitimized centralizing powers by deficit spending and increased debt levels, relying on these models and the misconstrued and mismeasured aggregates. 

　　Although Keynes was mistaken that the world needed a new jargon and theory to sustain commercial societies, his recommendation that at times governments must pursue deficit spending and increase debts was not mistaken in the 1930s—assuming, as he did, that restoring access to credit through private institutions, weakened or destroyed during the 1920s and 1930s in both Europe and the US, would take too long.

　　Keynes’ view and solution stood in sharp contrast with Milton Friedman’s for those same years. However, they were in agreement that the destruction of access to credit was the main culprit for the serious contraction that took place, though they disagreed on what brought it about. For Keynes, this happened because of random fluctuations in what he called “animal spirits,” unprovoked by any changes in government policies.

　　Friedman’s take was different: “What happened was that from 1929 to 1933 you had a major contraction which was caused primarily by the failure of the Federal Reserve System, to follow the course of action for which it was set up. It was set up to prevent exactly what happened from 1929 to 1933. But instead of preventing it, they facilitated it.The Depression, which started in 1929 was rather mild from 1929 to 1930. And, would have been over in 1931 at the latest had it not been that the Federal Reserve followed a policy which led to bank failures, widespread bank failures.”

　　Keynes reached the conclusion that the solution in such instances is for governments and central banks to coordinate and, by default, assume greater roles as financial intermediaries of last resort, pursuing a policy of deficit financing. His implicit rationale was that politicians, governments and central banks, bureaucrats, and economists exempt from the volatile “animal spirits” plaguing the “hoi-polloi,” could be trusted to allocating public spending.

　　By contrast, Friedman’s take was that people without working financial experience would misallocate public funds, failing to match them with the appropriate talents. The financial sector, with a large number of independent, dispersed players, would have better incentives to either prevent such mismatches or correct them more quickly. Having no access to impose taxes and borrow as governments do, private players cannot linger with mistaken spending decisions—they go bankrupt. Since every mismatch is a mistake, and every mistake is a cost, making fewer mistakes and correcting them faster is the solution for both preventing contractions and getting out of them more quickly—unless bad policies prevent them.

　　This old debate helps to explain how the destruction of access to capital brought panic and bets on policies based on macroeconomics’ half-baked ideas. As the saying goes, “Necessity is the Mother of Invention, but Can be Stepmother of Deceptions Too.” Macroeconomics became such a “stepmother” during much of the disastrous twentieth century, and unfortunately, it is still with us. 

　　What Happened During the 1920s and 1930s

　　Prosperity is the result of matching brains with credit, holding both sides accountable. Savings and financial markets are sources for accessing credit. When governments weaken or destroy financial markets, on purpose (under communism), or inadvertently (as happened during the 1920s and 1930s in Europe and the US), government and crime enter into the void. In some societies, it is hard to distinguish the two. By default, governments become increasingly important financial intermediaries. 

　　In the US, bank failures led to drastically diminished access to credit. In Europe, this happened following a different sequence of events. The contraction in the United Kingdom, reflected in both deflation and high unemployment, came about after Winston Churchill, then chancellor of the exchequer, relinked the pound sterling in 1925 to the price of gold at its pre–World War I parity, in spite of the fact that the price level had doubled during the war, and the pound had fallen by 60 percent. This abrupt political repricing brought deflation, massive financial distress, increased unemployment, and reduced exports, compounding the severe impact of WWI. Churchill admitted that this decision was his biggest blunder ever. 

　　The UK reversed the 1925 mistake only in 1931, when it abandoned the gold standard and devalued the pound. By then, after much upheaval and ideological confusion, many observers came to believe that new theories were needed for stability, rationalizing increased government spending and programs. 

　　Keynes’ book said nothing about either Churchill’s decision or exchange rates—his book was about a “closed economy,” with no mention of exchange rates. Nor did Keynes take note of the hyperinflation that plagued Germany, Austria, Hungary, and other countries during the 1920s, destroying the value of savings and access to credit. Instead, Keynes rationalized increased government spending as a general solution, independent of any specific policies, political events, institutions, or exchange rate volatility. The book is effectively fact-free. Predictably, governments entered into the financial void, using the Keynesian jargon to rationalize deficit financing and centralization of powers.

　　Macroeconomics and Its Critics

　　Macroeconomics became a heavily subsidized academic field. Governments backed its practitioners with journals, books and conferences, jobs in their Treasury departments, central banks, and international institutions such as the IMF. 

　　A few prominent practitioners tried for decades to discard this field’s pretense to science, without success. I shall discuss their takes in reverse chronological order, mentioning Simon Kuznets’s—the Nobel Prize winner—criticism last. As the man who started and supervised the computation of national aggregates in the 1930s, and applied them during WWII, Kuznets grasped the fundamental flaws of macroeconomics far better than later generations of economists. 

　　Paul Romer, chief economist at the World Bank until 2018, noted in a 2016 piece titled The Trouble with Macroeconomics, that “for more than three decades macroeconomics has gone backward,” having become an obsolete scientific embarrassment. This is true, though it was really six decades, as I showed in a chapter titled “Making Sense out of Nonsense,” how bad ideas persist in academia, covered by “masks of science.” This happens when governments subsidize practitioners, creating isolated academic echo chambers. The late Fischer Black, commenting on my books, noted wryly that he had “stopped going to conferences as economists do not take well to criticism.” 

　　When there are many independent investors and the volume of transaction is high, prices in financial markets allow us to extract implied probabilities, indicating where the economy is heading, and what are the impediments to sustained prosperity.

　　In his Exploring General Equilibrium, Black demolished macroeconomists’ mathematical and statistical models. His alternative was to calculate option prices derived from observed prices in financial markets, which were used at the time by his derivative group at Goldman Sachs. 

　　Olivier Blanchard, chief economist at IMF between 2008–2015, published in 2016 a sharper criticism of macroeconomics and its reliance “on assumptions profoundly at odds with what we know about consumers and firms.” He still hoped to salvage the field, noting that “the pursuit of widely accepted macroeconomic core may be a pipe dream, but it is a dream surely worth pursuing,” the goal being to have a “structure around which to build and organize discussions.” 

　　With such logic, why not subsidize discussions about models and policies based on the positions of stars? After all, astrology wore the masks of science for centuries, its manuals filled with mathematical formulae, deriving conclusions about human affairs from the positions of stars. It is worth recalling Kurt Vonnegut’s 1988 warning to “stop thinking ‘science’ can fix everything if you give it a trillion dollars.”

　　James Bullard, President and CEO of the Federal Reserve of St Louis between 2008 and 2023, challenged the macro-myth in his 2012 “Death of a Theory.” Two claims in particular are discussed at length: “One, that a tax-financed increase in government expenditures would temporarily increase total output. … The other, that increased government expenditures may inspire confidence.” Bullard dismisses both claims because the “political systems are ill-suited to implement the first policy,” and “governments pushed distortionary taxes in the future, which … reduces or eliminates the desired effects.” 

　　Milton Friedman admitted near the end of his life that using macroeconomic models and aggregates to refute them was his biggest blunder. In a July 1999 column titled “My Biggest Mistakes” in the New York Times, he recounted how in the early 1980s, he hoped it would be possible to support his insights by translating his assumptions to macroeconomic models’ jargon, and using statistical analyses of aggregates. He acknowledged that he failed because “he did not realize that squeezing his ideas in Keynesian language could not work.” It is a surprise he did not foresee this, since his attempt was similar to squeezing Einstein’s calculations, where time becomes a “bending” variable depending on gravity, into Newton’s language and calculations, where time and gravity are independent.

　　Jump now back to Simon Kuznets, another Nobel Prize winner in economics, who, as noted, was in charge of building the first set of aggregate data in the US, and applying the models during WWII. Beyond his adamant opposition to using these models and wartime statistics to guide policies during peacetimes, he took issue with the very principle of adding all government spending to the calculation of the GDP. His point was that spending on public services was already reflected in the aggregates computed from private production. Businesses’ mere existence depends on law and order—say the police, the courts, prisons, firemen, the military—adding spending on them to the private sector’s output implies double counting. 

　　Keynesians argued against Kuznets, insisting that his argument does not take into account governments’ role in restoring confidence. It would take decades for Jason Bullard and others to dismiss their view. The macroeconomist won and it became common practice these days to add all government spending to the private sector’s—which though ceases to have an obvious meaning. 

　　A Forward-Looking Alternative

　　If we want to know where an economy is heading, there is a way. The most reliable indicator comes from adding the forward-looking total enterprise values to the value of the government’s total outstanding debt, measured in a stable unit of account. That calculation can help us to identify obstacles to restoring and sustaining standards of living—when financial markets are deep and deepening. 

　　However, financial markets are not laboratory experiments: People put their hard-earned money where their thoughts are, thoughts shaped by armies of financial analysts doing due diligence, looking at income statements, balance sheets, and cash flows. These numbers reflect taxes, costs of regulations, costs of using government services, expected integration of values of innovations, and so forth. 

　　Drawing on these numbers thus avoids far more than the double counting that Kuznets found so objectionable. Total enterprise values reflect expectations of interest movements too. This is why, when there are many independent investors and the volume of transactions is high, prices in financial markets allow us to extract implied probabilities, indicating where the economy is heading, and what are the impediments to sustained prosperity. The market value of government securities reflects the value of the collateral backing it: That is, governments’ ability to tax and borrow. This is the information that can guide governments as they work to identify legal, fiscal, or regulatory obstacles that create “mismatches,” which in turn bring about what we now call “recessions.” 

　　Of course, nothing is perfect even in decentralized or decentralizing commercial societies. However, financial markets prevent mismatches and resulting mistaken prices from lasting too long. As Warren Buffet put it, he uses market prices to identify what most investors got wrong, and “detect substantially undervalued securities.” The existence of such investors ensures that financial markets correct mismatches in the private sector faster than when governments allocate public funding.

　　For millennia, rulers and governments have opposed all “betting on ideas” markets, relating to stock, futures, insurance, sports—on false premises. The facts are that these markets—when deep—threaten the concentration of powers. Recall these extreme examples (much before communism). The four major innovations that helped make Western Europe what it became—paper, printing press, compass, and gunpowder—were all invented centuries before in the Far East. However, it was Europe’s increasingly commercial society with deepening financial markets that rediscovered them and put them to use. The West thrived and China remained dormant. 

　　Washington’s policies still pass regulations and laws preventing deepening financial markets, and misunderstand what “producing prices,” in commodity and betting markets mean. The 2010 Dodd-Frank Act increased capital requirements and greater oversight from regulatory agencies, among others. Yet, whereas more than 1,300 new banks were opened in the US between 2000 and 2009, between 2010 to 2024, only 83 were, restricting access to credit on the part of smaller businesses in particular. And in 2023, the Commodity Futures Trading Commission (CFTC) has been rejecting applications of traders, political analysts, and investors to bet on a wide range of events, elections among them, showing their deep misunderstanding of commodity trading and credit. 

　　Correcting these and other errors is the key to restoring and sustaining prosperity. Macroeconomic pseudoscience and the big words of not-thought-through “isms” have warped economic policies long enough.