In a recent lecture on the US recession, Robert Lucas gave an outline of what the new classical school of macroeconomics today thinks on the latest downturns in the US economy and its future prospects.
Lucas starts by showing that real US GDP has grown at an average yearly rate of 3 per cent since 1870, with one big dip during the Depression of the 1930s and a big – but smaller – dip in the recent recession.
After stating his view that the US recession that started in 2008 was basically caused by a run for liquidity, Lucas then goes on to discuss the prospect of recovery from where the US economy is today, maintaining that past experience would suggest an “automatic” recovery, if the free market system is left to repair itself to equilibrium unimpeded by social welfare activities of the government.
As could be expected there is no room for any Keynesian type considerations on eventual shortages of aggregate demand discouraging the recovery of the economy. No, as usual in the new classical macroeconomic school’s explanations and prescriptions, the blame game points to the government and its lack of supply side policies.
Lucas is convinced that what might arrest the recovery are higher taxes on the rich, greater government involvement in the medical sector and tougher regulations of the financial sector. But – if left to run its course unimpeded by European type welfare state activities -the free market will fix it all.
In a rather cavalier manner – without a hint of argument or presentation of empirical facts – Lucas dismisses even the possibility of a shortfall of demand. For someone who already 30 years ago proclaimed Keynesianism dead – “people don’t take Keynesian theorizing seriously anymore; the audience starts to whisper and giggle to one another” – this is of course only what could be expected. Demand considerations are simply ruled out on whimsical theoretical-ideological grounds, much like we have seen other neo-liberal economists do over and over again in their attempts to explain away the fact that the latest economic crises shows how the markets have failed to deliver. If there is a problem with the economy, the true cause has to be government.
Trying to explain business cycles in terms of rational expectations has failed blatantly. Maybe it would be asking to much of freshwater economists like Lucas to concede that, but it’s still a fact that ought to be embarrassing. My rational expectation is that 30 years from now, no one will know who Robert Lucas was. John Maynard Keynes, on the other hand, will still be known as one of the masters of economics.
Is academic (mainstream neoclassical) macroeconomics flourishing? “New Keynesian” macroeconomist Simon Wren-Lewis has a post up today on his blog answering the question affirmatively:
Consider monetary policy. I would argue that we have made great progress in both the analysis and practice of monetary policy over the last forty years … However, it has to be acknowledged that policymakers who look at the evidence day in and day out believe that New Keynesian theory is the most useful framework currently around. I have no problem with academics saying ‘I know this is the consensus, but I think it is wrong’. However to say ‘the jury is still out’ on whether prices are sticky is wrong. The relevant jury came to a verdict long ago …
It is obvious that when it comes to using fiscal policy in short term macroeconomic stabilisation there can be no equivalent claim to progress or consensus. The policy debates we have today do not seem to have advanced much since when Keynes was alive …
What has been missing with fiscal policy has been the equivalent of central bank economists whose job depends on taking an objective view of the evidence and doing the best they can with the ideas that academic macroeconomics provides…
The contrast between monetary and fiscal policy tells us that this failure is not an inevitable result of the paucity of evidence in macroeconomics. I think it has a lot more to do with the influence of ideology …
Hmm. This doesn’t seem convincing at all.
1 So, according to Wren-Lewis, macroeconomics has really made progress on monetary issues thanks to central bank economists and since we have been able to definitely conclude that wages are “sticky”. Wow! That’s really impressive! (And the earth still isn’t flat?) Keynes argued that conclusively more than 75 years ago …
2 And are central bank economists really “taking an objective view”? How is it even possible to think that thought today, when the “relevant jury” for at least four years has known that these guys to a large extent were the culprits of the latest financial and economic crisis. Devoted Ayn Randian Alan Greenspan “taking an objective view”? I’ll be dipped!
3 Is ideology only playing a role when it comes to fiscal policies? Hard to believe. As already Gunnar Myrdal argued 80 years go, ideology is all over all economists. Whether they are into monetary or fiscal policies is immaterial.
Here – again – we see a rather unbecoming self-congratulatory attitude, according to which all macroeconomists (allegedly) share the same basic mainstream neoclassical theory, so when we discuss and argue it’s only about which policy and model to choose. All the more or less licensed and shared models and policies are already there on the shelf and we just have to decide which one to pick for today’s monetary or fiscal problem solving. This is of course nothing but pure nonsense. Today’s macroeconomic debates are about so much more than selecting models for policy advice. And I think this is obvious for all that look further than the seminar room at the economics department at Oxford University.
A couple of days ago yours truly had a piece on why mainstream economists have tended to go astray in their tool-sheds and actually thereby have contributed to causing today’s economic crisis rather than to solving it.
J Bradford DeLong – professor of economics at Berkeley – writes on a related theme on Project Syndicate:
It is the scale of the catastrophe that astonishes me. But what astonishes me even more is the apparent failure of academic economics to take steps to prepare itself for the future. “We need to change our hiring patterns,” I expected to hear economics departments around the world say in the wake of the crisis.
The fact is that we need fewer efficient-markets theorists and more people who work on microstructure, limits to arbitrage, and cognitive biases. We need fewer equilibrium business-cycle theorists and more old-fashioned Keynesians and monetarists. We need more monetary historians and historians of economic thought and fewer model-builders …
Yet that is not what economics departments are saying nowadays.
Perhaps I am missing what is really going on. Perhaps economics departments are reorienting themselves after the Great Recession in a way similar to how they reoriented themselves in a monetarist direction after the inflation of the 1970’s. But if I am missing some big change that is taking place, I would like somebody to show it to me.
Perhaps academic economics departments will lose mindshare and influence to others – from business schools and public-policy programs to political science, psychology, and sociology departments. As university chancellors and students demand relevance and utility, perhaps these colleagues will take over teaching how the economy works and leave academic economists in a rump discipline that merely teaches the theory of logical choice.
Or perhaps economics will remain a discipline that forgets most of what it once knew and allows itself to be continually distracted, confused, and in denial. If that were that to happen, we would all be worse off.
Fick du för dåliga betyg? Höll inte uppsatsen måttet? Vågade någon tala om för dig att du gjort ett dåligt arbete eller inte ansträngt dig nog? Det gör inget! För nu för tiden kan alla slö, slappa, lata och likgiltiga komma undan det egna ansvaret med tidens egen deus ex machina – de är kränkta. Och simsalabim är problemet inte längre deras utan den som hade fräckheten att våga påtala bristerna och undermåligheten. O tempora, o mores!
One of the main functions of System 2 is to monitor and control thoughts and actions “suggested” by System 1 … For an example, here is a simple puzzle. Do not try to solve it but listen to your intuition:
A bat and ball cost $1.10.
The bat costs one dollar more than the ball.
How much does the ball cost?
A number came to your mind. The number, of course, is 10: 10 cents. The distinctive mark of this easy puzzle is that it evokes an answer that is intuitive, appealing, and wrong … The right answer is 5 cents.
Economics – and especially mainstream neoclassical economics – has as a science lost immensely in terms of status and prestige during the last years. Not the least because of its manifest inability to foresee the latest financial and economic crisis – and its lack of constructive and sustainable policies to take us out of the crisis.
We all know that many activities, relations, processes and events are uncertain and that the data do not unequivocally single out one decision as the only “rational” one. Neither the economist, nor the deciding individual, can fully pre-specify how people will decide when facing uncertainties and ambiguities that are ontological facts of the way the world works.
Neoclassical economists, however, have wanted to use their hammer, and so decided to pretend that the world looks like a nail. Pretending that uncertainty can be reduced to risk and construct models on that assumption have only contributed to financial crises and economic havoc.
How do we put an end to this intellectual cataclysm? How do we re-establish credence and trust in economics? Five changes are absolutely decisive.
(1) Stop pretending that we have exact and rigorous answers on everything. Because we don’t. We build models and theories and tell people that we can calculate and foresee the future. But we do this based on mathematical and statistical assumptions that often have little or nothing to do with reality. By pretending that there is no really important difference between model and reality we lull people into thinking that we have things under control. We haven’t! This false feeling of security was one of the factors that contributed to the financial crisis of 2008.
(2) Stop the childish and exaggerated belief in mathematics giving answers to important economic questions. Mathematics gives exact answers to exact questions. But the relevant and interesting questions we face in the economic realm are rarely of that kind. Questions like “Is 2 + 2 = 4?” are never posed in real economies. Instead of a fundamentally misplaced reliance on abstract mathematical-deductive-axiomatic models having anything of substance to contribute to our knowledge of real economies, it would be far better if we pursued “thicker” models and relevant empirical studies and observations.
(3) Stop pretending that there are laws in economics. There are no universal laws in economics. Economies are not like planetary systems or physics labs. The most we can aspire to in real economies is establishing possible tendencies with varying degrees of generalizability.
(4) Stop treating other social sciences as poor relations. Economics has long suffered from hubris. A more broad-minded and multifarious science would enrich today’s altogether too autistic economics.
(5) Stop building models and making forecasts of the future based on totally unreal micro-founded macromodels with intertemporally optimizing robot-like representative actors equipped with rational expectations. This is pure nonsense. We have to build our models on assumptions that are not so blatantly in contradiction to reality. Assuming that people are green and come from Mars is not a good – not even as a “successive approximation” – modeling strategy.
Enligt en Sifo-under-sökning beställd av Aftonbladet rasar nu förtroendet för center-ledaren Annie Lööf.
Nu har bara var femte väljare stort eller mycket stort förtroende för henne.
För ett år sedan var det nästan en tredjedel
Förvånande? Knappast – för få svenskar tänder på vad fru Lööf argumenterat och motionerat för på senare år:
Inför plattskatt (lägre skatt för höginkomsttagare)
Avskaffa lagen om anställningsskydd
Sälj ut SvT och SR
Sverige bör gå med i NATO
Bygg ut kärnkraften
Med en sådan politisk agenda är det naturligt att centerns alla väljare snart får plats på Stureplan.
Verkligheten börjar nu komma ikapp vår egen Margaret Thatcher. Det börjar dra ihop sig till ett uppvaknande ur den nyliberala mardröm denna politiska broiler och klyschmakare lyckats dra ner det en gång så stolta centerpartiet i …
Bedövande vackert och nästintill outhärdligt smärtsamt berörande.
Stefan Nilsson har skrivit musiken till filmatiseringen av Göran Tunströms episka mästerverk Juloratoriet.
Though I speak with the tongues of angels,
If I have not love…
My words would resound with but a tinkling cymbal.
And though I have the gift of prophesy…
And understand all mysteries…
and all knowledge…
And though I have all faith
So that I could remove mountains,
If I have not love…
I am nothing.
In the article The Scientific Model of Causality renowned econometrician and Nobel laureate James Heckman writes (emphasis added):
A model is a set of possible counterfactual worlds constructed under some rules. The rules may be laws of physics, the consequences of utility maximization, or the rules governing social interactions … A model is in the mind. As a consequence, causality is in the mind.
Even though this is a standard view among econometricians, it’s - at least from a realist point of view - rather untenable. The reason we as scientists are interested in causality is that it’s a part of the way the world works. We represent the workings of causality in the real world by means of models, but that doesn’t mean that causality isn’t a fact pertaining to relations and structures that exist in the real world. If it was only “in the mind,” most of us couldn’t care less.
The reason behind Heckman’s and most other econometricians’ nominalist-positivist view of science and models, is the belief that science can only deal with observable regularity patterns of a more or less lawlike kind. Only data matters and trying to (ontologically) go beyond observed data in search of the underlying real factors and relations that generate the data is not admissable. All has to take place in the econometric mind’s model since the real factors and relations according to the econometric (epistemologically based) methodology are beyond reach since they allegedly are both unobservable and unmeasurable. This also means that instead of treating the model-based findings as interesting clues for digging deepeer into real structures and mechanisms, they are treated as the end points of the investigation. Or as Asad Zaman puts it in Methodological Mistakes and Econometric Consequences:
Instead of taking it as a first step, as a clue to explore, conventional econometric methodology terminates at the discovery of a good fit … Conventional econometric methodology is a failure because it is merely an attempt to find patterns in the data, without any tools to assess whether or not the given pattern reflects some real forces which shape the data.
The critique put forward here is in line with what mathematical statistician David Freedman writes in Statistical Models and Causal Inference (2010):
In my view, regression models are not a particularly good way of doing empirical work in the social sciences today, because the technique depends on knowledge that we do not have. Investigators who use the technique are not paying adequate attention to the connection – if any – between the models and the phenomena they are studying. Their conclusions may be valid for the computer code they have created, but the claims are hard to transfer from that microcosm to the larger world …
Given the limits to present knowledge, I doubt that models can be rescued by technical fixes. Arguments about the theoretical merit of regression or the asymptotic behavior of specification tests for picking one version of a model over another seem like the arguments about how to build desalination plants with cold fusion and the energy source. The concept may be admirable, the technical details may be fascinating, but thirsty people should look elsewhere …
Causal inference from observational data presents may difficulties, especially when underlying mechanisms are poorly understood. There is a natural desire to substitute intellectual capital for labor, and an equally natural preference for system and rigor over methods that seem more haphazard. These are possible explanations for the current popularity of statistical models.
Indeed, far-reaching claims have been made for the superiority of a quantitative template that depends on modeling – by those who manage to ignore the far-reaching assumptions behind the models. However, the assumptions often turn out to be unsupported by the data. If so, the rigor of advanced quantitative methods is a matter of appearance rather than substance.
Econometrics is basically a deductive method. Given the assumptions (such as manipulability, transitivity, Reichenbach probability principles, separability, additivity, linearity etc) it delivers deductive inferences. The problem, of course, is that we will never completely know when the assumptions are right. Real target systems are seldom epistemically isomorphic to axiomatic-deductive models/systems, and even if they were, we still have to argue for the external validity of the conclusions reached from within these epistemically convenient models/systems. Causal evidence generated by statistical/econometric procedures like regression analysis may be valid in “closed” models, but what we usually are interested in, is causal evidence in the real target system we happen to live in.
Most advocates of econometrics and regression analysis want to have deductively automated answers to fundamental causal questions. Econometricians think – as David Hendry expressed it in Econometrics – alchemy or science? (1980) – they “have found their Philosophers’ Stone; it is called regression analysis and is used for transforming data into ‘significant results!’” But as David Freedman poignantly notes in Statistical Models: “Taking assumptions for granted is what makes statistical techniques into philosophers’ stones.” To apply “thin” methods we have to have “thick” background knowledge of what’s going on in the real world, and not in idealized models. Conclusions can only be as certain as their premises – and that also applies to the quest for causality in econometrics and regression analysis.
Without requirements of depth, explanations most often do not have practical significance. Only if we search for and find fundamental structural causes, can we hopefully also take effective measures to remedy problems like e.g. unemployment, poverty, discrimination and underdevelopment. A social science must try to establish what relations exist between different phenomena and the systematic forces that operate within the different realms of reality. If econometrics is to progress, it has to abandon its outdated nominalist-positivist view of science and the belief that science can only deal with observable regularity patterns of a more or less law-like kind. Scientific theories ought to do more than just describe event-regularities and patterns – they also have to analyze and describe the mechanisms, structures, and processes that give birth to these patterns and eventual regularities.
Christmas is here again – and with five kids in the family, blogging can’t have top priority. Regular blogging will be resumed late next week.
Winter is not my season, so I’m already longing for when the view from my library once again looks like this: