New classical macroeconomics – science without aspirations
6 March, 2013 at 15:23 | Posted in Economics | 1 CommentThe problem is that the new theories, the theories embedded in general equilibrium dynamics of the sort that we know how to use pretty well now—there’s a residue of things they don’t let us think about.
They don’t let us think about the U.S. experience in the 1930s or about financial crises and their real consequences in Asia and Latin America. They don’t let us think, I don’t think, very well about Japan in the 1990s. We may be disillusioned with the Keynesian apparatus for thinking about these things, but it doesn’t mean that this replacement apparatus can do it either. It can’t. In terms of the theory that researchers are developing as a cumulative body of knowledge—no one has figured out how to take that theory to successful answers to the real effects of monetary instability. Some people just deny that there are real effects of monetary instability, but I think that is just a mistake. I don’t think that argument can be sustained.
Isn’t that like having seismological and meteorological sciences that can’t help us explain or predict earthquakes or hurricanes? Maybe we should have just a little higher aspiration level as scientists? After all, if uncertainty is all around in the economy and – as Lucas has said – “in cases of uncertainty, economics reasoning will be of no value,” then why should be bother with economics at all? Just wondering …
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The comparison between meteorology and economic forecasting is interesting, especially with the development of climate change models. Accurate weather forecasting of specific conditions is impossible beyond a few days, because weather conditions are so dependent on small changes in initial states, however, understanding of the path of hurricanes once they form has advanced considerably. Looking at it another way, to say it will be hot in Texas in August is an accurate statistically based statement, but to accurately predict the temperature several month’s hence based on the current temperature is essentially impossible.
The development of climate models is a major achievement that has been the result of a massive international effort in large scale analog modeling.
As discussed here, http://somewhatlogically.com/?p=785 quoting from an article on climate change from the American Institute of Physics, “Before they could understand how climates change, scientists would have to understand the basic principles for how any complicated system can change. Early studies, using highly simplified models, could see nothing but simple and predictable behavior, either stable or cyclical. But in the 1950s, work with slightly more complex physical and computer models hinted that even quite simple systems could lurch in unexpected ways. During the 1960s, computer experts working on weather prediction realized that such surprises were common in systems with realistic feedbacks.”
The link also contains references to the fascinating work on ‘gravity waves’ (a meteorological expression) which shows how a small pulse in the jet stream over the Pacific can cause massive snow storms in a swath of the east coast or giant hail stones in Texas. Sort of like how the flap of a piece of paper by a bond trader in London can cause massive shifts in the value of a bank in New York. Rather humbling when one considers that we know far more, with much more precision, about the physical laws governing weather systems than we know about the mechanisms of markets.
Comment by JRHulls— 6 March, 2013 #