The microfoundationalist illusions of Yates & Wren-Lewis17 December, 2013 at 20:42 | Posted in Economics | 7 Comments
In a blogpost the other day Tony Yates argues that microfoundations do have merits:
The merit in any economic thinking or knowledge must lie in it at some point producing an insight, a prediction, a prediction of the consequence of a policy action, that helps someone, or a government, or a society to make their lives better.
Microfounded models are models which tell an explicit story about what the people, firms, and large agents in a model do, and why. What do they want to achieve, what constraints do they face in going about it? My own position is that these are the ONLY models that have anything genuinely economic to say about anything.
And yesterday Simon Wren-Lewis — non-surprisingly — says he basically agrees:
microfoundations have done a great deal to advance macroeconomics. It is a progressive research program, and a natural way for macroeconomic theory to develop. That is why I work with DSGE models.
The one economist/econometrician/methodologist who has thought most on this issue — writing om microfoundations for now more than 25 years — is without any doubts Kevin Hoover. It’s actually quite interesting to compare his qualified and methodologically founded assessment on the representative-agent-rational-expectations microfoundationalist program with the more or less apologetic views of Yates and Wren-Lewis:
Given what we know about representative-agent models, there is not the slightest reason for us to think that the conditions under which they should work are fulfilled. The claim that representative-agent models provide microfundations succeeds only when we steadfastly avoid the fact that representative-agent models are just as aggregative as old-fashioned Keynesian macroeconometric models. They do not solve the problem of aggregation; rather they assume that it can be ignored. While they appear to use the mathematics of microeconomis, the subjects to which they apply that microeconomics are aggregates that do not belong to any agent. There is no agent who maximizes a utility function that represents the whole economy subject to a budget constraint that takes GDP as its limiting quantity. This is the simulacrum of microeconomics, not the genuine article …
[W]e should conclude that what happens to the microeconomy is relevant to the macroeconomy but that macroeconomics has its own modes of analysis … [I]t is almost certain that macroeconomics cannot be euthanized or eliminated. It shall remain necessary for the serious economist to switch back and forth between microeconomics and a relatively autonomous macroeconomics depending upon the problem in hand.
So next time these guys want to write atrocities like Wren-Lewis’s
Let’s take a very basic example. Suppose in the real world some consumers are credit constrained, while others are infinitely lived intertemporal optimisers. A microfoundation modeller assumes that all consumers are the latter
a visit to Dr Hoover is recommended!
Added November 18: And as part of the ongoing debate, Noah Smith contributes with the following tirade on his blog:
I think microfoundations are a great idea! I think they’re the dog’s bollocks! I think that macro time-series data is so uninformative that microfoundations are our only hope for really figuring out the macroeconomy. I think Robert Lucas was 100% on the right track when he called for us to use microfounded models.
Hmm … To me this is like saying “OK, to get our economic model-machine going we have to assume that people are hyper-rational robot-imitations from Mars. But these guys aren’t green, as you say, but blue!” That doesn’t seem to be the right approach to tackle the problem.