Wren-Lewis drivelling on macroeconomics

3 Jul, 2012 at 13:39 | Posted in Economics | 1 Comment

Back in 1938 Keynes wrote in a letter to Harrod:

Economics is a science of thinking in terms of models joined to the art of choosing models which are relevant to the contemporary world. It is compelled to be this, because, unlike the typical natural science, the material to which it is applied is, in too many respects, not homogeneous through time. The object of a model is to segregate the semi-permanent or relatively constant factors from those which are transitory or fluctuating so as to develop a logical way of thinking about the latter, and of understanding the time sequences to which they give rise in particular cases … Good economists are scarce because the gift for using “vigilant observation” to choose good models, although it does not require a highly specialised intellectual technique, appears to be a very rare one.

I came to think of this passage when I read “New Keynesian” macroeconomist Simon Wren-Lewis’s blog today. In a rather amazing post he writes:

The first, and probably critical, point to make is that when I and most others talk about antagonistic macroeconomic debates, we are referring to debates over current macroeconomic policy rather than the details of some macroeconomic research. The second point is that New Keynesian theory builds on Real Business Cycle foundations, and is therefore in theoretical terms not an alternative to it.

The current reversion of macro back into schools of thought relates to policy advice. It’s about which models we select, and which we reject, when telling governments what to do. So the interesting question that arises is how this selection process takes place.

For a number of reasons I’ve talked about elsewhere, the microfoundation of macro and DSGE modelling downplays the role of evidence. More specifically, it allows modellers to be selective about which evidence they focus on (the ‘puzzle’). This may be fine for writing papers, but when it comes to model selection to tackle policy problems it is weak. And this weakness lets in the ideological factors I talked about.

Again this self-congratulatory attitude. All macroeconomists share the same (mainstream neoclassical) basic 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 problem solving.

This is of course nothing else but pure drivel!

People like Hyman Minsky, Michal Kalecki, Sidney Weintraub, Johan Åkerman, Gunnar Myrdal, Paul Davidson, Fred Lee, Axel Leijonhufvud, Steve Keen – and yours truly – do not share any theory or models with Real Business Cycle theorists or “New Keynesians”. 

And to say that macroeconomic debates are just about selecting models for policy advice is not true, at least not if you look further than the seminar room at the economics department at Oxford University.

But it’s nice to see that Wren-Lewis explicitly acknowledges what I have argued for many years now – “New Keynesian” macroeconomic models are at heart based on the modeling strategy of RBC and DSGE – representative agents, rational expectations, equilibrium and all that. And yes, they do have some minor idiosyncracies like “menu costs” and “price rigidities”. But the differencies are not really that fundamental. The basic model assumptions are the same.

“New Keynesianism” is a gross misnomer. The macroeconomics of people like Greg Mankiw and Simon Wren-Lewis has a lot to do with Robert Lucas and Thomas Sargent – and very little, or next to nothing, to do with the founder of macroeconomics, John Maynard Keynes.

If  the “New Keynesian” macoeconomic models of  Wren-Lewis and others “builds on Real Business Cycle foundations”, they actually regularly assume representative actors, rational expectations, market clearing and equilibrium. But if  we know that real people and markets cannot be expected to obey these assumptions, the warrants for supposing that conclusions or hypothesis of causally relevant mechanisms or regularities can be bridged, are obviously non-justifiable. Macroeconomic theorists – regardless of being “New Monetarist”, “New Classical” or ”New Keynesian” – ought to do some ontological reflection and heed Keynes’ warnings on using thought-models in economics:

The object of our analysis is, not to provide a machine, or method of blind manipulation, which will furnish an infallible answer, but to provide ourselves with an organized and orderly method of thinking out particular problems; and, after we have reached a provisional conclusion by isolating the complicating factors one by one, we then have to go back on ourselves and allow, as well as we can, for the probable interactions of the factors amongst themselves. This is the nature of economic thinking. Any other way of applying our formal principles of thought (without which, however, we shall be lost in the wood) will lead us into error.

As all students of economics know, time is limited. Given that, there has to be better ways to optimize its utilization than spending hours and hours working through or constructing irrelevant “New Keynesian” RBC and DSGE macroeconomic models. I would rather recommend my students allocating their time into constructing better, real and relevant macroeconomic models – models that really help us to explain and understand reality.

1 Comment

  1. Tack Lars!Det finns ännu lite ljus i mörkret!Minns en gång på 1980-90 tal då inte fanns en förbaskad själ i detta land som stod upp för gammal hederlig Keynsianism!
    (Är vi Trälsinnade som gamle Strindberg sa Lars)Nåväl vi var några.Roland Spånt på TCO o Sven Grassman och några flera. Kulturskymning rådde!Och feghet från de som visste men inte,inte handlade efter
    sitt samvete!Men nu är det allvar.Vill samma människor som vet men inte handlar,ursäkta sig igen ?Nu är de allvar det finns inget sätt att skylla ifrån sig.Vi är några som läst historia i gamla “enhetsskolan” och vi vet att Bruning-Hayek etc. politik leder oss in i krig,depressioner ,kaptital förstörelse ,förödelse av till med en normal kapitalistik handels cykel enligt deras egna uträkningar tom!Fan om man inte får lära sig detta i en normal skola idag!
    Må gott Lars!

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