Macroeconomic aspirations

29 Oct, 2014 at 17:00 | Posted in Economics | 5 Comments

Oxford macroeconomist Simon Wren-Lewis has a post up on his blog on the use of labels in macroeconomics:

EPAreadlabelLabels are fun, and get attention. They can be a useful shorthand to capture an idea, or related set of ideas … Here are a couple of bold assertions, which I think I believe, and which I will try to justify. First, in academic research terms there is only one meaningful division, between mainstream and heterodox … Second, in macroeconomic policy terms I think there is only one meaningful significant division, between mainstream and anti-Keynesians …

So what do I mean by a meaningful division in academic research terms? I mean speaking a different language. Thanks to the microfoundations revolution in macro, mainstream macroeconomists speak the same language. I can go to a seminar that involves an RBC model with flexible prices and no involuntary unemployment and still contribute and possibly learn something.

Wren-Lewis seems to be überjoyed by the fact that using the same language as real business cycles macroeconomists he can “possibly learn something” from them.

Hmm …

Wonder what …

I’m not sure Wren-Lewis uses the same “language” as James Tobin, but he’s definitely worth listening to:

They try to explain business cycles solely as problems of information, such as asymmetries and imperfections in the information agents have. Those assumptions are just as arbitrary as the institutional rigidities and inertia they find objectionable in other theories of business fluctuations … I try to point out how incapable the new equilibrium business cycles models are of explaining the most obvious observed facts of cyclical fluctuations … I don’t think that models so far from realistic description should be taken seriously as a guide to policy … I don’t think that there is a way to write down any model which at one hand respects the possible diversity of agents in taste, circumstances, and so on, and at the other hand also grounds behavior rigorously in utility maximization and which has any substantive content to it.

Arjo Klamer, The New Classical Mcroeconomics: Conversations with the New Classical Economists and their  Opponents,Wheatsheaf Books, 1984

And contrary to Wren-Lewis I don’t think the fact that “thanks to the microfoundations revolution in macro, mainstream macroeconomists speak the same language,” takes us very far. Far better than having a common “language” is to have a well-founded, realist and relevant theory:

Microfoundations for macroeconomics are fine in principle—not indispensable, but useful. The problem is that what passes for microfoundations in the universe of orthodox macro is crap …

realityIt’s nothing more than robotic imitation of teaching exercises to improve math skills, without any consideration for such mundane matters as empirical verisimilitude. I will mention three crushing faults, each sufficient by itself to blow a wide hole in a supposedly useful model …

It is rife with anomalies (see “behavioral economics”), and, most important, it is oblivious to the last several decades of work in psychology, evolutionary biology, neuropsychology, organization theory—all the disciplines where people study behavior in a scientific way …

There are no interaction effects to generate multiple equilibria in the microfoundations macro theorists use. Every individual, firm and product is an isolated atom, floating uninterrupted through space until it bumps into another such atom in the marketplace. Social psychology, ecology, nonconvex production and consumption spaces?  Forget about it …

Microfoundations means general equilibrium theory, but the flavor it uses is from the mid-1950s. The Sonnenschein-Debreu-Mantel demonstration (update to the 1970s)  that initial conditions and out-of-equilibrium trades alter the equilibrium itself has turned GET upside down.

Notice that I haven’t mentioned the standard heterodox criticisms of representative agents and ergodicity. You can add those if you want …

Like I said, their microfoundations are crap.

Peter Dorman

Macroeconomists have to have bigger aspirations than speaking the same “language.” Rigorous models lacking relevance is not to be taken seriously. Truly great macroeconomists aspire to explain and understand the fundamentals of modern economies. As did e. g. John Maynard Keynes and Michal Kalecki.

5 Comments

  1. Wren-Lewis is, unfortunately, now part of the problem.

    ISTM that the real divide in macroeconomists is between those that think jiggling interest rates around achieves something and those that don’t.

  2. No. Micro foundations are not fine in principal.

    The micro foundations of General Relativity should be Quantum Mechanics. But it doesn’t work. General Relativity has no micro foundations. Should we scrap our GPS systems that rely on the truth of General Relativity in order to function?

    The response to the Lucas Critique in economics is absolutely mystifying when one steps back and thinks about it.

    It’s one of the reasons that even you heterodox clowns are wrong most of the time.

    Go out to the field. Do a Jane Goodall of economics.

  3. The micro foundations of genetics are DNA. Should Gregor Mendel have stopped experimenting with bean plants?

  4. And the Lucas Critique is an empirical claim about the interaction between academics and actual market participants, right? Any body ever bother to look for evidence? And if their can be no evidence, why does anyone care about it?

  5. Microfoundations is a silly attempt to prove that the Austrian School isn’t nuts when they claim as their prime postulate, “They is no such thing as an economy; only individual financial transactions.” In other words, macroeconomics doesn’t exist; now let me tell you about macroeconomics. Except when I came back with, “There’s no such thing as inflation; only individual price increases.” Then they all started screeching.


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