We are the 100%

19 Jan, 2015 at 10:44 | Posted in Economics | 1 Comment

we are the 100%

Debating “modern” macroeconomics I often get the feeling that mainstream economists when facing anomalies think that there is always some further “technical fix” that will get them out of the quagmire. But are these elaborations and amendments on something basically wrong really going to solve the problem? I doubt it. Acting like the baker’s apprentice who, having forgotten to add yeast to the dough, throws it into the oven afterwards, simply isn’t enough.

When criticizing the basic workhorse DSGE model for its inability to explain involuntary unemployment, DSGE defenders maintain that later elaborations — especially newer search models — manage to do just that. I strongly disagree.

One of the more conspicuous problems with those “solutions,” is that they — as e.g. Pissarides’ ”Loss of Skill during Unemployment and the Persistence of Unemployment Shocks” QJE (1992) — are as a rule constructed without seriously trying to warrant that the model immanent assumptions and results are applicable in the real world. External validity is more or less a non-existent problematique sacrificed on the altar of model derivations. This is not by chance. For how could one even imagine to empirically test assumptions such as Pissarides’ ”model 1″ assumptions of reality being adequately represented by ”two overlapping generations of fixed size”, ”wages determined by Nash bargaining”, ”actors maximizing expected utility”,”endogenous job openings”, ”jobmatching describable by a probability distribution,” without coming to the conclusion that this is — in terms of realism and relevance — nothing but nonsense on stilts?

1 Comment

  1. Lucas was right to suggest that macroeconomics needs to be based upon the actions of the underlying. (The old Keynes macroeconomics made the mistake of believing the aggregate without reference to the underlying, which ended up being its downfall. I have serious misgivings about the resurrection of that concept in some Post Keynesian works) The problem was that the neo-classicals then invented an underlying that has no connection at all with reality and aggregation functions that are literally impossible.

    It is, essentially, a religious belief.

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