Modern macroeconomics — an intellectually lazy ideology

6 April, 2015 at 15:10 | Posted in Economics | 4 Comments

I would defend using the assumption of rational choice as long as one realises that it is not a description of reality.

But there is one area where for 30 years economists – and others – have been making that mistake. That is unfortunately, of course, in the financial markets. Practitioners and policy makers acted as if the strong form of the Efficient Markets Hypothesis held true – in other words that prices instantly reflect all relevant information about the future – even though this evidently defies reality …

spock_in_2012_by_rabittooth-d4p2io9I think an honest conventionally-trained economist has to at least acknowledge that we grew intellectually lazy about this. Although we all knew at some level that the rational choice assumption was being made to bear too much weight, very few economists openly challenged its everyday use in justifying public policy decisions. Very few of us put this weight on it in our own work. But not all that many economists challenged its pervasive use in the public policy world …

The financial and economic crisis also spells a crisis for certain areas of economics, or approaches to economics. Financial economics and macroeconomics are particularly vulnerable. They are the subject areas where the consequences of the standard assumptions have been most damaging, because they are actually least valid. Financial market traders are not remotely like Star Trek’s Mr Spock, making rational calculations unaffected by emotion or by the decisions of other people. Macroeconomics – the study of how millions of individual decisions aggregate into economy-wide measures – is essentially ideological. How macroeconomists answer a question like ‘What will be the effect of cutting the budget deficit on growth next year?’ depends on their political views. This is not remotely a scientific area of the discipline. The consensus about macroeconomics during what’s been described as ‘the Great Moderation’ of the 1990s has entirely broken down.

Diane Coyle

4 Comments »

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  1. Interesting article. You bring up some very good points. I am curious on how would you approach the study of macroeconomics?

  2. “I would defend using the assumption of rational choice as long as one realises that it is not a description of reality.” Diane Coyle
    .
    Famous last words!?
    .
    Coyle’s litany of criticisms seem to me to be both conventional and weak-minded — as much an unintended illustration of the problems as what it purports to be, an informed but optimistic acknowledgment of those problems. Her half-clever bon mot — “Financial market traders are not remotely like Star Trek’s Mr Spock, making rational calculations unaffected by emotion or by the decisions of other people.” — is a popularizer’s hack, introducing a bit of popular culture to which her audience can relate in a light-hearted way, but doing so in a negative proposition that commits her to no affirmative position. In her talk (in a part not quoted in the OP), she scorns the so-called “strong-form” of the efficient markets hypothesis as defying reality in its presumption of instantaneous incorporation of information, but acknowledges, in a footnote, the consistency of the so-called “weak-form” with experience.
    .
    It is a clever bit of hackery to fashion what she presents as her sharpest criticism in this diplomatic formula, the over-reliance on an assumption of rational choice — a reliance she tactfully allows would be fine, if the practitioner were sufficiently modest and self-aware. Flattering the narcissism of economists should not be mistaken for understanding, let alone accepting, substantive criticism.

  3. Lazy or stupid or both?
    Comment on ‘Modern macroeconomics — an intellectually lazy ideology’
    .
    Diane Coyle writes:
    “I think an honest conventionally-trained economist has to at least acknowledge that we grew intellectually lazy about this [the assumption of rational choice].” (See intro)
    .
    This statement implies that the representative economist is capable of thinking but only too lazy to apply his full capacities. An alternative explanation for the manifest scientific failure of economists could be that they are substandard thinkers.
    .
    Students in any scientific discipline are expected to find out whether their teacher’s theory is true or false or incomplete. Growth of knowledge is what science is all about. Hence, the acceptance of basic tenets of conventional economics is strongly indicative of a lack of scientific acumen. From a student who has accepted utility maximization, rational choice, or supply-demand-equilibrium as an explanation no contribution to real scientific progress is to be expected.
    .
    At the moment economics is the mindless perpetuation of proto-scientific stuff. An honest conventionally-trained economist has to at least ask himself how it could happen that he and other seemingly intelligent persons could ever accept the green cheese assumptionism and the logical defects of econ101.
    .
    The wonder of economics is the large number of generations of well-trained students that have faithfully recycled intellectual junk.
    .
    In the final analysis it is not a question of honesty but of scientific intuition to realize that the present state of economics calls for a paradigm shift* and not for another ridiculous discussion about efficient markets.
    .
    Egmont Kakarot-Handtke
    .
    * for cross-references see
    http://axecorg.blogspot.de/2015/02/essentials-cross-references.html

  4. Lazy for sure.

    Everybody with a PHD in economics should be waterboarded with a course in financial accounting.


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