Macroeconomic ad hocery

4 August, 2015 at 08:31 | Posted in Economics | 2 Comments

adhocRobert Lucas is well-known for condemning everything that isn’t microfounded rational expectations macroeconomics as “ad hoc” theorizing.

But instead of rather unsubstantiated recapitulations, it would be refreshing and helpful  if the Chicago übereconomist — for a change — endeavoured to clarify just what he means by “ad hoc.”

The standard meaning — OED — of the term is “for this particular purpose.” But in the hands of New Classical–Real Business Cycles–New Keynesians it seems to be used more to convey the view that modeling with realist and relevant assumptions is somehow equivalent to basing models on “specifics” rather than the “fundamentals” of individual intertemporal optimization and rational expectations.

This is of course pure nonsense, simply because there is no — as yours truly has argued at length e. g. here — macro behaviour that consistently follows from the NC–RBC–NK microfoundations. The only ones that succumb to ad hoc assumptions here are macroeconomists like Lucas et consortes, who believe that macroeconomic behaviour can be adequately analyzed with a fictitious rational-expectations-optimizing-robot-imitation-representative-agent.

And don’t get me wrong on this. I like good fiction. But that doesn’t include New Classical–Real Business Cycles–New Keynesian fiction. That’s just bad fiction.

2 Comments »

RSS feed for comments on this post. TrackBack URI

  1. Lucas’s humbug
    Comment on ‘Macroeconomic ad hocery’
    .
    “Whether we like it or not, we have no philosopher’s stone for touching quickly a humbug.” (Georgescu-Roegen, 1971, p. 67)
    .
    In the deeper meaning, ad hoc is the opposite of science. For example: you have an explanation why and how the apple falls, why and how the moon circles the earth and when comets reappear. The beauty of science is that Newton could demonstrate that all these phenomena, and vastly more, can be derived from a handful of elementary premises.
    .
    “Could all the phaenomena of nature be deduced from only thre [sic] or four general suppositions there might be great reason to allow those suppositions to be true.” (Newton, quoted in Westfall, 2008, p. 642)
    .
    In contradistinction, ad hocery is — in the most extreme case — to construct as many incoherent models as there are economic phenomena. This is, by and large, what the different economic schools actually do.
    .
    Newton stated his ‘general suppositions’ at the very first pages of Principia as axioms. The classical economists understood this methodological procedure very well.
    .
    “To Senior belongs the signal honor of having been the first to make the attempt to state, consciously and explicitly, the postulates that are necessary and sufficient in order to build up … that little analytic apparatus commonly known as economic theory, or to put it differently, to provide for it an axiomatic basis.” (Schumpeter, 1994, p. 575)
    .
    Orthodoxy, too, subscribed to this procedure.
    “As with any Lakatosian research program, the neo-Walrasian program is characterized by its hard core, heuristics, and protective belts. Without asserting that the following characterization is definitive, I have argued that the program is organized around the following propositions: HC1 economic agents have preferences over outcomes; HC2 agents individually optimize subject to constraints; HC3 agent choice is manifest in interrelated markets; HC4 agents have full relevant knowledge; HC5 observable outcomes are coordinated, and must be discussed with reference to equilibrium states.By definition, the hard-core propositions are taken to be true and irrefutable by those who adhere to the program. “Taken to be true” means that the hard-core functions like axioms for a geometry, maintained for the duration of study of that geometry.” (Weintraub, 1985, p. 147)
    .
    Now, it should be pretty obvious what ad hoc means: every model that cannot be logically derived from HC1 to HC5 is ad hoc.
    .
    Thus far Lucas’s argument is cogent and fully in harmony with what Heterodoxy says: “… nothing can be derived from an analytical model that is not logically contained in its axiomatic basis.” (Georgescu-Roegen, 1979, p. 321)
    .
    Lucas’s logical blunder consists first and foremost in the claim that Orthodoxy’s hard core is an acceptable formal basis. It is not.
    .
    “In fact, the history of every science, including that of economics, teaches us that the elementary is the hotbed of the errors that count most.” (Georgescu-Roegen, 1970, p. 9)
    .
    There cannot be a microfoundation of macroeconomics because the axiomatic foundation of micro itself is methodologically unacceptable.
    .
    The scientific dilettantism of Lucas in particular and of the representative economist in general consists in not intuitively realizing that there is no such thing as a behavioral axiom. However, this becomes crystal-clear not before one takes objective axioms as the formal foundation of all of economics (2014).
    .
    All of microeconomics is false because the axiomatic hard core is false. This is, ultimately, the reason why the microfoundation project is proto-scientific humbug.
    .
    Egmont Kakarot-Handtke
    .
    References
    Georgescu-Roegen, N. (1970). The Economics of Production. American Economic
    Review, Papers and Proceedings, 60(2): 1–9. URL http://www.jstor.org/stable/
    1815777.
    Georgescu-Roegen, N. (1971). The Entropy Law and the Economic Process. Cambridge,
    MA: Cambridge University Press.
    Georgescu-Roegen, N. (1979). Methods in Economic Science. Journal of Economic
    Issues, 13(2): 317–328. URL http://www.jstor.org/stable/4224809.
    Kakarot-Handtke, E. (2014). Objective Principles of Economics. SSRN Working
    Paper Series, 2418851: 1–19. URL
    http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2418851.
    Schumpeter, J. A. (1994). History of Economic Analysis. New York, NY: Oxford
    University Press.
    Weintraub, E. R. (1985). Joan Robinson’s Critique of Equilibrium: An Appraisal.
    American Economic Review, Papers and Proceedings, 75(2): 146–149. URL
    http://www.jstor.org/stable/1805586.
    Westfall, R. S. (2008). Never at Rest. A Biography of Isaac Newton. Cambridge:
    Cambridge University Press, 17th edition.

  2. Romer talks a lot about the ‘scientific method’. But in my mind he does not really convincingly define what that really is. One thing for sure, it is not this:

    “Read Mike Woodford or Gauti Eggertsson or Ken Rogoff when he’s doing theory: they all take pains to provide an intuition behind their models,” (Krugman)

    Of course they provide some intuition. But what if it is not true and ignores the evidence? Then surely it is as meaningless as an unintuitive explanation?

    What the above method does is get an explanation to fit the model – as a simple example, so you can get two diagonal lines in the ISLM model.

    But a scientific method does the reverse – it achieves an explanation by meticulously piecing together the evidence. That means a lot of qualitative and quantitative historical documentation. Theories and models emanating from this investigation can be referred to, but only usefully so if they are robust and produce consistently accurate forecasts. But the crucial thing is that theories and models emerge from looking at the historical evidence. You never let a theory or model dictate the terms of your analysis.

    Unfortunately, whether Krugman, Romer or Woodford, this is not what goes on.


Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

Create a free website or blog at WordPress.com.
Entries and comments feeds.