Robert Solow kicking Lucas and Sargent in the pants

16 August, 2015 at 20:34 | Posted in Economics | 5 Comments

McNees documented the radical break between the 1960s and 1970s. The question is: what are the possible responses that economists and economics can make to those events?

robert_solow4One possible response is that of Professors Lucas and Sargent. They describe what happened in the 1970s in a very strong way with a polemical vocabulary reminiscent of Spiro Agnew. Let me quote some phrases that I culled from thepaper: “wildly incorrect,” “fundamentally flawed,” “wreckage,” “failure,” “fatal,” “of no value,” “dire implications,” “failure on a grand scale,” “spectac- ular recent failure,” “no hope” … I think that Professors Lucas and Sargent really seem to be serious in what they say, and in turn they have a proposal for constructive research that I find hard to talk about sympathetically. They call it equilibrium business cycle theory, and they say very firmly that it is based on two terribly important postulates — optimizing behavior and perpetual market clearing. When you read closely, they seem to regard the postulate of optimizing behavior as self-evident and the postulate of market-clearing behavior as essentially meaningless. I think they are too optimistic, since the one that they think is self-evident I regard as meaningless and the one that they think is meaningless, I regard as false. The assumption that everyone optimizes implies only weak and uninteresting consistency conditions on their behavior. Anything useful has to come from knowing what they optimize, and what constraints they perceive. Lucas and Sargent’s casual assumptions have no special claim to attention …

It is plain as the nose on my face that the labor market and many markets for produced goods do not clear in any meaningful sense. Professors Lucas and Sargent say after all there is no evidence that labor markets do not clear, just the unemployment survey. That seems to me to be evidence. Suppose an unemployed worker says to you “Yes, I would be glad to take a job like the one I have already proved I can do because I had it six months ago or three or four months ago. And I will be glad to work at exactly the same wage that is being paid to those exactly like myself who used to be working at that job and happen to be lucky enough still to be working at it.” Then I’m inclined to label that a case of excess supply of labor and I’m not inclined to make up an elaborate story of search or misinformation or anything of the sort. By the way I find the misinformation story another gross implausibility. I would like to see direct evidence that the unemployed are more misinformed than the employed, as I presume would have to be the case if everybody is on his or her supply curve of employment. Similarly, if the Chrysler Motor Corporation tells me that it would be happy to make and sell 1000 more automobiles this week at the going price if only it could find buyers for them, I am inclined to believe they are telling me that price exceeds marginal cost, or even that marginal revenue exceeds marginal cost, and regard that as a case of excess supply of automobiles. Now you could ask, why do not prices and wages erode and crumble under those circumstances? Why doesn’t the unemployed worker who told me “Yes, I would like to work, at the going wage, at the old job that my brother-in-law or my brother-in-law’s brother-in-law is still holding”, why doesn’t that person offer to work at that job for less? Indeed why doesn’t the employer try to encourage wage reduction? That doesn’t happen either. Why does the Chrysler Corporation not cut the price? Those are questions that I think an adult person might spend a lifetime studying. They are important and serious questions, but the notion that the excess supply is not there strikes me as utterly implausible.

Robert Solow

No unnecessary beating around the bush here.

The always eminently quotable Solow says it all.

The purported strength of New Classical macroeconomics is that it has firm anchorage in preference-based microeconomics, and especially the decisions taken by inter-temporal utility maximizing “forward-loooking” individuals.

To some of us, however, this has come at too high a price. The almost quasi-religious insistence that macroeconomics has to have microfoundations – without ever presenting neither ontological nor epistemological justifications for this claim – has put a blind eye to the weakness of the whole enterprise of trying to depict a complex economy based on an all-embracing representative actor equipped with superhuman knowledge, forecasting abilities and forward-looking rational expectations. It is as if – after having swallowed the sour grapes of the Sonnenschein-Mantel-Debreu-theorem – these economists want to resurrect the omniscient walrasian auctioneer in the form of all-knowing representative actors equipped with rational expectations and assumed to somehow know the true structure of our model of the world.

That anyone should take that kind of stuff seriously is totally and unbelievably ridiculous. Or as Solow has it:

4703325Suppose someone sits down where you are sitting right now and announces to me that he is Napoleon Bonaparte. The last thing I want to do with him is to get involved in a technical discussion of cavalry tactics at the battle of Austerlitz. If I do that, I’m getting tacitly drawn into the game that he is Napoleon. Now, Bob Lucas and Tom Sargent like nothing better than to get drawn into technical discussions, because then you have tacitly gone along with their fundamental assumptions; your attention is attracted away from the basic weakness of the whole story. Since I find that fundamental framework ludicrous, I respond by treating it as ludicrous – that is, by laughing at it – so as not to fall into the trap of taking it seriously and passing on to matters of technique.

Robert Solow

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  1. In his post FRB of Boston conference comments, Solow said some very sensible things at a time when economists almost seemed to be in panic about economic theory not being able to explain the stagflation of the 1970s. Frank Morris’ opening remarks to the conference gave a sense of that disquiet and uneasiness. The early 1970s were tumultuous times – the US dollar coming off gold, the oil shocks, the end of the Vietnam war, the hardening of cold war rhetoric. The Phillips curve conundrums that Lucas and Sargent built RE upon almost seems a straw man, an argument they pushed too far for too long. And the paper they delivered at the conference, it seems to me, was a low point in the development of economic theory in that their attack on Keynesianism was overly brutal and replete with an ugly hubris. Now we have Romer attempting to write a history of the period which almost has Solow to blame for the fact that Lucas and Sargent went off the rails, an argument I find too incredible. Furthermore, Romer’s discussion around mathiness and scientific integrity in many ways misses the point, I believe. He ignores the impact ideology and partisanship had on the pattern of analysis that Lucas and Sargent adopted and developed. It was also clear that Lucas and Sargent believed they had not yet, at that point in time, developed their ideas to a point that had any usefulness from a policy perspective (see Morris’s opening remarks for comments about having to wait ten years for the work of Lucas and Sargent to bear policy fruit).

    • Like Henry, I find myself reading Romer’s attempt to write a history, in which Solow is to blame for driving Lucas and Sargent off the rails, with a certain incredulity. (http://paulromer.net/solows-choice/)
      .
      If Romer seems to ignore the ideology and partisanship driving the pattern of analysis Lucas and Sargent adopted and developed, it is because Romer wishes to retain that pattern. Romer’s peroration is ecumenical praise for the signature projects of both Solow and Lucas & Sargent:
      .
      “. . . we can learn from history. What it teaches us is that economists should have faith that the social process we call science will get to the right answers and should be patient enough to let that process work.
      .
      “The deep insight of the Samuelson program was that simple/silly applied general equilibrium models are a powerful way for economists to codify and exchange ideas. Solow deserves credit for showing their power in the theory of growth. Lucas deserves credit for showing their power in the theory of economic fluctuations.
      .
      “Most first-draft SAGE [simple/silly applied general equilibrium models] models that economists explore will turn out to be wrong. Knowledge accumulates through a process of being silly enough to be precise, and then culling out the silly/precise models that do not fit the facts well enough. The process is messy and takes its time, but it works.”
      .
      As Romer goes on and on, his thesis becomes murkier and murkier.

  2. The moral of the story
    Comment on ‘Robert Solow kicking Lucas and Sargent in the pants’
    .
    Lucas et al. diagnosed the ruling paradigm of the 1970s with a crushing curse “wildly incorrect, fundamentally flawed, wreckage, failure, fatal, of no value, dire implications, failure on a grand scale, spectacular recent failure, no hope.”
    .
    This is roughly what Keynes said about the ruling paradigm of the 1930s.
    .
    Both diagnoses were spot on. Now Solow tells us roughly the same about the New Classical paradigm. He, too, is spot on.
    .
    Let us now synthesize the recurring small light bulb moments over the last 200 years to one gigantic light bulb moment. All theories/models that contain at least one of the following concepts fall under the Lucas curse: utility, expected utility, rationality/bounded rationality, equilibrium, constrained optimization, well-behaved production functions/fixation on decreasing returns, supply/demand functions, simultaneous adaptation, rational expectation, total income=value of output/I=S, and ergodicity. All these items are nonentities like the perpetual motion machine, unicorns, or dancing-angels-on-a-pinpoint.
    .
    The first thing to notice is that Solow himself employed nonentities. Therefore, his growth theory falls also under the Lucas curse. Let us make it short: economics is a failed science, there is nothing to choose. This is the situation: the critique of the at any one time ruling paradigm has always been spot on, but the proposed alternative has not been much better or even worse. This explains the secular stagnation of economics.
    .
    “The moral of the story is simply this: it takes a new theory, and not just the destructive exposure of assumptions or the collection of new facts, to beat an old theory.” (Blaug, 1998, p. 703)
    .
    The new economic paradigm must not contain any of the cursed nonentities enumerated above (2014). That much is clear: in the history of economic thought pants kicking has never lead to real progress. Solow is a case in point.
    .
    Egmont Kakarot-Handtke
    .
    References
    Blaug, M. (1998). Economic Theory in Retrospect. Cambridge: Cambridge University Press, 5th edition.
    Kakarot-Handtke, E. (2014). Economics for Economists. SSRN Working Paper
    Series, 2517242: 1–29. URL
    http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2517242

  3. Like Bruce, I find that Romer’s remaking of intellectual history, together with the New Keynesian agenda, pernicious. Lucas and Sargent is garbage, but Romer seems to be the one making the case that centering the discipline around nonsensical models helps us understand how the world actually works, rather than what it really does – distracts us from carefully building up our understanding from historical and other observable fact.

  4. An extract from a letter written by Lucas after the FRB of Boston conference to Herschel Grossman appearing in a paper by Da Silva puts a clear complexion on the situation. Lucas writes:

    “Tom and I were trying to jog people into an awareness that the cozy intellectual world of the neoclassical synthesis has gone the way of Queen Victoria’s.”

    (The Establishment of Robert E. Lucas Jr.’s Macroeconomics of Equilibrium in the 1970s – D. F. R. Da Silva – March 2014 – p.18)

    Lucas clearly admits he was out to provoke a reassessment by the adherents of the Neoclassical Synthesis.

    The agent provocateur here is Lucas, not Romer’s Solow.


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