Is macroeconomics for real?

19 Nov, 2015 at 12:10 | Posted in Economics | 5 Comments

861cf344575acd50ed67b35d88615f2318610d8148e8c471ad10ca0132cda91eEmpirically, far from isolating a microeconomic core, real-business-cycle models, as with other representative-agent models, use macroeconomic aggregates for their testing and estimation. Thus, to the degree that such models are successful in explaining empirical phenomena, they point to the ontological centrality of macroeconomic and not to microeconomic entities … At the empirical level, even the new classical representative-agent models are fundamentally macroeconomic in content …

The nature of microeconomics and macroeconomics — as they are currently practiced — undermines the prospects for a reduction of macroeconomics to microeconomics. Both microeconomics and macroeconomics must refer to irreducible macroeconomic entities.

Kevin Hoover

Kevin Hoover has been writing on microfoundations for now more than 25 years, and is beyond any doubts the one economist/econometrician/methodologist who has thought most on the issue. It’s always interesting to compare his qualified and methodologically founded assessment on the representative-agent-rational-expectations microfoundationalist program with the more or less apologetic views of freshwater economists like Robert Lucas:

hoovGiven what we know about representative-agent models, there is not the slightest reason for us to think that the conditions under which they should work are fulfilled. The claim that representative-agent models provide microfundations succeeds only when we steadfastly avoid the fact that representative-agent models are just as aggregative as old-fashioned Keynesian macroeconometric models. They do not solve the problem of aggregation; rather they assume that it can be ignored. While they appear to use the mathematics of microeconomis, the subjects to which they apply that microeconomics are aggregates that do not belong to any agent. There is no agent who maximizes a utility function that represents the whole economy subject to a budget constraint that takes GDP as its limiting quantity. This is the simulacrum of microeconomics, not the genuine article …

[W]e should conclude that what happens to the microeconomy is relevant to the macroeconomy but that macroeconomics has its own modes of analysis … [I]t is almost certain that macroeconomics cannot be euthanized or eliminated. It shall remain necessary for the serious economist to switch back and forth between microeconomics and a relatively autonomous macroeconomics depending upon the problem in hand.

Instead of just methodologically sleepwalking into their models, modern followers of the Lucasian microfoundational program ought to do some reflection and at least try to come up with a sound methodological justification for their position. Just looking the other way won’t do. Writes Hoover:

garciaThe representative-­agent program elevates the claims of microeconomics in some version or other to the utmost importance, while at the same time not acknowledging that the very microeconomic theory it privileges undermines, in the guise of the Sonnenschein-­Debreu­-Mantel theorem, the likelihood that the utility function of the representative agent will be any direct analogue of a plausible utility function for an individual agent … The new classicals treat [the difficulties posed by aggregation] as a non-issue, showing no apprciation of the theoretical work on aggregation and apparently unaware that earlier uses of the representative-agent model had achieved consistency wiyh theory only at the price of empirical relevance.

Where ‘New Keynesian’ and New Classical economists think that they can rigorously deduce the aggregate effects of (representative) actors with their reductionist microfoundational methodology, they — as argued in my On the use and misuse of theories and models in economics — have to put a blind eye on the emergent properties that characterize all open social and economic systems. The interaction between animal spirits, trust, confidence, institutions, etc., cannot be deduced or reduced to a question answerable on the individual level. Macroeconomic structures and phenomena have to be analyzed also on their own terms.

5 Comments

  1. Not just microeconomics, all theory is a “simulacrum” of the reality. Indeed, good theories have to parsimonious. Theories are convenient fictions — reference frames — we invent to interpret empirical data.
    There may be serious arguments against extant agent-based models. This is not one of them.

    Comment by policytensor— 19 Dec, 2015 #

  2. Who is the guy in the picture?

    Comment by Mathijs Janssen— 21 Nov, 2015 #

  3. There is an alarming lack of intellectual curiosity. People seem to be more worried about how you do reconcile things with ‘the standard model’ than what actually goes on. The result is mind-numbing banality. Anything that is actually interesting is ignored or trivialised.

    Comment by Nanikore— 21 Nov, 2015 #

  4. Taking the augeries

    Damn spell check

    Comment by Bruce Wilder— 19 Nov, 2015 #

  5. Somewhat tangential to the theme of the original post, but directly relevant to the whole project of the blog, is the question of curiosity. What, if anything, is this macroeconomics curious about? What about the economy puzzles the RBC theorist? Or, the New Classical purveyor of representative agents and rational expectations?
    .
    Thinking you have the answer before you can prove it is arrogance, but perhaps necessary to motivate a long trial. Losing track of the question while enveloped in the arcane problems of technique is human. But a lack of curiosity in a scientist is damning.
    .
    The actual economy is puzzling, often in practically urgent ways, its behavior requires interpretation, both on its own terms and in ways that relate performance to public policy. The rhetoric of microfoundations — the word itself — suggests to the untutored mind a curiosity about how the phenomena familiar to the individual — the microeconomic experiences of daily life — relate to the global phenomena of headline numbers — GDP, unemployment rates, inflation estimates, stock exchange indices — headline numbers that often bear down on individual lives with all the power and mysterious fury of the weather.
    .
    But, if this macro is not curious, what function does it fulfill? One sad possibility is that these economists are the secular priesthood of a civic religion, meant to reconcile the individual to the abusive vagaries of the economy as the ancient Roman religion did with the doings of the gods, managing a complex calendar and taking the surgeries. Rather than master the management in the common, public interest of the machinery of an artifactual economy, they make a show of expertise out of not-knowing and continue to insist on magic as an official explanation — in this case the magic of the market.

    Comment by Bruce Wilder— 19 Nov, 2015 #


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