Micofoundations are crap

5 April, 2016 at 21:37 | Posted in Economics | Leave a comment

Oxford macroeconomist Simon Wren-Lewis thinks that ‘the micrcofoundations revolution’ has been great, since it means that

EPAreadlabelmainstream macroeconomists speak the same language. I can go to a seminar that involves an RBC model with flexible prices and no involuntary unemployment and still contribute and possibly learn something.

Wren-Lewis seems to be überjoyed by the fact that using the same language as real business cycles macroeconomists, he can ‘possibly learn something’ from them.

Hmm …

Wonder what …

Contrary to Wren-Lewis, yours truly doesn’t think the fact that the micrcofoundations people share the same language, takes us very far. Far better than having a common ‘language’ is to have a well-founded, realist and relevant theory:

Microfoundations for macroeconomics are fine in principle—not indispensable, but useful. The problem is that what passes for microfoundations in the universe of orthodox macro is crap …

realityIt’s nothing more than robotic imitation of teaching exercises to improve math skills, without any consideration for such mundane matters as empirical verisimilitude. I will mention three crushing faults, each sufficient by itself to blow a wide hole in a supposedly useful model …

It is rife with anomalies (see “behavioral economics”), and, most important, it is oblivious to the last several decades of work in psychology, evolutionary biology, neuropsychology, organization theory—all the disciplines where people study behavior in a scientific way …

There are no interaction effects to generate multiple equilibria in the microfoundations macro theorists use. Every individual, firm and product is an isolated atom, floating uninterrupted through space until it bumps into another such atom in the marketplace. Social psychology, ecology, nonconvex production and consumption spaces?  Forget about it …

Microfoundations means general equilibrium theory, but the flavor it uses is from the mid-1950s. The Sonnenschein-Debreu-Mantel demonstration (update to the 1970s)  that initial conditions and out-of-equilibrium trades alter the equilibrium itself has turned GET upside down.

Notice that I haven’t mentioned the standard heterodox criticisms of representative agents and ergodicity. You can add those if you want …

Like I said, their microfoundations are crap.

Peter Dorman

Macroeconomists have to have higher aspirations than speaking the same ‘language.’ Rigorous models lacking relevance is not to be taken seriously. Truly great macroeconomists aspire to explain and understand the fundamentals of modern economies. As did, e. g., John Maynard Keynes, Michal Kalecki, and Hyman Minsky.

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