Relevance is not irrelevant8 January, 2017 at 12:17 | Posted in Economics | 1 Comment
There is something about the way macroeconomists construct their models nowadays that obviously doesn’t sit right.
Empirical evidence still only plays a minor role in mainstream economic theory, where models largely function as a substitute for empirical evidence.
One might have hoped that humbled by the manifest failure of its theoretical pretences during the latest economic-financial crisis, the one-sided, almost religious, insistence on axiomatic-deductivist modeling as the only scientific activity worthy of pursuing in economics would give way to methodological pluralism based on ontological considerations rather than formalistic tractability. That has, so far, not happened.
If macroeconomic models – no matter of what ilk – build on microfoundational assumptions of representative actors, rational expectations, market clearing and equilibrium, and we know that real people and markets cannot be expected to obey these assumptions, the warrants for supposing that conclusions or hypotheses of causally relevant mechanisms or regularities can be bridged, are obviously non-justifiable. Incompatibility between actual behaviour and the behaviour in macroeconomic models building on representative actors and rational expectations microfoundations is not a symptom of ‘irrationality.’ It rather shows the futility of trying to represent real-world target systems with models flagrantly at odds with reality.
A gadget is just a gadget – and no matter how brilliantly silly ‘New Keynesian’ DSGE or IS-LM models Paul Krugman et consortes come up with, they do not help us working with the fundamental issues of modern economies. Using that kind of models only confirms Robert Gordon’s dictum that today
rigor competes with relevance in macroeconomic and monetary theory, and in some lines of development macro and monetary theorists, like many of their colleagues in micro theory, seem to consider relevance to be more or less irrelevant.