Relevance is not irrelevant

8 January, 2017 at 12:17 | Posted in Economics | 1 Comment

irrThere 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.

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  1. “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.”
    .
    Restating somewhat for clarity:
    .
    //The predictive power of economic theories based on “formalistic tractability” failed in the recent economic/financial crisis.
    .
    Therefore such theories should be replaced with pluralistic methodologies based on “ontological considerations”.//
    .
    The argument seems here to be that, because one methodology has failed, an alternative methodology will therefore succeed.
    .
    If the measure of success of an economic methodology is its predictive power, what evidence can you offer that pluralistic ontological methodologies will have greater success? And without such evidence, on what basis can you argue that the prevailing methodology should be replaced?
    .
    //The difference between a progressive and a degenerative research programme lies, for Lakatos, in whether the recent changes to its auxiliary hypotheses have achieved this greater explanatory/predictive power or whether they have been made simply out of the necessity of offering some response in the face of new and troublesome evidence. A degenerative research programme indicates that a new and more progressive system of theories should be sought to replace the currently prevailing one, but until such a system of theories can be conceived of and agreed upon, abandonment of the current one would only further weaken our explanatory power and was therefore unacceptable for Lakatos.//
    .
    https://en.wikipedia.org/wiki/Imre_Lakatos


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