Chicago-inspired methodology

1 June, 2017 at 13:30 | Posted in Economics | 7 Comments

A couple of years ago Michel De Vroey felt the urge to write a defense of Robert Lucas’ denial of involuntary unemployment:

What explains the difficulty of constructing a theory of involuntary unemployment? Is it, as argued by Lucas, that the “thing” to be explained doesn’t exist, or is it due to some deeply embedded premise of economic theory? My own view tilts towards the latter. Economic theory is concerned with fictitious parables. The premises upon which it is based have the advantage of allowing tractable, rigorous theorising, but the price of this is that important facts of life are excluded from the theoretical universe. Non-chosen outcomes is one of them. The underlying reason lies in the trade technology and information assumptions upon which both the Walrasian and the Marshallian (and the neo-Walrasian and neo-Marshallian) approaches are based. This is a central conclusion of my inquiry: the stumbling block to the introduction of involuntary unemployment lies in the assumptions about trade technology that are usually adopted in economic theory.

unemployed1Foregoing the involuntary unemployment claim may look like a high price to pay, particularly if it is admitted that good reasons exist for believing in its real world relevance. But would its abandonment really be so dramatic? …

First of all, the elimination of this concept would only affect the theoretical sphere. Drawing conclusions from this sphere about the real world would be a mistake. No jumps should be made from the world of theory to the real world, or vice-versa … The fact that solid arguments can be put forward as to its real world existence is not a sufficient condition to give involuntary unemployment theoretical legitimacy.

Michel De Vroey

I have to admit of being totally unimpressed by this rather defeatist methodological stance. Is it really a feasible methodology for economists to make  a sharp divide between theory and reality, and then treat the divide as something recommendable and good? I think not.

first-economist1

Models and theories should — if they are to be of any real interest — have to look to the world. Being able to construct “fictitious parables” or build models of a “credible world,” is not enough. No matter how many convoluted refinements of concepts made in the theory or model, if they do not result in “things” similar to reality in the appropriate respects, such as structure, isomorphism etc, the surrogate system becomes a substitute system — and why should we care about that? Science has to have higher aspirations.

Mainstream economic theory today is in the story-telling business whereby economic theorists create mathematical make-believe analogue models of the target system – usually conceived as the real economic system. This modeling activity is considered useful and essential. Formalistic deductive “Glasperlenspiel” can be very impressive and seductive. But in the realm of science it ought to be considered of little or no value to simply make claims about the theory or model and lose sight of reality. Insisting — like De Vroey — that “no jumps should be made from the world of theory to the real world, or vice-versa” is an untenable methodological position.

full coverIn A History of Macroeconomics from Keynes to Lucas and Beyond (CUP 2016) De Vroey basically tells the same misleading and wrong-headed story as in the article mentioned above. He explicitly acknowledges that his assessment of The General Theory ‘follows from this analysis.’ Citing Mankiw and Patinkin, the author criticises Keynes for not having built his analysis on an ‘explicit and complete model’ and therefore was unable to translate his views ‘into a rigorous demonstration.’

Where did Keynes’ unemployment analysis go wrong? To De Vroey the answer  seems to be that ‘the notion of involuntary unemployment was not questioned’ and that  ‘the fact that unemployment was massive was taken as an indication that it could not be voluntary.’

Does it sound familiar? Well it should! Because this is the standard Chicago New Classical Economics view that never has accepted Keynes’s distinction between voluntary and involuntary unemployment. According to New Classical übereconomist Robert Lucas, an unemployed worker can always instantaneously find some job. No matter how miserable the work options are, “one can always choose to accept them,” according to Lucas:

KLAMER: My taxi driver here is driving a taxi, even though he is an accountant, because he can’t find a job …

LUCAS: I would describe him as a taxi driver [laughing], if what he is doing is driving a taxi.

KLAMER: But a frustrated taxi driver.

LUCAS: Well, we draw these things out of urns, and sometimes we get good draws, sometimes we get bad draws.

Arjo Klamer

In New Classical Economics unemployment is seen as as a kind of leisure that workers optimally select. In the basic DSGE models used by these economists, the labour market is always cleared – responding to a changing interest rate, expected life time incomes, or real wages, the representative agent maximizes the utility function by varying her labour supply, money holding and consumption over time. Most importantly – if the real wage somehow deviates from its “equilibrium value,” the representative agent adjust her labour supply, so that when the real wage is higher than its “equilibrium value,” labour supply is increased, and when the real wage is below its “equilibrium value,” labour supply is decreased.

In this model world, unemployment is always an optimal choice to changes in the labour market conditions. Hence, unemployment is totally voluntary. To be unemployed is something one optimally chooses to be.

It is extremely important to pose the question why mainstream economists choose to work with these kinds of models. It is not a harmless choice based solely on ‘internal’ scientific considerations. It is in fact also, and not to a trivial extent, a conscious choice motivated by ideology.

By employing these models one is actually to a significant degree absolving the structure of market economies from any responsibility in creating unemployment. Focussing on the choices of individuals, the unemployment ‘problem’ is reduced to being an individual ‘problem’, and not something that essentially has to do with the workings of market economies. A conscious methodological choice in this way comes to work as an apologetic device for not addressing or challenging given structures.

Not being able to explain unemployment, these models can’t help us to change the structures and institutions that produce the arguably greatest problem of our society.

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7 Comments

  1. Many of “these models” are not intended to answer this question and to claim otherwise, that they should, is perverse.

  2. Voluntary unemployment? Clearly, the real world is not allowed to intrude in this theoretical nonsense. I have been unemployed and it was NEVER voluntary! I became a social worker and retired after 48 years and I am now voluntarily unemployed! But during those 48 years, I met with many distressed clients especially after the advent of the Neoliberal Age of Austerity in the 70s who were not voluntarily unemployed and submitted resumes and applications daily over a wide range of occupational categories. When it is believed that a 6% unemployment rate constitutes full employment (another reified theory), how do you then assume that the 6% or 7% or 8% has a sizable meaningful number voluntarily unemployed? Remember NAIRU? It is alive and well in the present neoliberal age despite denials.

  3. I have issues with the book but I liked it overall.

  4. DeVroey: Drawing conclusions from this sphere about the real world would be a mistake. No jumps should be made from the world of theory to the real world, or vice-versa …
    .
    Syll: Is it really a feasible methodology for economists to make a sharp divide between theory and reality, and then treat the divide as something recommendable and good? . . . Mainstream economic theory today is in the story-telling business whereby economic theorists create mathematical make-believe analogue models of the target system – usually conceived as the real economic system.
    .
    DeVroey is saying that economists do not get to choose an analytic theory that produces models isomorphic to the real world. And, what he recommends is that they should not pretend that their analytic models are analogues. He says, no jumps should be made from theory to the real world. You say that is untenable “methodologically”.
    .
    I think DeVroey is right and you are wrong. Not wrong with regard to “method” but with regard to epistemology. Analytic theory is never descriptive. Not in economics nor in any other field. Euclid’s geometry is not descriptive, which is to say, it does not produce maps. Economists alone elaborate a completely a priori analysis and then wave their hands out the window, claiming the world is like this. Economists will detail an analysis of perfect competition, say, and then claim without warrant, that any market will conform to this “ideal” if the numbers of buyers and sellers is large enough.
    .
    Is it feasible that there should be a sharp divide between (analytic) theory and reality? It does not matter if it is “feasible”, it is. Such is our epistemic reality. There is a sharp divide between analytic theory and reality. To do science, we need to recognise that theory can be powerful, but is never sufficient to describe or make declarative true statements about things in the world. For that expertise, economists have to abandon the story telling and false analogues and observe and measure. In Popper’s frame, it is necessary to build operational models.
    .
    DeVroey proposes that “involuntary unemployment” will be found in the frictions of the actual machinery of the economy. This is not an unreasonable thesis. A physics of heat engines does not expect any and every design of heat engine to produce a perfect transmission of heat into mechanical energy. Engineers must test the heat efficiency of a particular engine and measure how well it does. Aerodynamics does not contemplate that any and every air foil will produce perfect lift. That is why engineers take their designs to wind tunnels.
    .
    Your so-called realism is not realistic enough about epistemology.

    • Bruce,

      Your question is interesting. I put my comments here.
      1. Reality: production, labors, equipment, construction, produced goods/services, etc.
      .
      2. Measurements:
      GDP=C+I+G+X- M
      GDI =Wages+Net Operating Surplus+CFC+Tariffs-Subsides
      GDP=GDI=PQ
      .
      3. Theories or Models: narrative stories or math formula in terms of measurements.
      .
      Measurements are not economic realities themselves, but interfaces to realities. We should view them as sensor data for measuring the realities.
      Any theories or models should respect existing economic measurements and their correlation relationships in terms of accounting identities. That’s only ground truth we have.
      .
      It is crucial to build diagnostic models based on the first principles of sensor data, not operational models to simulate the realities. We cannot build correct operational models without violating sensor data semantics, not to mention human choices in the realities

  5. Goods points by Bruce Wilder. DeVrroey set out to reflect on the model (theorizing) of economics. In fact, he criticizes those who try to have it both ways. The book that tries to take a realist view of capitalism is Anwar Shaikh.


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