Modern macroeconomics

22 Aug, 2019 at 15:32 | Posted in Economics | 3 Comments

mod econ

Rethinking Economics actually gives a pretty good description of the state of modern macroeconomics here.

There is a purist streak in economics that wants everything to follow from asumming things like ‘rationality’ and ‘equilibrium.’ That purist streak has given birth to a kind ‘deductivist blindness’ of mainstream economics, something that also to a larger extent explains why it contributes to causing economic crises rather than to solving them. But where does this ‘deductivist blindness’ of mainstream economics come from? To answer that question we have to examine the methodology of mainstream economics.

The insistence on constructing models showing the certainty of logical entailment has been central in the development of mainstream economics. Insisting on formalistic (mathematical) modeling has more or less forced the economist to give upon on realism and substitute axiomatics for real world relevance. The price paid for the illusory rigour and precision has been monumentally high.

Real business cycle theory (RBC) is one of the theories that has put macroeconomics on a path of intellectual regress for three decades now. And although there are many kinds of useless ‘post-real’economics held in high regard within mainstream economics establishment today, few — if any — are less deserved than real business cycle theory.

The future is not reducible to a known set of prospects. It is not like sitting at the roulette table and calculating what the future outcomes of spinning the wheel will be. So instead of — as RBC economists do — assuming calibration and rational expectations to be right, one ought to confront the hypothesis with the available evidence. It is not enough to construct models. Anyone can construct models. To be seriously interesting, models have to come with an aim. They have to have an intended use. If the intention of calibration and rational expectations  is to help us explain real economies, it has to be evaluated from that perspective. A model or hypothesis without a specific applicability is not really deserving our interest.

Without strong evidence all kinds of absurd claims and nonsense may pretend to be science. We have to demand more of a justification than rather watered-down versions of ‘anything goes’ when it comes to rationality postulates. If one proposes rational expectations one also has to support its underlying assumptions. None is given by RBC economists, which makes it rather puzzling how rational expectations has become the standard modeling assumption made in much of modern macroeconomics. Perhaps the reason is that economists often mistake mathematical beauty for truth.

In the hands of Lucas, Prescott and Sargent, rational expectations has been transformed from an – in principle – testable hypothesis to an irrefutable proposition. Believing in a set of irrefutable propositions may be comfortable – like religious convictions or ideological dogmas – but it is not  science.

So where does this all lead us? What is the trouble ahead for economics? Putting a sticky-price DSGE lipstick on the RBC pig sure won’t do. Neither will  just looking the other way and pretend it’s raining.

3 Comments

  1. Modern mainstream neoclassical economics cannot make reliably accurate predictions more complex than, “The recent trend will continue,” because it is fundamentally not an empirical science whose errors can be corrected by resort to impartial observation of objective reality. That’s because unlike a genuine empirical science, its purpose is not to enhance understanding of objective reality. Its intended purpose is rather to provide an epistemological cover story — a kind of plausible deniability — for the greed and parasitism of the privileged, a project at which it has self-evidently been very successful. Founding inspiration for neoclassical economics John Bates Clark stated this purpose explicitly: to show that legal possession of wealth and receipt of income were proof of commensurate contributions to production. Neoclassical economics is the dominant, mainstream school of the discipline (one cannot call it a science) because economics, uniquely among all sciences, is governed by the fact that the wealthiest and most powerful strata of society seek to prevent emergence of an understanding of its subject that would directly threaten their financial interests.

    We can see parallels for the multiple fundamental errors of neoclassical economics in the history of other sciences. Equilibrium has the same epistemological role in neoclassical economics that circular orbits had in pre-Keplerian astronomy. The marginal contribution of the privilege owner has the same role in neoclassical economics that phlogiston had in chemistry before Lavoisier and Fulhame. The conflation as “capital” of producer goods with legal privileges has the same role in neoclassical economics as the conflation of weight with mass had in pre-Newtonian mechanics. The disaggregation of money according to its liquidity rather than its type has the same role in neoclassical economics that classification of living organisms according to the Great Chain of Being had in pre-Linnaean taxonomy. The economic justification for the extreme inequalities of wealth, income and condition observed in capitalist economies has the same role in neoclassical economics that Terra Australis had in pre-Cook-voyage geography.

    Unfortunately, even the most promising and talented students of economics cannot gain admission to graduate study in the discipline unless they have internalized, proved they accept, and will never question or attempt to correct these errors.

  2. There’s no justification at all for the assumptions and methodology that modern macroeconomists use. They are totally arbitrary. And the empirical ‘success’ of this project has been plain for all to see for a very long time. And yet nothing has changed, they even still award themselves “Nobel” Prizes. It is the most appalling example of an elite out of touch. And I feel the consequences will get ever more serious.

  3. Instead you might look on systems theory and social psychology I presume?


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