Sargent’s ‘Nobel prize’ winning mumbo jumbo

26 Sep, 2019 at 19:26 | Posted in Economics | 11 Comments

The Royal Swedish Academy of Sciences decided back in 2011 to award The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel to Thomas Sargent and Christopher Sims “for their empirical research on cause and effect in the macroeconomy”.

In an interview with Thomas Sargent in The Region, the Nobel prize winner tried to defend the kind of  “modern macro” he himself has been part of developing:

Sargent: I know that I’m the one who is supposed to be answering questions, but perhaps you can tell me what popular criticisms of modern macro you have in mind.

Rolnick: OK, here goes. Examples of such criticisms are that modern macroeconomics makes too much use of sophisticated mathematics to model people and markets; that it incorrectly relies on the assumption that asset markets are efficient in the sense that asset prices aggregate information of all individuals; … that the modern macro mainstay “real business cycle model” is deficient because it ignores so many frictions and imperfections and is useless as a guide to policy for dealing with financial crises … Shouldn’t these be taken seriously?

lebowski-610x0Sargent: Sorry, Art, but aside from the foolish and intellectually lazy remark about mathematics, all of the criticisms that you have listed reflect either woeful ignorance or intentional disregard for what much of modern macroeconomics is about and what it has accomplished … A rule of thumb is that the more dynamic, uncertain and ambiguous is the economic environment that you seek to model, the more you are going to have to roll up your sleeves, and learn and use some math. That’s life.

Are these the words of an empirical macroeconomist? I’ll be dipped! To me, it sounds like the same old axiomatic-deductivist mumbo-jumbo that parades as economic science of today.

Mainstream economic theory today is in the story-telling business whereby economic theorists create make-believe analogue models of the target system – usually conceived as the real economic system. This modelling activity is considered useful and essential. Since fully-fledged experiments on a societal scale, as a rule, are prohibitively expensive, ethically indefensible or unmanageable, economic theorists have to substitute experimenting with something else. To understand and explain relations between different entities in the real economy the predominant strategy is to build models and make things happen in these “analogue-economy models” rather than engineering things happening in real economies.

Mainstream economics has since long given up on the real world and contents itself with proving things about thought up worlds. Empirical evidence only plays a minor role in economic theory, where models largely function as a substitute for empirical evidence. Hopefully humbled by the manifest failure of its theoretical pretences, the one-sided, almost religious, insistence on axiomatic-deductivist modelling as the only scientific activity worthy of pursuing in economics will give way to methodological pluralism based on ontological considerations rather than formalistic tractability.

When that day comes  The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel will hopefully be awarded real macroeconomists and not axiomatic-deductivist modellers like Thomas Sargent and economists of that ilk in the efficient-market-rational-expectations camp.

11 Comments

  1. “The Dude” is fare more better and brighter than Sargent! He will sweep the floor with the guy! 🙂

  2. “A rule of thumb is that the more dynamic, uncertain and ambiguous is the economic environment that you seek to model, the more you are going to have to roll up your sleeves, and learn and use some math. That’s life.”

    As a mathematician, I agree. But which math? Who decides? On what basis? Much ‘mainstream’ practice seems to take its lead from long-dead economists and seems to me “foolish and intellectually lazy”. Let them at least acknowledge that there is a debate to be had.

    • “Which math” was going to be my comment too. When you have vertical supply curves on reserves, the math becomes about hedging bets on what the Fed is going to do with rates. Supply and demand curves become subservient to math based on vertical curves and negative rates, allowing banks to make profits.

      • Is VaR a dim forethought to IR ,,,,

        • I think you have to look at derivative notional totals, which are in the hundreds of trillions of dollars, as a kind of proxy measure of the monetary expansion capacity of the system. Traders set a price and adjust notionals to suit. Negative rates make them money because there is still carry and the cross-currency basis. A US dollar investor can swap into Euros or Yen, buy negative-yielding government debt, and still end up with a positive return, because of the cross-currency basis. Banks have figured this out; economists remain largely ignorant.

  3. “A rule of thumb is that the more dynamic, uncertain and ambiguous is the economic environment that you seek to model, the more you are going to have to roll up your sleeves, and learn and use some math. That’s life.”

    Before you ‘seek to model’ you have to understand the ‘uncertain and ambiguous’ environment. Think of it like a criminal investigation. You need to consider the facts – all of them. You then make a conclusion “on the basis of what we can know, we do know this”. When you don’t have the evidence (including evidence that is unquantifiable or not particularly usefully expressed in algebra) you say so. You do not send people to prison on the basis of a model.

    The objective of economics is to implement good policy. That requires a widely and deeply informed understanding of capitalism. It requires a knowledge of facts. When trying to determine real world causation you have to trace that step by step looking at the facts. Like a jigsaw puzzle, the pieces, all of them, or all the ones you have, have to be pieced to together. It requires a multidisciplinary approach. It does not necessarily require models.

    A good example of how not to go about things is Sargent’s Four Inflation study. Here he attributes the control of inflation to control over the money supply in four countries – Germany, Czechoslovakia, Poland and Austria-Hungary after WWI. The real reasons why inflation was eventually contained (Germany lost a big war, Austria-Hungary an empire, Poland was shifted 50 per cent westtwards, Czechoslavakia squeezed in the middle of it) was that new power regimes and authorities were established. Until that could happen their currencies were meaningless. A state needs to have a functioning government for its currency to have ‘currency’. So really he is jumping the gun to primarily attribute containment to money supply reduction. This is what happens when you draw conclusions from theories or models, and not proper historical awareness and investigation.

    The real issues here are about power.

    To a European in particular, Sargent’s ‘seminal’ article shows extraordinary ignorance. An O level student would know these historical facts. The consequences of the indulgences of Samuelson, Sargent and others are very big. We can now see the political fall-out from a profession that has been trained this way. What he had was a theory (rational expectations) which he set out to prove. You should not start with theories. You can use them as a reference point- after you have done your investigation. But they should not guide and therefore determine the results of your investigation.

    For the sake of democracy, the work of Sargent and others needs to be brought out into the open and subject to proper scientific scrutiny.

    Political economy needs to get back to doing what it should be. It’s end goal should not be making models. It should be understanding capitalism with a view to finding solutions to its problems.

  4. ” A rule of thumb is that the more dynamic, uncertain and ambiguous is the economic environment that you seek to model, the more you are going to have to roll up your sleeves, and learn and use some math.”

    Maybe Sargent should try to forecast kaothic weather movements for longer time periods? Roll up your sleeves.

  5. Maybe Sargen should roll up his sleeves and look on weather forecasts?

  6. Someone please tell Sargent its maths and not math, before he gets all stroppy about intellectually lazy.

    • Funny but that is one word in American English that does seem to grate. Particularly when it is spoken with the characteristic dropped jaw.

      But in economics perhaps it is really about the nonsense that it disguises.

      Best to avoid an American Economics Association Conference!

  7. The fake Nobel prize should be shelved. Read Bo Rothstein’s attack at http://www.rothstein.dinstudio.se/empty_21.html


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