So your models are nothing but fiction? Count me out!

12 May, 2020 at 18:52 | Posted in Economics | Comments Off on So your models are nothing but fiction? Count me out!

I have spent a considerable part of my life building economic models, and examining the models that other economists have built. I believe that I am making reasonably good use of my talents in an attempt to understand the social world.I have no fellow-feeling with those economic theorists who, off the record at seminars and conferences, admit that they are only playing a game with other theorists. If their models are not intended seriously, I want to say (and do say when I feel sufficiently combative), why do they expect me to spend my time listening to their expositions? Count me out of the game.

Robert Sugden

Those who want to build macroeconomics on microfoundations usually maintain that the only robust policies and institutions are those based on rational expectations and representative actors. As yours truly has tried to show in On the use and misuse of theories and models in economics there is really no support for that conviction at all. On the contrary. If we want to have anything of interest to say on real economies, financial crisis and the decisions and choices real people make, it is high time to place macroeconomic models building on representative actors and rational expectations microfoundations where they belong — in the dustbin.

If this microfounded macroeconomics has nothing to say about the real world and the economic problems out there, why should we care about it? The final court of appeal for macroeconomic models is the real world, and as long as no convincing justification is put forward for how the inferential bridging de facto is made, macroeconomic modelbuilding is little more than hand waving that give us rather a little warrant for making inductive inferences from models to real-world target systems. If substantive questions about the real world are being posed, it is the formalistic-mathematical representations utilized to analyze them that have to match reality, not the other way around.

The real macroeconomic challenge is to accept uncertainty and still try to explain why economic acts, decisions and processes take place the way they do — instead of simply conjuring the problem away by assuming rational expectations and treating uncertainty as if it was possible to reduce it to stochastic risk. That is scientific cheating. And it has been going on for too long now. If that’s the kind of game you want to play, yours truly says as Robert Sugden: Count me out!