The irrelevance of the Ramsey growth model

20 Mar, 2022 at 16:08 | Posted in Economics | 6 Comments

4703325-2So in what sense is this “dynamic stochastic general equilibrium” model firmly grounded in the principles of economic theory? I do not want to be misunderstood. Friends have reminded me that much of the effort of “modern macro” goes into the incorporation of important deviations from the Panglossian assumptions that underlie the simplistic application of the Ramsey model to positive macroeconomics. Research focuses on the implications of wage and price stickiness, gaps and asymmetries of information, long-term contracts, imperfect competition, search, bargaining and other forms of strategic behavior, and so on. That is indeed so, and it is how progress is made.

But this diversity only intensifies my uncomfortable feeling that something is being put over on us, by ourselves. Why do so many of those research papers begin with a bow to the Ramsey model and cling to the basic outline? Every one of the deviations that I just mentioned was being studied by macroeconomists before the “modern” approach took over. That research was dismissed as “lacking microfoundations.” My point is precisely that attaching a realistic or behavioral deviation to the Ramsey model does not confer microfoundational legitimacy on the combination. Quite the contrary: a story loses legitimacy and credibility when it is spliced to a simple, extreme, and on the face of it, irrelevant special case. This is the core of my objection: adding some realistic frictions does not make it any more plausible that an observed economy is acting out the desires of a single, consistent, forward-looking intelligence …

For completeness, I suppose it could also be true that the bow to the Ramsey model is like wearing the school colors or singing the Notre Dame fight song: a harmless way of providing some apparent intellectual unity, and maybe even a minimal commonality of approach. That seems hardly worthy of grown-ups, especially because there is always a danger that some of the in-group come to believe the slogans, and it distorts their work …

There has always been a purist streak in economics that wants everything to follow neatly from greed, rationality, and equilibrium, with no ifs, ands, or buts. Most of us have felt that tug. Here is a theory that gives you just that, and this
time “everything” means everything: macro, not micro. The theory is neat, learnable, not terribly difficult, but just technical enough to feel like “science.”

Robert Solow

6 Comments

  1. May I first express appreciation for the thoughtful replies to my queries?
    .
    Regarding shaikh945’s comment, may I ask, what good is the scientific method, if it is unable to distinguish a good theory from a bad for millennia? For example, were the epicyclists able to use the same methods as an as-yet-unnamed scientific method to disprove Aristarchus’s heliocentric theory, because parallax could not be observed? How were such faithful adherents to the scientific method as geologists able to dismiss Wegener’s continental drift theory for decades, using ridicule and mockery in support of purely localized theories that are now viewed as clearly wrong? (Why is the geologist response “but there was no mechanism” not enough to dismiss dark energy today? Are geologists really not good scientists?) How did the scientific method allow geneticists to count 24 human chromosome pairs in a picture where they now count 23?
    .
    What good is the scientific method, if at any given moment it may be used to disprove a theory that later turns out to be right?
    .
    “Cargo Cult Science” says:
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    “I call these things Cargo Cult Science, because they follow all the apparent precepts and forms of scientific investigation, but they’re missing something essential, because the planes don’t land […] It’s a thing that scientists are ashamed of—this history—because it’s apparent that people did things like this: When they got a number that was too high above Millikan’s, they thought something must be wrong—and they would look for and find a reason why something might be wrong. When they got a number closer to Millikan’s value they didn’t look so hard. And so they eliminated the numbers that were too far off, and did other things like that. We’ve learned those tricks nowadays, and now we don’t have that kind of a disease.”
    .
    Have we, though? Feynman himself notes further on in the essay:
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    “Nowadays there’s a certain danger of the same thing happening, even in the famous field of physics. I was shocked to hear of an experiment done at the big accelerator at the National Accelerator Laboratory, where a person used deuterium. In order to compare his heavy hydrogen results to what might happen to light hydrogen he had to use data from someone else’s experiment on light hydrogen, which was done on different apparatus. When asked he said it was because he couldn’t get time on the program (because there’s so little time and it’s such expensive apparatus) to do the experiment with light hydrogen on this apparatus because there wouldn’t be any new result. And so the men in charge of programs at NAL are so anxious for new results, in order to get more money to keep the thing going for public relations purposes, they are destroying—possibly—the value of the experiments themselves, which is the whole purpose of the thing. It is often hard for the experimenters there to complete their work as their scientific integrity demands.”
    .
    How many currently accepted physics results are more dependent on social factors than physical reality?
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    As for Henry’s point, aren’t the results only reliable and replicable within an error margin? Would bridges stay up if bridge builders didn’t include safety factors of at least two, which is basically saying “the theory could be 100% wrong” (even before accounting for social things like your supplier committing fraud)?

    • Robert,
      .
      Engineers sometimes have to deal with imperfect knowledge when it comes to physical systems – there are unpredictable construction imperfections and imperfections in materials which need to be considered. Unpredictable environmental factors intrude such as wind loadings, earthquakes.

      Designing a bridge is not like predicting the trajectory of a heavenly body.
      .

      • Does F = Ma hold for galactic orbits, unless you hypothesize aether-like dark matter? (Not that there’s anything wrong with aethers but doesn’t physics self-contradict by mocking aether theories while selling their own?)

  2. Thank you Lars, I heartily agree. As for the comment by rsm, I think one must distinguish real physics from the claim that orthodox economics is rooted physics. Here is a quote from my own book (p. 748) about what a prominent mathematician and physicist says about economics

    “the mathematician and physicist J. Doyne Farmer offers the following comment on a fundamental difference between orthodox economics and physics:

    ‘Although it is often said that economics is too much like physics, to a physicist economics is not at all like physics. The difference is in the scientific method of the two fields: theoretical economics uses a top-down approach in which hypothesis and mathematical rigor come first and empirical confirmation comes second. Physics, in contrast, embraces the bottom up ‘experimental philosophy’ of Newton, in which ‘hypotheses are inferred from phenomena, and afterward rendered general by induction’ . . . if economics were to truly make empirical-verification the ultimate arbiter of theories . . . [this] would force it to open up to alternative approaches. (Farmer 2013, abstract).’ “

  3. May I apply a similar criticism to thermodynamics?
    .
    《There has always been a purist streak in economics [thermodynamics] that wants everything to follow neatly from greed [temperature], rationality [pressure], and equilibrium, with no ifs, ands, or buts.》
    .
    But why does the equation of state for water follow not from theory but from observation? Why do friction coefficients have to be brute forced, rather than follow some theoretical equation?
    .
    Are all human institutional endeavors, even physics, doomed to produce fickle arbitrary rules that say more about the researchers than about reality?
    .
    For example, can you start from the same physical assumptions that enjoy so much oft-cited prediction success in some areas, and derive other things like a value for zero point energy that is empirically off by (at least) 60 orders of magnitude? Why does physics get to cherry-pick the results that seem to support their theories? Are there better theories of bridges that are currently being squelched by the same type of groupthink conformity that Solow describes in this quotation?

    • Robert,
      .
      Isn’t the difference between empirically derived physical relationships and empirically derived economic relationships that the former are reliable, the results of which can be repeated time and time again? Whereas the latter are totally unreliable once new time frames are applied.


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