Macroeconomic aspirations

22 Oct, 2022 at 16:29 | Posted in Economics | 3 Comments

Some economists seem to be überjoyed by the fact that they are using the same ‘language’ as real business cycles macroeconomists and that they therefore somehow can learn something from them.

James Tobin obviously did not find any need to speak the RBC ‘language’:

They try to explain business cycles solely as problems of information, such as asymmetries and imperfections in the information agents have. Those assumptions are just as arbitrary as the institutional rigidities and inertia they find objectionable in other theories of business fluctuations … I try to point out how incapable the new equilibrium business cycles models are of explaining the most obvious observed facts of cyclical fluctuations … I don’t think that models so far from realistic description should be taken seriously as a guide to policy … I don’t think that there is a way to write down any model which at one hand respects the possible diversity of agents in taste, circumstances, and so on, and at the other hand also grounds behavior rigorously in utility maximization and which has any substantive content to it.

Arjo Klamer, The New Classical Mcroeconomics: Conversations with the New Classical Economists and their  Opponents,Wheatsheaf Books, 1984

Using the same microfoundational ‘language’ as mainstream macroeconomists don’t take us very far. Far better than having a common ‘language’ is to have a well-founded, realist, and relevant theory:

Microfoundations for macroeconomics are fine in principle—not indispensable, but useful. The problem is that what passes for microfoundations in the universe of orthodox macro is crap …

realityIt’s nothing more than robotic imitation of teaching exercises to improve math skills, without any consideration for such mundane matters as empirical verisimilitude …

Microfoundations means general equilibrium theory, but the flavor it uses is from the mid-1950s. The Sonnenschein-Debreu-Mantel demonstration (update to the 1970s)  that initial conditions and out-of-equilibrium trades alter the equilibrium itself has turned GET upside down.

Notice that I haven’t mentioned the standard heterodox criticisms of representative agents and ergodicity. You can add those if you want …

Like I said, their microfoundations are crap.

Peter Dorman

Macroeconomists have to have bigger aspirations than speaking the same ‘language.’ Rigorous models lacking relevance are not to be taken seriously. Truly great macroeconomists aspire to explain and understand the fundamentals of modern economies. As did e. g. John Maynard Keynes and Michal Kalecki.


  1. Economic Sociology and Political Economy:

    Wassily Leontief: “Professional economic journals are filled with mathematical formulas leading the reader from sets of more or less plausible but entirely arbitrary assumptions to precisely stated but irrelevant theoretical conclusions.” Read the whole quote:

  2. The first and most fundamental obstacle to building understanding is an explanatory strategy that starts from a presumption that a “perfect” market economy would “lie flat” without business cycles except for information asymmetries or institutional rigidities or wage and price rigidity or some other “imperfection”. This Platonic Ideal of a “market economy” is unrealistic, by definition, but it is also unexamined and the failure to examine it is what keeps theory frozen and lifeless.

    Theory does have to explore the logic of the system, but this insistence on an arbitrary standard of “perfect” functioning prevents critical consideration of what elements even a toy model must look account for. Is allocation of resources all an “ideal” economy must do? This is rarely asked and the answer is, “no”. Is market price enough information even in the absence of “imperfections” to decide the answers to the questions even a minimally “ideal” economic system poses? Again, the correct answer is, “no”.
    Consider the introduction of consumer durable goods. If an economy is producing resaleable consumer durables with dedicated capital, a business cycle follows as night the day. In the competition between new consumer durables and sale out of the accumulating stock of “used” and aging consumer durables of similar type and function, there is no steady state path of output, price and resource utilization: there will be a “real” business cycle. An empiricist will recognize immediately how the stock of automobiles and housing came to drive business cycles in the course of the 20th century without resort to imaginary technology “shocks”. And further how bank lending standards would become a visible hand in price formation for autos and houses, if any cared to look.

    Denial of logical necessity is built into the handicaps placed on imagination by dogmatic insistence on a Platonic Ideal of market perfection that simply does not admit critical thinking.

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