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Macroeconomic aspirations

from Lars Syll

Oxford macroeconomist Simon Wren-Lewis has a post up on his blog on the use of labels in macroeconomics:

EPAreadlabelLabels are fun, and get attention. They can be a useful shorthand to capture an idea, or related set of ideas … Here are a couple of bold assertions, which I think I believe, and which I will try to justify. First, in academic research terms there is only one meaningful division, between mainstream and heterodox … Second, in macroeconomic policy terms I think there is only one meaningful significant division, between mainstream and anti-Keynesians …

So what do I mean by a meaningful division in academic research terms? I mean speaking a different language. Thanks to the microfoundations revolution in macro, mainstream macroeconomists speak the same language. I can go to a seminar that involves an RBC model with flexible prices and no involuntary unemployment and still contribute and possibly learn something.

Wren-Lewis seems to be überjoyed by the fact that using the same language as real business cycles macroeconomists he can “possibly learn something” from them.

Hmm …

Wonder what …

I’m not sure Wren-Lewis uses the same “language” as James Tobin, but he’s definitely worth listening to:

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

And contrary to Wren-Lewis I don’t think the fact that “thanks to the microfoundations revolution in macro, mainstream macroeconomists speak the same language,” takes 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. I will mention three crushing faults, each sufficient by itself to blow a wide hole in a supposedly useful model …

It is rife with anomalies (see “behavioral economics”), and, most important, it is oblivious to the last several decades of work in psychology, evolutionary biology, neuropsychology, organization theory—all the disciplines where people study behavior in a scientific way …

There are no interaction effects to generate multiple equilibria in the microfoundations macro theorists use. Every individual, firm and product is an isolated atom, floating uninterrupted through space until it bumps into another such atom in the marketplace. Social psychology, ecology, nonconvex production and consumption spaces?  Forget about it …

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 is 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. chdwr
    October 30, 2014 at 8:56 pm

    DSGE is dead. However, Keynesian/Post Keynesian/Disequilibrium economics has not found the stable ground of an accurate and sufficiently deep metric with which base a new economics. As I have suggested here numerous times before that metric is to be found in the subset of double entry bookkeeping known as cost accounting. Accounting on a supperficial level of debits and credits seemingly statistically appears to justify DSGE. However, on the level of cost, which is the most deeply embedded, constant and thus dynamic microeconomic factor, we have the correct statistics and the correctly understood relationships between those statistics to find a metric that enlightens the path toward macro-economic policies that will enable a new economics…..or rather the resurrection of one which was a world wide force prior to WW II and has subsequently been buried by a combination of false economic orthodoxy and financial self interest.

    In other words COST Accounting is not a mere stochastic, momentary look at the economy…it is an integrative look at the ongoing/constant reality of the economy in terms of both statistical and dynamic forces. Those statistics show that total costs and hence by the rules and conventions of cost accounting total prices are always greater then total individual incomes simultaneously produced…..in real time. Thus commerce itself is in a radical and continual state of underlying PRICE inflation and individual income deflation. Of course this necessitates continual injecting of money into the economy in the only way presently allowed, namely as loans which require even more continuous money creation to pay back. Economists see this monetary inflation and mistakenly believe it is the primary cause of our problems, but they miss the more primary price inflationary nature of commerce/the costing/pricing system which exposes the subsequent continuous necessity of injecting more and more money just to tread economic water…as actually an economic effect of the deeper cause. Austrians go nearly berserk about this fact (there ain’t no free lunch!) and mistake an accurate depiction of the problem….as its solution (deflation) despite the fact that there is already a deflationary monetary reality for the individual.

    The solution to the problem is actually the dual policies of a direct gift of money to the individual and a general discount to consumers by retail merchants and then the rebating of those discounts back to participating merchants.

  2. Fred Zaman
    October 31, 2014 at 4:25 pm

    Zygonomics: the science of yolking the economies of the wealthy upper class to the middle class in ways that allow the latter to flourish along with the upper class; thereby preventing the economic gap between them from becoming unfair, immoral, even dangerous to the stability of society.

  3. November 1, 2014 at 9:14 am

    Funny folks in the big omnibus
    Comment on ‘Macroeconomic aspirations’

    “… economics is a big omnibus which contains many passengers of incommensurable interests and abilities.” (Schumpeter, 1994, p. 827)

    First of all one has to distinguish between theoretical and political economics. The goal of political economics is to push an agenda, the goal of theoretical economics is to explain how the actual economy works. From the viewpoint of science political economics as a whole is a no-go. The first problem in the economics omnibus is that the majority of passengers are agenda pushers of one sort or another. This has always been an impediment to scientific advance.

    Currently, economists do not understand how the economy works.

    “As Joan Robinson said, our essential object in economics is “to understand how the economic system works”; or, putting the emphasis differently, as did Keynes, “Is the economic system self-adjusting?” Sadly, we economists have so far done little to address, much less provide satisfying answers to the issues posed by Newcomb, Robinson, and Keynes. … we know little more now about “how the economy works,” or about the modus operandi of the invisible hand than we knew in 1790, after Adam Smith completed the last revision of The Wealth of Nations.” (Clower, 1999, p. 401), see also (2014b; 2014a)

    Keynes, too, was an agenda pusher but he clearly understood that nothing less than a paradigm shift would do in economics. His valuable insights for theoretical economics are:

    (i) Conventional (=classical=orthodox) economic theory is false and has been refuted once and for all by the Great Depression.

    (ii) The mistakes are located in the premises: “For if orthodox economics is at fault, the error is to be found not in the superstructure, which has been erected with great care for logical consistency, but in a lack of clearness and of generality in the premises.” (Keynes, 1973, p. xxi)

    (iii) The indispensable paradigm shift requires the replacement of old premises by a new set of axioms: “The classical theorists resemble Euclidean geometers in a non-Euclidean world who, discovering that in experience straight lines apparently parallel often meet, rebuke the lines for not keeping straight — as the only remedy for the unfortunate collisions which are occurring. Yet, in truth, there is no remedy except to throw over the axiom of parallels and to work out a non-Euclidean geometry. Something similar is required to-day in economics.” (Keynes, 1973, p. 16)

    Outcome of the Keynesian Revolution:

    (i) Keynes could not perform the paradigm shift in a formally acceptable way (2011a).

    (ii) Post-Neo-New Keynesians were so occupied with ‘What Keynes really meant’ that they could not rectify the General Theory until today (2011b).

    (iii) Keynes could not ‘throw over’ the old axioms for good and this made the reappearance of ‘dead ideas’ (Quiggin, 2010) possible.

    (iv) Theoretical economics is still groping in the dark in the no man’s land between the obsolete and a new paradigm.

    So here we are:

    “Nothing is more difficult than to turn an entire discipline around, asking in effect to jettison its own history over the last 200 years.” (Blaug, 1990, p. 205)

    The first thing to do is to turn microeconomics around. There can be no microeconomic foundation of macroeconomics because the foundations of microeconomics itself are erroneous. For funny label-sticking Oxford macroeconomists there is still something to learn from Keynes.

    Egmont Kakarot-Handtke

    Blaug, M. (1990). Economic Theories, True or False? Aldershot, Brookfield, VT:
    Edward Elgar.

    Clower, R. W. (1999). Post-Keynes Monetary and Financial Theory. Journal of Post
    Keynesian Economics, 21(3): 399–414. URL http://www.jstor.org/stable/4538639.

    Kakarot-Handtke, E. (2011a). Keynes’s Missing Axioms. SSRN Working Paper
    Series, 1841408: 1–33. URL http://ssrn.com/abstract=1841408.

    Kakarot-Handtke, E. (2011b). Why Post Keynesianism is Not Yet a Science. SSRN
    Working Paper Series, 1966438: 1–15. URL http://ssrn.com/abstract=1966438.

    Kakarot-Handtke, E. (2014a). Economics for Economists. SSRN Working Paper
    Series, 2511741: 1–30. URL http://papers.ssrn.com/sol3/cf_dev/AbsByAuth.cfm?

    Kakarot-Handtke, E. (2014b). The Three Fatal Mistakes of Yesterday Economics:
    Profit, I=S, Employment. SSRN Working Paper Series, 2489792: 1–13. URL

    Keynes, J. M. (1973). The General Theory of Employment Interest and Money.
    The Collected Writings of John Maynard Keynes Vol. VII. London, Basingstoke:
    Macmillan. (1936).

    Quiggin, J. (2010). Zombie Economics. How Dead Ideas Still Walk Among Us.
    Princeton, NJ, Oxford: Princeton University Press.

    Schumpeter, J. A. (1994). History of Economic Analysis. New York, NY: Oxford
    University Press.

  4. Norman L. Roth
    November 1, 2014 at 3:36 pm

    November 01 2014
    Thank-you M. Egmont Kakarot-Handke ,wherever you are. My points almost verbatim. From the paradigm that “dare not speak its name”.

    Norman L. Roth, Toronto, Canada

    Please GOOGLE: {1} Telos & Technos {2} Norman Roth, Origins of Markets {3} Norman Roth, Economic theory [4] Norman Roth, Economics of Technology [5] Norman L. Roth, RWER

  5. davetaylor1
    November 2, 2014 at 1:54 am

    “Macroeconomists have to have bigger aspirations than speaking the same ‘language’.”

    Egmont’s response is delightfully provocative: “Keynes could not perform the [necessary] paradigm shift in a formally acceptable way”!

    I’ve just found an old friend telling the history of our Algol68 language as we lived it (http://www.ieeeghn.org/wiki/index.php/Oral-History:Susan_Bond ), when her boss didn’t employ experts in it because there weren’t any: we were learning how to do things as we went along. Putting the “acceptability” issue another way, “it takes two to tango”.
    And Schumpeter’s “omnibus” contains people. I can’t see theoretical and political economics pushing agendas, only people.

    One of the things I learned (from bitter experience of having to use another language) is to aspire not just to “speaking the same language” but to the same language being adequate, whatever our need. Egmont likes his axioms, so here’s a snippet from Raymond Turner’s “Logics for Artificial Intelligence”. (One of the first uses of Algol68 was in automating computer operating systems, and economics is about operating economies).

    “Logics which extend classical logic sanction all the theorems of classical logic, but generally, supplement it … For example, modal logic is enriched by the addition of two new operators L (it is necessary that) and M (it is possible that). Under this new regime the sentence A -> MA is taken as axiomatic. The addition of such axioms, and appropriate rules of inference involving these operators, facilitates the derivation of theorems which are not even expressible in the language of the predicate calculus”.

    So Keynes had glimpsed his more general theory (Egmont’s (1) real things go wrong (2) at root, but (3) can be put right), this anticipating Shannon’s error-correction logic, the formalism of which includes the forms of information feedback circuits, simulation and error detection by parity checks. (Cf. Popper on falsification versus probable truth). With such formalism not yet available to him, never mind his audience, Keynes indicated the errors in the existing formalism by means of tangible examples. Notably, its “flat-earth” coordinate geometry only works on a “micro” area scale and not on single lines parallel in time; Gesell’s success with dated money (charging interest for the holding rather than the use of money), leaves money representing negative rather than positive value. As an amateur rather than professional economist I have remained free to explore how these point to macro theory taking as axioms the energy of a Big Bang and the topology of the four areas of spherical surface bounded by coordinates of latitude and longitude. One can trace with these invariants any point on the surface and the hours and quarter-hours of the clock of evolutionary time, from light waves and subatomic particles right up to people with guts, circulating blood and two-sided brains, their time-sharing economies, their abstract languages, complex numbers, PID control systems and monetary chrematistics. This “framework theory” has little content in it, but it accomodates all the facts along with redundancy and parity criteria for error-checking.

    I think the relevant conclusions is not Egmont’s (2), true though it is, that “Post-Neo-New Keynesians were so occupied with ‘What Keynes really meant’ that they could not rectify the General Theory until today”. It is that Keynes’s macroeconomic aspiration was to correct the economy, not perfect a description of what was wrong with it. And let us not forget he thought “the future will learn more from the spirit of Gesell than from that of Marx” despite thinking the human factor of liquidity preference had escaped him. (Yet hadn’t Gesell negated IT)?

  6. Norman L. Roth
    November 2, 2014 at 1:34 pm

    Nov. 02 2014
    Egmont [Kakarot ] Handtke,

    Upon reviewing your past contributions to the painfully slow progress of “verstehen” and ‘erklarung” in economic thought, rather than the “nacht und nebel” for which it has become notorious, I urge our readers to refer back to your quite entertaining and informative articles of:

    July 02, 2013 [ two]
    July 03, 2013 [2] : July 05, July 08, July 09 & July 12, all in 2013.

    Norman L. Roth, Toronto Canada

  7. chdwr
    November 2, 2014 at 10:01 pm

    Theorists are right about what they are right about and wrong regarding what they are wrong regarding. It actually is that simple. It is an indication of how fragmented economic theory and modernity’s whole mindset has become that this is not generally understood. What is needed is a thoroughgoing integration of theory which leads to a more comprehensive, deeper and higher understanding of both the actual workings of the economy/productive system…and its purposes which are most basically to create abundance and economic freedom, for everyone, albeit perhaps unequally . This of course requires a philosophy more comprehensive and ethical than mere profit, which in and of itself is not a problem, but as a final goal is so paltry it is astonishing that economists do not seem to recognize it as so.

    As Wisdom is the integrative process itself the above becomes obvious, and the only actual questions needed to be asked are what is the highest reality of Wisdom and how can we craft policies that align with and perfectly reflect that highest reality. I would suggest using the very words which are the stated goals of economic theory itself, namely equilibrium, balance and flow.

    Economic Equilibrium is best characterized by continual present time adding and subtracting so as to maintain a stasis/equilibrium, like for instance in the consumer financial paradigm, a universal and variable individual dividend and an equally general and variable discount to prices.

    Economic Balance is best characterized by a duality of opposition so as to insure competition, like for instance a national credit office which would balance not only the credit creating power of the current endogenous private financial monopoly, but also ought to be mandated to balance its bias of loan ONLY with a balancing consumer financial paradigm of Gifting to the individual.

    Flow is best characterized by a river as all of its loosely interconnected elements move dynamically together and beautifully like a dancer that gracefully moves around the dance floor with virtually perfect….equilibrium, balance and flow.

    And there you have it, the highest philosophical/conceptual integration possible (Grace) for the temporal system of economics. Now all we have to do is garner the ethical will to act to implement such policies. Yes, after you see it…it actually is that simple.

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