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Macroeconomic ad hocery

from Lars Syll

Robert Lucas is well-known for condemning everything that isn’t microfounded rational expectations macroeconomics as “ad hoc” theorizing.  adhoc

But instead of rather unsubstantiated recapitulations, it would be refreshing and helpful  if the Chicago übereconomist — for a change — endeavoured to clarify just what he means by “ad hoc.”

The standard meaning — OED — of the term is “for this particular purpose.” But in the hands of New Classical–Real Business Cycles–New Keynesians it seems to be used more to convey the view that modeling with realist and relevant assumptions is somehow equivalent to basing models on “specifics” rather than the “fundamentals” of individual intertemporal optimization and rational expectations.

This is of course pure nonsense, simply because there is no — as yours truly has argued at length e. g. here — macro behaviour that consistently follows from the NC–RBC–NK microfoundations. The only ones that succumb to ad hoc assumptions here are macroeconomists like Lucas et consortes, who believe that macroeconomic behaviour can be adequately analyzed with a fictitious rational-expectations-optimizing-robot-imitation-representative-agent.

And don’t get me wrong on this. I like good fiction. But that doesn’t include New Classical–Real Business Cycles–New Keynesian fiction. That’s just bad fiction.

  1. Larry Motuz
    August 9, 2015 at 10:44 pm

    The problems of modern macro-economics are not due to not having micro-foundations, but, and rather, to the lack of substantive foundations within micro-economics itself.
    All that the marginalist revolution accomplished was to remove objective benefits (i.e., values-in-use) out of economic ‘analysis’, replacing this with ‘value-in-exchange” and ‘willingness-to-pay’ based open subjective preferences.

    It is one thing to say that people have preferences. It is another entirely to give these likes and dislikes particular mathematical forms, and to then deduce from those forms all of the conclusions modern economics finds consistent with such ‘assumed’ mathematical forms.

    • August 10, 2015 at 10:14 am

      Spot on, Larry. I recently discovered and drew attention to Fig. 3 in Jevon’s “The Theory of Political Economy” doing exactly what you say in your second paragraph. The first two increments in his histogram are left undefined, because, Jevon’s says, “these portions of of food would be indespensible to life, and their utility, therefore, infinitely great”. So he ignores them! (Presumably in the belief that, while people are still alive, they must be getting them).

      Rephrasing the argument in terms of C E Shannon’s definition of redundant information (“The Mathematical Theory of Communication”, part 1.7, p.398, Bell System Technical Journal, July, 1948), it turns out that the only real information is that which Jevons has omitted, all the rest being redundant (though nevertheless useful for making correctives). This surely corresponds with the economic philosophy of trading only what is surplus after what is necessary has been provided for from what is locally available. ‘Economic philosophy’ amounts in practice to ‘political choice’.

      • Larry Motuz
        October 31, 2015 at 11:12 pm

        Hi, David. For some reasons I wasn’t getting replies sent to me, and I just noticed yours minutes ago. Now I am going to have to find Fig. 3.

        Thanks for your reply and confirmation.

  2. Larry Motuz
    August 9, 2015 at 10:51 pm

    The words “based open” should be “based upon” in my earlier comment.

    A very different analysis, both micro and macro, emerges once one takes into account that people purchase goods to derive specific and quantifiable benefits from their use. That analysis begins with the consumer making at decision about how much to spend … leading to a process of budget formation that the marginalists elide. Benefit substitution is not price substitution, for the measure of benefits is not ‘exchange value’ per se, but whether or not goods can be used for purposes other than merely for exchange.

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