Home > methodology > How evidence is treated in macroeconomics

How evidence is treated in macroeconomics

from Lars Syll

“New Keynesian” macroeconomist Simon Wren-Lewis has a post up on his blog, discussing how evidence is treated in modern macroeconomics (emphasis added):

quote-Oscar-Wilde-consistency-is-the-last-refuge-of-the-58It is hard to get academic macroeconomists trained since the 1980s to address this question, because they have been taught that these models and techniques are fatally flawed because of the Lucas critique and identification problems. But DSGE models as a guide for policy are also fatally flawed because they are too simple. The unique property that DSGE models have is internal consistency. Take a DSGE model, and alter a few equations so that they fit the data much better, and you have what could be called a structural econometric model. It is internally inconsistent, but because it fits the data better it may be a better guide for policy.

Being able to model a credible world, a world that somehow could be considered real or similar to the real world, is not the same as investigating the real world. Even though all theories are false, since they simplify, they may still possibly serve our pursuit of truth. But then they cannot be unrealistic or false in any way. The falsehood or unrealisticness has to be qualified (in terms of resemblance, relevance, etc.). At the very least, the minimalist demand on models in terms of credibility has to give away to a stronger epistemic demand of appropriate similarity and plausibility. One could of course also ask for a sensitivity or robustness analysis, but the credible world, even after having tested it for sensitivity and robustness, can still be a far way from reality – and unfortunately often in ways we know are important. Robustness of claims in a model does not per se give a warrant for exporting the claims to real world target systems.

Questions of external validity are important more specifically also when it comes to microfounded DSGE macromodels. It can never be enough that these models somehow are regarded as internally consistent. One always also has to pose questions of consistency with the data. Internal consistency without external validity is worth nothing.

Yours truly and people like Tony Lawson have for many years been urging economists to pay attention to the ontological foundations of their assumptions and models. Sad to say, economists have not paid much attention — and so modern economics has become increasingly irrelevant to the understanding of the real world.

an-unconvenient-truthWithin mainstream economics internal validity is still everything and external validity nothing. Why anyone should be interested in that kind of theories and models is beyond imagination. As long as mainstream economists do not come up with any export-licenses for their theories and models to the real world in which we live, they really should not be surprised if people say that this is not science, but autism!

Since fully-fledged experiments on a societal scale as a rule are prohibitively expensive, ethically indefensible or unmanageable, economic theorists have to substitute experimenting with something else. To understand and explain relations between different entities in the real economy the predominant strategy is to build models and make things happen in these “analogue-economy models” rather than engineering things happening in real economies.

Formalistic deductive “Glasperlenspiel” can be very impressive and seductive. But in the realm of science it ought to be considered of little or no value to simply make claims about the model and lose sight of reality.

Neoclassical economics has since long given up on the real world and contents itself with proving things about thought up worlds. Empirical evidence only plays a minor role in economic theory, where models largely function as a substitute for empirical evidence. Hopefully humbled by the manifest failure of its theoretical pretences, the one-sided, almost religious, insistence on axiomatic-deductivist modeling as the only scientific activity worthy of pursuing in economics will give way to methodological pluralism based on ontological considerations rather than formalistic tractability.

To have valid evidence is not enough. What economics needs is sound evidence. Why? Simply because the premises of a valid argument do not have to be true, but a sound argument, on the other hand, is not only valid, but builds on premises that are true. Aiming only for validity, without soundness, is setting the economics aspirations level too low for developing a realist and relevant science.

  1. August 22, 2015 at 11:19 am

    How true your cartoon! If you can’t explain the creation or evolution of matter, assume it has always existed! But Einsteinian interpretation of the evidence points to a Big Bang, which fits in with matter evolving. How?

    Reverse engineered evolution by abstracting away all today’s material content and interaction, what’s left? Where does time come from? What definition will make sense of “existence” before, during and after the Big Bang and the subsequent evolution and differentiation of material forms? Does the evidence of what we have found to exist in successive stages of evolution support your definition right up into our era of language, networked linguistic communication, error, and “economising with the truth”? Will you be at Tony Lawson’s Critical Realist reunion, Lars? I’m hoping (but not expecting) these ontological issues to come up for discussion there.

  2. JdeV
    August 22, 2015 at 4:47 pm

    Epually the physicists at Cern could have observed artefacts, akin to Percival Lowell concluding that there were Canals on Mars?

    • August 22, 2015 at 5:39 pm

      That seems to me likely. Matter evolving is not the same as smashing particles which already exist. You don’t see matter evolving, only that it has evolved, whereas if the ultimate particles are matter is circulating energy, a one-dimensional observation of its disintegration will see only of its three dimensions, hence it seemingly disintegrates into three smaller particles (c.f. quarks).

  3. JdeV
    August 22, 2015 at 7:38 pm

    Would the Cern resources have been better spent on attempts to efficiently utilise nuclear fusion power for peaceful purposes ?? Does this mean we now have some sort of Socio-Economic context for discuss on P/physics, or should we go back to Brownian Motion?

  4. August 23, 2015 at 1:03 pm

    As it is now 60 years since (as an apprentice) I worked on superconductivity with that in mind, I would like to think so. However, I was arguing conversely that discussion of P/physics from the inside rather than the outside of the particles provides some sort of physical context for discussion of Socio-Economic structures. Compare Copernicus, seeing our world as part of the solar system, with Hume, given knowledge of the solar and social systems, persuading naive scientists to believe they [not it] are artefacts of our head!

    But this thread is about Lars’ critique of DSGE models. When I have to go to the bank to access my money, the motion I experience is not Brownian and distant but channelled (i.e. directed) and personal. The channel exists if I am able to get there. Whether I walk down the centre or the edge of the path is immaterial.

    I think DSGE modellers have something like that in mind, but simply for buying and selling, not with different channels linking six fundamentally different purposes as in Macrocompa’s excellent model of what we have; or my reduction of that to what (given physical things embody information) is logically possible, which includes what we have. A one-purpose or duplex channel either exists or it doesn’t, no matter what it conveys. A network linking a set of distinct types of information can be more or less complete, elegant and logically arranged, which is what is needed if improvement is to be possible.

    If life on our world is to survive, its leaders need to decide pretty quickly to go for such a Copernican revolution of understanding.

    • August 23, 2015 at 1:56 pm

      How I agree with Ack Nice on “Austerity – US style”.

      “Getting priorities correct is vital: if you are picnicking on a railway line, moving the picnic comes first”.

      • August 24, 2015 at 12:10 pm

        Had difficulties recognising Ack’s railway line as an example of a duplex channel? Try “the greatest story ever told” (Dorothy L Sayers’ agnostic description of the Gospels): this being full of parables – many about economics – which require one to think for oneself. Which [I’ve just realised] is what Lars’ first – Oscar Wilde – cartoon above is all about.

        Apologies, nevertheless, for irritating typos in my first two comments, which I didn’t see until they had been sent. In the first, the 2nd para was meant to begin “Reverse engineerING evolution …”. In the second comment, “the ultimate particles OF matter ARE circulating energy”. Actually, both statements are highly significant, so worth thinking through for oneself.

  5. November 26, 2015 at 3:18 am

    Very true and a nice informative read.Thanks for such a nice illustrated article

  6. November 26, 2015 at 9:49 am

    To quote Oscar Wilde in the context of methodology is a shot in the foot. As Nietzsche said: “In matters of knowledge, poets are always wrong.”* In Plato’s Republic Socrates even argued: “Thus the poets are liars, and therefore they should be expelled from the City of ideal governance.”**

    In the (real) sciences (as opposed to economics) formal consistency alone has never been regarded as sufficient. From this, though, by no means follows that formal consistency is dispensable.

    With regard to logical consistency, Heterodoxy — urgently — has to bring its own house in order. See the post

    * https://books.google.de/books?id=Kip0w0i1ykUC&pg=PA69&lpg=PA69&dq=all+poets+are+liars+Nietzsche&source=bl&ots=wgesAzxwbI&sig=53LlArx5UiGiADaFoWL1aLhZGio&hl=de&sa=X&ved=0ahUKEwjegKmD3a3JAhXKuhQKHbbNB1sQ6AEIRTAF#v=onepage&q=all%20poets%20are%20liars%20Nietzsche&f=false
    ** http://www.enotes.com/homework-help/whythe-poets-where-explled-from-republican-city-103593

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