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Macroeconomic machine dreams

from Lars Syll

blog_robot_overlordsMany mainstream macroeconomists  hold on to the hope that they will not be doomed forever to always ‘fight the last war,’ but instead, building on timeless microfoundational rules — Lucas ‘deep parameters’ — they will be able to predict upcoming problems before they happen. Adding some new little twist to the DSGE model will make all the difference …

What these economists ‘forget,’ however, is that to produce these n:th variations of the basic DSGE model, they still have to make ridiculously simplifying assumptions to make the models ‘forecast’ anything.

This is nothing but the age-old machine dream of neoclassical economics — an epistemologically founded cyborg dream that disregards the fundamental ontological fact that economies and societies are open — not closed — systems.

The empirical and theoretical evidence is clear. Predictions and forecasts are inherently difficult to make in a socio-economic domain where genuine uncertainty and unknown unknowns often rule the roost. The real processes that underly the time series that economists use to make their predictions and forecasts do not confirm with the assumptions made in the applied statistical and econometric models. Much less is a fortiori predictable than standardly — and uncritically — assumed. The forecasting models fail to a large extent because the kind of uncertainty that faces humans and societies actually makes the models strictly seen inapplicable. The future is inherently unknowable — and using statistics, econometrics, decision theory or game theory, does not in the least overcome this ontological fact. The economic future is not something that we normally can predict in advance. Better then to accept that as a rule “we simply do not know.”

In an interesting discussion on the hopelessness of accurately modeling what will happen in the real world, Nobel laureate Kenneth Arrow – in Eminent Economists: Their Life Philosophies (CUP 1992) – pretty well sums up what the forecasting business is all about:

It is my view that most individuals underestimate the uncertainty of the world. This is almost as true of economists and other specialists as it is of the lay public. To me our knowledge of the way things work, in society or in nature, comes trailing clouds of vagueness … Experience during World War II as a weather forecaster added the news that the natural world as also unpredictable. cloudsAn incident illustrates both uncertainty and the unwillingness to entertain it. Some of my colleagues had the responsibility of preparing long-range weather forecasts, i.e., for the following month. The statisticians among us subjected these forecasts to verification and found they differed in no way from chance. The forecasters themselves were convinced and requested that the forecasts be discontinued. The reply read approximately like this: ‘The Commanding General is well aware that the forecasts are no good. However, he needs them for planning purposes.’

  1. February 27, 2016 at 3:11 pm

    Scientists do not predict
    Comment on Lars Syll on ‘Macroeconomic machine dreams’

    A theory cannot be dismissed because it cannot predict the future. Therefore, as a matter of principle, economics from Jevons/Walras/Menger to DSGE cannot be dismissed because it has not predicted crises. Neoclassics is unacceptable because it is logically and empirically inconsistent. In more colloquial terms, all models that have been built and are still being built upon the maximization-and-equilibrium axioms have to be straightforwardly rejected as scientific garbage and NOT for any other reason.

    Who in all history has been preoccupied with prediction? Mainly two groups, (i) prophets, doomsters, apocalyptics, fear mongers, gurus, utopians, astrologers, Pythia and other oracles, rise-and-fall historians/sociologists, politicians, and (ii), people who want to make a killing in the casino of Monte Carlo or on the stock-market.

    No scientist is occupied with the prediction of historical events because it is long known that “The future is unpredictable.” (Feynman, 1992, p. 147)

    The point is that scientists use the word prediction in a quite different sense from everyday usage. For example, Einstein deduced gravity waves from his theory in 1916 and in our days, 100 years later, they are observed. Only in the very specific sense of testable hypothesis scientists make ‘predictions’.

    All this is well-known among methodologists: “We are very far from being able to predict, even in physics, the precise results of a concrete situation, such as a thunderstorm, or a fire.” (Popper, 1960, p. 139)

    So Arrow’s argument that long-run weather forecasts are pointless is not a great revelation but an additional proof that neoclassical economists never understood what science is all about. And just because of this, economics has never been anything else than a cargo cult science. This, too, is well known: “Suffice it to say that, in my opinion, what we presently possess by way of so-called pure economic theory is objectively indistinguishable from what the physicist Richard Feynman, in an unflattering sketch of nonsense ‘science,’ called ‘cargo cult science’.” (Clower, 1994, p. 809)

    In the sense of a self-description, the Keynesian “we simply do not know” applies to economists since more than 200 years. That economists are incompetent scientists that much we know for sure — and it holds with absolute certainty for both orthodox and heterodox economists.

    So we can predict that nothing of real scientific value will ever come from these folks, in perfect analogy to the prediction of physics that pigs will never fly.

    Egmont Kakarot-Handtke

    Clower, R. W. (1994). Economics as an Inductive Science. Southern Economic Journal, 60(4): 805–814.
    Feynman, R. P. (1992). The Character of Physical Law. London: Penguin.
    Popper, K. R. (1960). The Poverty of Historicism. London, Henley: Routledge and Kegan Paul.

  2. Alan
    February 27, 2016 at 3:46 pm

    This is nothing but the age-old machine dream of neoclassical economics — an epistemologically founded cyborg dream that disregards the fundamental ontological fact that economies and societies are open — not closed — systems.

    I think I may have referenced this previously but it is worth referencing again. Chicago economics that makes sense (needless to say not from University of Chicago’s Department of Economics and focused on cultural understanding rather than prediction):
    Marshall Sahlins On the culture of material value and the cosmography of riches.

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