Home > Uncategorized > ‘Post-real’ macroeconomics — three decades of intellectual regress

‘Post-real’ macroeconomics — three decades of intellectual regress

from Lars Syll

Macroeconomists got comfortable with the idea that fluctuations in macroeconomic aggregates are caused by imaginary shocks, instead of actions that people take, after Kydland and Prescott (1982) launched the real business cycle (RBC) model …

67477738In response to the observation that the shocks are imaginary, a standard defence invokes Milton Friedman’s (1953) methodological assertion from unnamed authority that “the more significant the theory, the more unrealistic the assumptions.” More recently, “all models are false” seems to have become the universal hand-wave for dismissing any fact that does not conform to the model that is the current favourite.

The noncommittal relationship with the truth revealed by these methodological evasions and the “less than totally convinced …” dismissal of fact goes so far beyond post-modern irony that it deserves its own label. I suggest “post-real.”

Paul Romer

There are many kinds of useless economics held in high regard within the mainstream economics establishment today. Few  are less deserved than the post-real macroeconomic theory — mostly connected with Finn Kydland, Robert Lucas,  Edward Prescott and Thomas Sargent — called RBC.  

In Chicago economics one is cultivating the view that scientific theories has nothing to do with truth. Constructing theories and building models is not even considered an activity wth the intent of  approximating truth. For Chicago economists it is only an endeavour to organize their thoughts in a ‘useful’ manner.

What a handy view of science!

What these defenders of scientific storytelling ‘forget’ is that potential explanatory power achieved in thought experimental models is not enough for attaining real explanations. Model explanations are at best conjectures, and whether they do or do not explain things in the real world is something we have to test. To just believe that you understand or explain things better with thought experiments is not enough.

Without a warranted export certificate to the real world, model explanations are pretty worthless. Proving things in models is not enough — not even after having put ‘New Keynesian’ sticky-price DSGE lipstick on the RBC pig.

Truth is an important concept in real science — and models based on meaningless calibrated ‘facts’ and ‘assumptions’ with unknown truth value are poor substitutes.

  1. November 28, 2016 at 6:27 pm

    In a recent discussion with a professor of economics, I was actually accused of being “reality-based” the term used as a pejorative!

  2. November 29, 2016 at 11:45 am

    “What a handy view of science!” I’m glad to see Lars has parentheses doubting the veracity of ‘forget’.

    We keep going over and over these arguments, though. Unless the Professors who lead these blogs pick up and feed back their thoughts on new lines of discussion the status quo will remain unchanged by endorsement and criticism and there will be no chance of our converging on a more fruitful way of resolving the world’s problems.

    Here I am complaining about Lars talking about explanations and truth without defining what they are – i.e. by taking positions which commit his discussion to either a causal or a descriptive understanding of explanation, and to either a logical (one of a set) or a mirror-image (point-by-point correspondence of model and reality) perceptual conception of truth.

    To explain the logical type of truth a little further, the ‘one’ may be a subset and the bounds of the set spatial, as in a geographical map. Without needing to be precise it can be true that the town of Malvern – and so a street within that and a house within the street – is in the county of Worcestershire. With events it can be temporal: it is true I was born in the 20th century. The word ‘logic’ derives from that for a word: the true understanding of which associates it with the right set, map or image.

    If this is not made clear the discussion remains frustratingly at cross-purposes, as it surely has been as between Ken Zimmerman and myself.

  3. November 29, 2016 at 11:56 am

    Just found this on the resurrected parallel discussion at https://rwer.wordpress.com/2012/03/28/the-ergodic-axiom-davidson-versus-stiglitz-and-lucas/#comment-114287

    Henry Law March 28, 2012 at 6:10 pm Reply

    “Hmm. This is barely English. Let’s get some clarity into the discussion. A physical science defines its terms rigorously and the students of that science then set out to discover, through observation and experiment, consistencies in the relationships between different entities. Those consistent relationships can then be formulated as laws.

    “When, as seems to be the case, there is no agreement on the definition of fundamental concepts in economics such as “wealth” and “capital”, there is no possibility of developing an agreed body of fundamental theory”.

  4. November 30, 2016 at 9:56 am

    “Truth is an important concept in real science — and models based on meaningless calibrated
    ‘facts’ and ‘assumptions’ with unknown truth value are poor substitutes.” Even the standard versions of the life of science and scientists rejects this assertion. Science for Popper, etc. is the testing of hypothesis vs. observations, and the construction of theories (partial and incomplete) from that work. Truth is not considered in this science. The pragmatic version of science considers “theoretical constructs,” e.g., gravity as explanations of certain assumed observations. There are an unlimited number of constructs that can be used to explain any observation. And observations cannot be confirmed as equivalent or repeatable. I prefer the latter view of science as it in my view reflects the actual work and limitations of scientists. This conversation of in the 1951 movie “The Day the Earth Stood Still” represents this view of science.

    Professor Barnhardt: “Have you tested this theory”?
    Klaatu: [subtle change in expression] “Umm, I find it works well enough to get me from one planet to another”.

    “Works well enough” sums up science well. Including economics. It’s in practice, everyday work we find science. Not in textbooks or journals. And such work is interpretive, imaginative, requires imagination. Imagination is in fact what set homo sapiens apart from the other human species with which it inhabited the Earth, and allowed the invention of science.

    I’m all in favor of “reality based” work. So long as we recognize what reality is for humans. Practices that “work well enough” to help find our way and understand what’s happening. The practical effects of the understandings we invent is the only “truth” humans have.

    • November 30, 2016 at 11:41 am

      Ken, once again I have to object to your attempting to drown out my straightforward comparison of two interpretations of truth, two aims and forms of science, by a mass of words asserting your own completely one-sided version. So the truth of an understanding is that an action will achieve what we think it will? That’s fine. But which action should we take? Where should we look to see what we need to do? The efficient transmission of that knowledge from one generation to another is the function of logic. Fundamental science works like a map developed for us by our predecessors. It doesn’t tell us what we will see but it gives us some idea of where to look for what we are interested in. Perhaps it might help if I gave up by talk of ‘fundamental’ or ‘basic’ science and started talking about it as the Prelude to your ‘pragmatic’ science? In computing, you cannot compute until you have programmed the computing processes. In humanity, most people aren’t interested in computing for practical purposes, and around half of those who are are quite satisfied with having done the programming, not wanting to dirty their hands by working. Sad, but true. An “intellectual regress” at the macro level but a general failure to learn from the past at the micro level.

      • December 1, 2016 at 5:34 am

        My comments are about the original post, not your reactions to it. You ask the appropriate question, in my view. What actions should we take? But then you go off the track again. No so-called rule, of logic or anything else can stand on its own. Whether we call these rules theories or laws makes no difference. To be carried over from one generation to another requires that each be interpreted by each member of each new generation. It’s not logic by which knowledge is transmitted from generation to generation, but the collective life (culture) in which these generations are embedded. Various forms of science are part of these cultures in western nations. Members of a generation imitate (partially and with some changes) the habits of thought and action of the preceding generation. And each generation also “reinterprets” parts of those habits. The things you list (basic vs. fundamental science; micro vs. macro; etc.) are parts of those habits, at least in the cultures of the west. These are things invented by humans and other actors to “explain” the habits and give them a teleology, a purpose. Humans invent such things and then apply them only in practice, even if the practice is just a thought experiment. The process is no different for scientists, except that scientists invent many more beliefs and explanations for them in hopes of capturing a clearer sense of the habits and explanations and how they are related.

        I reject any “science” that claims it searches for truth. Science is an effort to figure out if the habits and explanations we invent can be useful and productive in guiding our actions. From a pragmatic perspective, this is the only truth or clarity we can have access to, even if only remotely and through an opaque glass. But along with homo sapiens’ imagination goes vanity. The notion that we can find truth; a term homo sapiens invented to explain and justify its vanity. So, the right question to ask in looking at human economic actions is indeed, what actions should we take and why? The answer is not truth, but merely the continuing efforts of humans to link their ways of life with explanations.

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