‘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 …
In 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.”
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.