Home > Uncategorized > Wren-Lewis on internal consistency

Wren-Lewis on internal consistency

from Lars Syll

The example is the derivation of a benevolent policy maker’s preferences from the utility function of the representative consumer assumed as part of the model, a line of research initiated by Michael Woodford.

-consistency-36616Before getting on to the values point, let me note that it is a good example of the primacy of internal consistency in microfoundations rather than the Lucas critique. Before Woodford’s work, microfoundations macroeconomists were embarrassed that they typically assumed an ad hoc objective function for the policy maker choosing between the bads of deviations in inflation from target or deviations of output from its natural rate. Typically, results were presented with alternative values for the policy maker’s preferences between the two. But if the policy maker was benevolent and the model is internally consistent, shouldn’t this objective function reflect the utility function of the representative consumer in the model? What Woodford showed was how this could be done, and better still how it implied the form of objective function, quadratic, that had previously been used on an ad hoc basis. The preference between output and inflation deviations was now an implication of the model.

It was, it is important to admit, an exciting breakthrough. We could now tell policymakers that, if this is the utility function of the representative consumer, and the model was a good representation of reality (yes, I know), this is how you should be trading off output and inflation losses. It was a literature I participated in with colleagues. The derivations were hard and tedious to do, and could take pages of algebra, but within a year every macro paper of this kind had switched from ad hoc objective functions to derived objective functions. If you were doing macro and wanted the paper published in a good journal, this is what you had to do.

Simon Wren-Lewis

Wooh. We’ve put a lot of work and time into modelling this in an internally consistent way into our macromodels, so it sure has to be an exciting and interesting breakthrough …

I’ll be dipped!

This is, of course, basically a question of methodology. And it shows the danger of neglecting methodological issues — issues mainstream economists regularly have almost put an honour in neglecting. 

Being able to model a credible world, a world that somehow could be considered somehow ‘similar’ to the real world is not the same as investigating the real world.  The minimalist demand on models in terms of ‘credibility’ and ‘consistency’ has to give away to stronger epistemic demands. Claims in a ‘consistent’ model do 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 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.

Within mainstream economics — to which Wren-Lewis and his New Keynesian ‘consistent’ macromodelling certainly belong — 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!

To have ‘consistent’ models and ‘valid’ evidence is not enough. What economics needs are real-world relevant models and sound evidence.  Aiming only for ‘consistency’ and ‘validity’ is setting the economics aspirations level too low for developing a realist and relevant science.

Economics is not mathematics or logic. It’s about society. The real world. Forgetting that, economics is really in dire straits.

9781138851023Economic models often comprise not single, but sets of, equations, each of which is notoriously found to have little relation to what happens in the real world. One question that nevertheless keeps economists occupied with such unrealistic models is whether the equations formulated are mutually consistent in the sense that there ‘exists’ a vector of values of some variable, say one labelled ‘prices’, that is consistent with each and all the equations … As such the notion is not at all a claim about the world but merely a (possible) property that a set of equations may or may not be found to possess.

  1. Norman L. Roth
    January 26, 2018 at 6:21 pm

    Jan. 26, 2018

    Thank you for this M. {Lars} Syll,

    One of the foundations of TELOS & TECHNOS is the emergent property called the ‘CURRENT CONCEPTION of the STANDARD of LIFE. {NOT the same as the vaguely defined “Standard of Living”}. Nor was it conceived with “the utility function of the representative consumer” or the Bergsonian- false issue of “microfounded macro-models”.in mind. In TELOS & TECHNOS” Georgescu Rogen’s dismissal of the fantasy of “arithmomorphic ” accumulation from micro to macro is implicit as ontologically given. The reader should keep in mind that Henri Bergson, like the great John Maynard Keynes, was a mathematical prodigy in his youth. He never gave the slightest thought or interest in applying math to any social science .As was Thorstein Veblen’s nephew Oswald Veblen. Think about that ! The paradigm implicit in TELOS & TECHNOS is so different from what, the perhaps overly maligned Simon Wren Lewis is talking about, that it defies comparison. Incidently, metaphysical considerations are unavoidably just below the surface in economics, no matter how vigorously denied by their wannabe’ “scientific” progenitors and polemical critics.

    Please GOOGLE: {1} Norman L. Roth, Current Conception of the Standard of Life {2} Norman L. Roth, Technological Time {3} Norman L. Roth, Economics of work

    • Frank Salter
      January 27, 2018 at 6:59 am

      Quote from above:
      “…the fantasy of “arithmomorphic ” accumulation from micro to macro is implicit as ontologically given…”

      This assertion is totally wrong! Aggregation, using appropriate analysis from first principles, is mathematically valid! You will find the proof in Salter (2017)!

      Read:
      Salter, Frank M. (2017). “Transient Development”. In: Real World Economic Review (81), pp. 135–167

  2. Rob Reno
    January 26, 2018 at 7:58 pm

    As always Lars, you lead me to the most interesting resources. Lawson’s book The Nature and State of Modern Economics looks very interesting. Having just completed Marques I will work on Fullbrook, one of the two works you recommended.

    I have been trying to more fully grasp the Externalist v. Internalist terminology, and could only find on preliminary search could only find Davis (2008) The Individual in Recent Economics: Internalist and Externalist Conceptions (https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1109112). If you have any insights or recommended resources that would shed light on these terms I would appreciate this greatly.

    What would be your next 2 or 3 recommended readings, if you would be so kind as to share your thoughts.

    Interesting Next Reads:

    Economic Methodology: Understanding Economics as a Science
    by Marcel Boumans et al.
    Link: http://a.co/egk8vd8

    Essays on: The Nature and State of Modern Economics (Economics as Social Theory)
    by Tony Lawson
    Link: http://a.co/97FV7Z5

  3. Norman L. Roth
    January 26, 2018 at 10:53 pm

    January 26, 2018

    Further to my comments above:: I would refer interested readers back to another of the venerable Lars Syll’s “interesting resources” of June 10, 2017. ECONOMICS TEXTBOOKS TRANSMOGRIFYING TRUTH::WAGES & UNEMPLOYMENT: Please scroll down to comments of Norman L. Roth: {1} June 10, 2017 & {2} Nov.07, 2017, 9:22 PM & 10:35 PM.

    I would also highly recommend a video: TONY LAWSON-Confronting Mathematical Modelling, Bloomsbury Confrontations.
    M. Lawson, almost the quintessential Cambridge don in style, makes it clear that he’s not against the use of mathematical reasoning & “resources” PER SE. But he greatly sneers at the notion that Science is all about “predicting things.” And this fallacy of contemporary economics has led them down the primrose path of using {Or is ABUSING a better description ?} those techniques that are, in their minds, most associated
    with “prediction” in the more reputable sciences. My findings, recorded in TELOS & TECHNOS, with notorious examples, concluded that SPURIOUS QUANTIFIABILITY {e.g. ‘Total Factor Productivity”.{.Hardly the only one } was a leading contender for contributing to Homo Economist Agonistes. Please consult the late John Milton’s SAMSON AGONISTES as inspiration.

    Norman L. Roth

  4. January 27, 2018 at 9:10 am

    “What Woodford showed was how this could be done, and better still how it implied the form of objective function, quadratic, that had previously been used on an ad hoc basis. The preference between output and inflation deviations was now an implication of the model.”

    What needed to be shown is that a quadratic function produces complex numbers, for a quadratic formula can represent a simple function, i.e. produce a simple output, which is what happens when it represents the intersection of different variables like supply and demand, rather than different dimensions. The Law of Diminishing Returns is a complex result, its mathematical equivalent in electric circuit theory being the easily derived Maximum Power Transfer Theorem. To see whether this is what Woodward showed, I would have to see what he actually said.

  5. Norman L. Roth
    January 27, 2018 at 11:47 pm

    Jan.27, 2018

    There is something oddly familiar about “,,,,It’s mathematical equivalent in ELECTRIC CIRCUIT THEORY BEING THE EASILY DERIVED MAXIMUM POWER TRANSFER…”

    Especially when we consider Philip Mirowski’s constructively polemical classic MORE HEAT THAN LIGHT” of 1989:
    Which was a learned critique of how Economists, driven by “Physics envy” ,ruined the reputation of their subject by bathing it in the effluent of metaphors, borrowed from Physics and engineering. In this case reducing Economics to a “mimosis” of 19th century thermodynamics. Mirowski’s final chapter should be read especially carefully, M. Lars Syll being the most appropriate teaching source for explaining it to non -mathematical readers such as myself.

    But the neoclassical “thermodynamic” fantasy was not the only example of such “scientistic” indulgence. Others included Irving Fisher’s version of the QUANTITY THEORY of MONEY, which he seems to have designed as a metaphor of Boyle’s Law. He is reputed to have built a mechanical-hydraulic model of it, Which may still lie in some dust & lint covered nook of the Smithsonian. And Fisher was a well trained mathematician. An almost comic version of such inverted Physics Metaphors was Tustin’s “Hydraulic Keynesianism” of the 1950’s.But Tustin was himself a very competent engineer. I could go on & on, with further entertaining examples, including aspirations to magic algorithms that would reduce macro-economic phenomena to electrical analogies and then force highly complex,interactive, quasi-organic path-dependent , gestalt like economic systems into controllable stability. The definition of “Stability” being left to the discretion of the controller of the magic algorithm. George Orwell understood completely what that sort of thing led to.

    Monetarism in its crudest incarnation was grandfathered from Irving Fisher’s “model”. See the back jacket of TELOS and TECHNOS.

    The highly respected M. Tony Lawson is not the only one who has uncovered the rancid cul-de-sac where such pseudo-scientific convolutions end-up. Keynes, Marshall, Hayek, Mises, Gunnar Myrdal, Knut Wicksell and others sniffed out such tendencies in their own time.

    Thank you for your patience. GOOGLE: Norman L. Roth

  6. Norman L. Roth
    January 28, 2018 at 5:00 pm

    Jan. 2,8,2018,
    M. {Frank} Salter

    Thank you for your valid criticism. Of course You are correct in the context you have described. What I omitted was, that the late-great Georgescu -Roegen, who was a well respected applied mathematician, meant his statement to apply ONLY to a macro-economic context. Which is apparent in his 1971 & 1976 Classic, THE ENTROPY LAW & THE ECONOMIC PROCESS. It’s at the beginning of the bibliography of TELOS & TECHNOS. Hopefully, my context will be much clearer when you read my letter of Jan. 27, at
    11:47 P.M. Feel free to criticize my offerings at any time.

    With Respect, Norman L. Roth

  7. Norman L. Roth
    January 28, 2018 at 8:06 pm

    Jan. 2, 2018
    Addendum to my letter of Jan. 26,, 2018 at 10:53 P.M.

    In HIS dismissal of the naïve & shallow notion that the measure of authentic Science is its capability to “predict things, Mr. {Tony} Lawson is perhaps {implicitly} taking us back to the days of 19th century “liberal” German Scholarship. The leading lights of that era insisted that the aim of any learning experience was “verstehen” and “erklarung”. This acceptance of the “degrees of freedom” that should be pursued & allowed where attainable,, by true scholars of any subject, doesn’t necessarily lead to a conclusion that a high degree of “predictability”, or for that matter ease of quantification, will be an outcome of our investigations. Examples abound. And not just from Quantum Physics. Thank you for your patience.

    Norman L. Roth

    • Craig
      January 28, 2018 at 9:48 pm

      What is your best succinct definition/expression of the paradigm of Telos & Technos?

  8. Norman L. Roth
    January 31, 2018 at 3:34 pm

    Jan. 31, 201,

    Don’t fret M. Craig, I’M trying to get a “SUCCINCT” together. But the one who did the paradigm is the worst candidate for the job. I need some helpful inspiration from “other voices, other rooms”.

    Norman l. Roth, Technological Time.

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