New Classical macroeconomists — people having their heads fuddled with nonsense
from Lars Syll
McNees documented the radical break between the 1960s and 1970s. The question is: what are the possible responses that economists and economics can make to those events?
One possible response is that of Professors Lucas and Sargent. They describe what happened in the 1970s in a very strong way with a polemical vocabulary reminiscent of Spiro Agnew. Let me quote some phrases that I culled from the paper: “wildly incorrect,” “fundamentally flawed,” “wreckage,” “failure,” “fatal,” “of no value,” “dire implications,” “failure on a grand scale,” spectacular recent failure,” “no hope” … I think that Professors Lucas and Sargent really seem to be serious in what they say, and in turn they have a proposal for constructive research that I find hard to talk about sympathetically. They call it equilibrium business cycle theory, and they say very firmly that it is based on two terribly important postulates — optimizing behavior and perpetual market clearing. When you read closely, they seem to regard the postulate of optimizing behavior as self-evident and the postulate of market-clearing behavior as essentially meaningless. I think they are too optimistic, since the one that they think is self-evident I regard as meaningless and the one that they think is meaningless, I regard as false. The assumption that everyone optimizes implies only weak and uninteresting consistency conditions on their behavior. Anything useful has to come from knowing what they optimize, and what constraints they perceive. Lucas and Sargent’s casual assumptions have no special claim to attention …
It is plain as the nose on my face that the labor market and many markets for produced goods do not clear in any meaningful sense. Professors Lucas and Sargent say after all there is no evidence that labor markets do not clear, just the unemployment survey. That seems to me to be evidence. Suppose an unemployed worker says to you “Yes, I would be glad to take a job like the one I have already proved I can do because I had it six months ago or three or four months ago. And I will be glad to work at exactly the same wage that is being paid to those exactly like myself who used to be working at that job and happen to be lucky enough still to be working at it.” Then I’m inclined to label that a case of excess supply of labor and I’m not inclined to make up an elaborate story of search or misinformation or anything of the sort. By the way I find the misinformation story another gross implausibility. I would like to see direct evidence that the unemployed are more misinformed than the employed, as I presume would have to be the case if everybody is on his or her supply curve of employment. Similarly, if the Chrysler Motor Corporation tells me that it would be happy to make and sell 1000 more automobiles this week at the going price if only it could find buyers for them, I am inclined to believe they are telling me that price exceeds marginal cost, or even that marginal revenue exceeds marginal cost, and regard that as a case of excess supply of automobiles. Now you could ask, why do not prices and wages erode and crumble under those circumstances? Why doesn’t the unemployed worker who told me “Yes, I would like to work, at the going wage, at the old job that my brother-in-law or my brother-in-law’s brother-in-law is still holding”, why doesn’t that person offer to work at that job for less? Indeed why doesn’t the employer try to encourage wage reduction? That doesn’t happen either. Why does the Chrysler Corporation not cut the price? Those are questions that I think an adult person might spend a lifetime studying. They are important and serious questions, but the notion that the excess supply is not there strikes me as utterly implausible.
No unnecessary beating around the bush here.
The always eminently quotable Solow says it all.
The purported strength of New Classical macroeconomics is that it has firm anchorage in preference-based microeconomics, and especially the decisions taken by inter-temporal utility maximizing ‘forward-loooking’ individuals.
To some of us, however, this has come at too high a price. The almost quasi-religious insistence that macroeconomics has to have microfoundations – without ever presenting neither ontological nor epistemological justifications for this claim – has put a blind eye to the weakness of the whole enterprise of trying to depict a complex economy based on an all-embracing representative actor equipped with superhuman knowledge, forecasting abilities and forward-looking rational expectations. It is as if – after having swallowed the sour grapes of the Sonnenschein-Mantel-Debreu-theorem – these economists want to resurrect the omniscient Walrasian auctioneer in the form of all-knowing representative actors equipped with rational expectations and assumed to somehow know the true structure of our model of the world.
That anyone should take that kind of stuff seriously is totally and unbelievably ridiculous. Or as Solow has it:
Suppose someone sits down where you are sitting right now and announces to me that he is Napoleon Bonaparte. The last thing I want to do with him is to get involved in a technical discussion of cavalry tactics at the battle of Austerlitz. If I do that, I’m getting tacitly drawn into the game that he is Napoleon. Now, Bob Lucas and Tom Sargent like nothing better than to get drawn into technical discussions, because then you have tacitly gone along with their fundamental assumptions; your attention is attracted away from the basic weakness of the whole story. Since I find that fundamental framework ludicrous, I respond by treating it as ludicrous – that is, by laughing at it – so as not to fall into the trap of taking it seriously and passing on to matters of technique.
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Real-World Economics Review Blog 
This is why Robert Solow was one of my favorites as a young student graduating in 1968.
It’s correct that perfectionism and absolutism is flawed. Even paradigm changes require regulation and lead on to further discoveries and eventually new changes. The trick is to see the paradigm as the singular concept that resolves, changes and advances everything beneficially in the current pattern with logically aligned policies. That is what clarifies, unifies and focuses such change as history testifies to.
I wish I could find “the trick” to which you refer. Your description of its effect is exemplary. That two hundred and forty two years of qualitative analysis by innumerable economists has failed to provide any meaningful analysis, would appear to be highly suggestive that a solution will not be found by following this method.
The major problem I believe I am finding is that there is strong antipathy to mathematical analysis within the heterodox community. Kaldor’s “cumulative causation” papers are not cited as frequently as the citations of neoclassical growth hypotheses. Clearly cumulative causation is an attempt to describe numerical solutions for analysing production. That an analytical solution is available which predicts (not correlates with) the empirical data appears so far to have achieved no traction within the heterodox community, amazes me. The new paradigm is available (Transient development — RWER-81).
If Lars Syll’s main contention is to oppose the idea that macroeconomics has to have MICROfoundations, he must be right. However, it does not imply that macroeconomics does not need foundations. Ontological or epistemological arguments cannot give these foundations. They can only give suggestions or orientations to the research, but they are not the foundations themselves.
This is the problem not only for Neoclassical Keynesians like Solow and New Keynesians like Mankiw, but for Post Keynesians as well. The lack of theoretical foundations is making Post Keynesian Economics superficial, logically loose discipline. It depends too much on empirical tendency laws and observations without any accuracy. Combining those tendency laws into an equilibrium system does not ensure what happens in the real economy. It is necessary to find underlying mechanisms that generate those phenomena. I am not saying this to accuse Post Keynesian Economics. I pose myself among Post Keynesians in a wide sense (I am at least sympathetic to Post Keynesians).
I believe this is a misinterpretation of what Lars is saying. I have read his book on the WEA, and nowhere did I read that he opposes the idea per se of so-called microfoundations, rather he is cogently shedding light upon the current failures of existing claims of the “purported strength of New Classical macroeconomics is that it has firm anchorage in preference-based microeconomics, and especially the decisions taken by inter-temporal utility maximizing ‘forward-looking’ individuals.” I think he is pretty clear here.
The assertion that “macroeconomics has to have MICROfoundations” is purely Yoshinori’s own assumption. But it seems economists are moving forward without such so-called microfoundations and seeking, within a pluralist context, to solve real-world problems, without fretting about the lack of some theoretical microfoundation, as can be seen in the WEA Conference Economic Philosophy: Complexities in Economics.
It seems that Yoshinori believes that individual human and social interactions within economics can be reduced to causal mechanisms that can be mathematically modeled in support of his theory-first approach. He uses examples from physics, stating, “Kuhn talks about Copernicus, Newton, Lavoisier and Einstein. In each case, the person who brought a revolution had a well developed theory.” He used a similar argument in the discussion section of the Economic Philosophy: Complexities in Economics discussion forum, but without success.
Putting aside the fact that insights from relativity and quantum theory call into question such mechanistic assumptions, the simple fact is that human beings and their social interactions are not reducible to physics, and therefore cannot be treated like physics or compared thereto without grossly distorting reality. And therein lies the fundamental difference between his theory-first approach and that of those heterodox economists taking a more pragmatic approach to solving real-world problems. Economics as a social science is not the same as physics. This is a fundamental philosophical error in my view.
I must agree with Robert Delorme, this insistence on a theory-first approach and conflation of the science of physics with the social science of economics is really a form of scientism that has outlived its usefulness in todays modern world.
What you say is true. It is very unlikely that a valid theory which predicts human behaviour will ever be found.
However, all human action takes place within physical reality. These effects are able to be described mathematically. The hypersurfaces of production theory, I describe in “Transient Development”, represents every conceivable decision, available to the protagonists, in developing production processes. That the hypersurfaces have a maximum output for minimum effort explains the “invisible hand” of Adam Smith. It is physical reality which determines this. It is good engineering, not the result of arbitrary decisions.
Thank you Frank. One question. Have you read Lars’ book On the use and misuse of theories and models in economics?
I have not read “On the use and…”. I believe I would be in complete agreement with all he has to say.
My research into production theory was triggered by colleagues’ claims that Keynes’ economic multiplier was not theoretically justified — contrary to my experience gained on World Bank projects. I examined published papers and found that their mathematical treatments, in general, varied from the elementary to the simply ridiculous. I found very few with useful content.
What I also found, in general, was that the basis of modelling was to guess equations, fit their coefficients to the data and then commit the cardinal error of claiming causation from correlation! None, not even widely accepted analyses, passed the simple tests of the scientific method. So I needed to understand the nature of production. This lead to my paper, “Transient development − RWER-81”, where a coherent scientifically valid analysis predicts the characteristics of production fully in accord with the empirical evidence — sufficient for its acceptance as valid theory.
“equilibrium business cycle theory”
Here, a glaring error, is obvious. Equilibrium and cycle contradict each other.
Try it on DSGE.
Not true: one can have an equilibrium amount of flow in a cyclic channel, as in a super-conductive current. Where the physics basis gets it back to front is in assuming control is effected by resistance, when in fact it is controlled by our using [our own] forces to modify the forces overcoming resistance, e.g. putting our foot down when the car slows up.
What Frank is saying here is very significant. What I will say is that its hypersurfaces are showing what is possible GIVEN the present organisation of production and distribution.
I think he’s probably right about heterodox economist’s tendency to maths phobia, but that is largely down to mainstream professors showing off their skills rather than (like engineers) not spending a pound when they can do their own job for a penny. The visual forms of mathematics (geometry, topology, graph theory[4] etc) increase understanding rather than bamboozle with unnecessary information.
Lars Syll
please watch what kind of people you are bringing up. You have gotten a good number of ardent supporters, but many of them are feeble minded people who believe that they can change economics if they denounce mathematics and natural sciences. They are simple minded anti-scientists. I believe we need a more strong-minded people who endure long logical training and the study of long history of economics seriously and deeply. Without those preparations, they will never arrive to create a new economics that we wait.
Although I am critical of the application/introduction of critical realism on/into economics, I agree with the following five points:
(1) Scientific theories (ought to) do more than just describe event-regularities. They also analyze and describe the mechanisms, structures, and processes that exist. They try to establish what relations exist between these different phenomena and the systematic forces that operate within the different realms of reality.
(2) Explanations are important within science, since the choice between different theories hinges in large part on their explanatory powers. The most reasonable explanation for one theory’s having greater explanatory power than others is that the mechanisms, causal forces, structures, and processes it talks of, really do exist.
(3) Explanations and predictions of social phenomena require theory constructions. Just looking for correlations between events is not enough. One has to get under the surface and see the deeper underlying structures and mechanisms that essentially constitute the social system.
(4) To be relevant from the explanatory viewpoint, the adduced theory has to provide a good basis for believing that the phenomenon to be explained really does or did take place. One has to be able to say: “That’s right! That explains it. Now I understand why it happened.”
(5) What makes knowledge in social sciences possible is the fact that society consists of social structures and positions that influence the individuals of society, partly through their being the necessary prerequisite for the actions of individuals but also because they dispose individuals to act (within a given structure) in a certain way. These structures constitute the “deep structure” of society.
What is important is not to criticize existing economies, but to construct a new economics that can (cor)respond to the above five points.