Home > Uncategorized > The biggest trouble with modern​ macroeconomics

The biggest trouble with modern​ macroeconomics

from Lars Syll

romer-paul_picThe trouble is not so much that macroeconomists say things that are inconsistent with the facts. The real trouble is that other economists do not care that the macroeconomists do not care about the facts. An indifferent tolerance of obvious error is even more corrosive to science than committed advocacy of error.

Paul Romer 

New-Classical-Real-Business-Cycles-DSGE-New-Keynesian microfounded macromodels try to describe and analyze complex and heterogeneous real economies with a single rational-expectations-robot-imitation-representative-agent. That is, with something that has absolutely nothing to do with reality.

Opting for cloned representative agents that are all identical is of course not a real solution for analyzing macroeconomic issues. Representative agent models are — as I have argued at length here — rather an evasion whereby issues of distribution, coordination, heterogeneity — everything that really defines macroeconomics — are swept under the rug.

Of course, most macroeconomists know that to use a representative agent is a flagrantly illegitimate method of ignoring real aggregation issues. They keep on with their business, nevertheless, just because it significantly simplifies what they are doing.

Continuing to model a world full of agents behaving as economists — ‘often wrong, but never uncertain’ — is a gross misallocation of intellectual resources and time.

  1. Paul Davidson
    February 28, 2018 at 7:27 pm

    Although I attacked “rational expectations in an article in 1986 where I argued uncertainty regarding the future required a nonergodic process — I have made absolutely no impact on manistream macroeconomists and finance theorist.

    In fact when I argue that every transaction on financial markets such as the stock market requires two transactors with opposite expectations regarding the future — the bull who expects the price to rise and the bear who expects the price to fall. So which one of the two can have rational expectations???

    Even such an obvious comment has made no effect on mainstream theorists!!!

    • March 1, 2018 at 2:25 pm

      This seems to be a simple example of the dictum: it takes a theory to beat a theory. This also clarifies why methodological criticism has no effect over neoclassical mainstream.

  2. March 1, 2018 at 1:26 am

    Re: Romer’s point:

    The real trouble is that other economists do not care that the macroeconomists do not care about the facts.

    Might be a point worth pondering. Why do they not care?

    Could the reason possibly be their motivation in pursuing an advanced level of expertise in “economic knowledge?”

    Are they driven by a fundamental yearning for knowledge, to understand the truth of things? Or could it be that many “practising economists” were motivated to obtain knowledge of economics as a means of advancing their own personal pursuit of wealth accumulation?

    One of the things that many advocates for the Working Class do not understand is why there is so much political support for the advocates of The Wealthy among those who are not actually wealthy. The answer is that they 1) entertain hopes that they, themselves, can become wealthy some day, and 2) sense that the best way to “get ahead” is to establish connections with those who actually are wealthy.

    In America, Republican politicians are generally individuals who seek to ingratiate themselves in the eyes of potential wealthy patrons in order to advance their own financial interests and their standing in polite society.

    They do not need to be paid to advocate for the wealthy; as entrepreneurs, they are constantly seeking ways to further enrich rich people because they hope it will win them the favor of any rich people out there who might be willing to throw some big money their way.

    At the very least, they hope it will garner them some big donations to their political campaigns, enabling them to continue with their political careers and their network of social connections to various rich people.

    I see essentially the same motivation in those numerous professional economists who embrace and advance Republican/Tory economic theories/policies. They really don’t care about advancing The Truth, or in optimizing the economic welfare of those on the bottom half of the economic ladder.

    They only really care about winning the favor of those economists who appear to be successful in winning the favor of wealthy patrons, or in improving their connections to the elite.

    Thus, their “indifferent tolerance of obvious error” that Romer laments in the quote.

    From my POV, their concerns about uncovering important truths re: the economy were eclipsed long ago by their transcendent desire for personal advancement.

    Is this the basis for a compelling indictment of that cohort within the Economist Club that turns a dear ear to serious theoretical analysis?

    • March 1, 2018 at 1:29 am

      deaf ear…

    • Rob Reno
      March 1, 2018 at 2:10 am

      No doubt for some this plays a part …

  3. Edward Ross
    March 1, 2018 at 6:50 am

    Response to Lars Syll February 28:2018

    Now that honest men like Lars Syll are acknowledging real reason why those genuine economists who see then need to reorient economics are being ignored by the ruling mainstream economists. Certainly I am only one of the working class. but I think I can think therefore I feel obliged to speak out for them. ON lars Syll’s comments on New Keynesians like some economists ,I find him spot on , because I see them as sneaky opportunists trying to benefit from Keynes name while they support the neoliberal mainstream greedy BAST—.

    Then on Paul Davidson’s post February 2018 AT 7:27 AM
    It appears to me that that Paul Davidson has long been an irritant to mainstream neoliberalism because he opposes their views. In my opinion your fighting a good fight please keep it up. Then to the rest of the concerned bloggers this could be a call to arms,

    James Kroeger March 1,2018 at 1:26 am
    Again in my humble opinion he gives a precise description of why the majority of economists do not have the moral fortitude to acknowledge the faults with the mainstream neoliberal economic rationalist ideology. Then he finishes the post with “Is this the basis for a compelling indictment of that cohort within the economic club that turns a deaf ear to serious analysis” Again spot on, this could a call to seriously challenging mainstream economic monopoly.
    Ted

  4. March 1, 2018 at 8:35 am

    What the real-world economics can provide would be more important than simple criticism with no alternatives. I doubt if the real-world or heterodox economists are providing macroeconomics that is not implicitly based on representative agent assumption. I have posed a following question in the ResearchGate. Those who are thinking to make Post Keynesian economics more powerful are requested to contribute to our discussion.

    Does Post Keynesian Economics need no theoretical foundations?
    https://www.researchgate.net/post/Does_Post_Keynesian_Economics_need_no_theoretical_foundations

  5. Paul Davidson
    March 1, 2018 at 2:12 pm

    Yoshinori:

    You can find the foundation of Post Keynesian theory in my textbook entitled POST KEYNESIAN MACROECONOMIC THEORY. These foundations include: (1) the future is a nonergodic process, (2) money is a creation of the State where the civil law of contracts specifies that thing that will settle all contractual obligations (3) in a money using economy liquidity is essential. Money and all liquid assets have two essential properties namely their elasticities of production and substitution (with producibles) is zero or negligible., etc

    • March 2, 2018 at 2:23 am

      Your book is most famous and respected one among Post Keynesian economists. However, how about my point:

      ”I doubt if the real-world or heterodox economists are providing macroeconomics that is not implicitly based on representative agent assumption.

      Lars Syll opposed to representative agent models. Your book does not treat formal models, but the narrative you use is implicitly assuming representative agents, isn’t it?

  6. C-R D
    March 1, 2018 at 4:40 pm

    Yet after learning supply/demand, it is so simple to just treat the economic (market) system as a complex dissipative system. All the tools of analysis are available. It surprising how much information pops out by treating the S&P-500 as a multifractal!

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