Home > Uncategorized > Paul Romer’s critique of ‘post-real’ economics

Paul Romer’s critique of ‘post-real’ economics

from Lars Syll

 blah_blahIn practice, what math does is let macro-economists locate the FWUTVs [facts with unknown truth values] farther away from the discussion of identification … Relying on a micro-foundation lets an author say, “Assume A, assume B, …  blah blah blah … And so we have proven that P is true. Then the model is identified.” …

Distributional assumptions about error terms are a good place to bury things because hardly anyone pays attention to them. Moreover, if a critic does see that this is the identifying assumption, how can she win an argument about the true expected value the level of aether? If the author can make up an imaginary variable, “because I say so” seems like a pretty convincing answer to any question about its properties.

Paul Romer

Yes, indeed, modern mainstream economics — and especially its mathematical-statistical operationalization in the form of econometrics — fails miserably over and over again. One reason why it does, is that the error term in the regression models used is thought of as representing the effect of the variables that were omitted from the models. The error term is somehow thought to be a ‘cover-all’ term representing omitted content in the model and necessary to include to ‘save’ the assumed deterministic relation between the other random variables included in the model. Error terms are usually assumed to be orthogonal (uncorrelated) to the explanatory variables. But since they are unobservable, they are also impossible to empirically test. And without justification of the orthogonality assumption, there is, as a rule, nothing to ensure identifiability.

In mainstream econometrics, the error term is usually portrayed as representing the combined effect of the variables that are omitted from the model. What one does not say — in a way bordering on intellectual dishonesty — is that this assumption only works when (1) the combined effect is independent of each and every variable included in the model, and (2) the expectational value of the combined effect equals zero. And that is something almost never fulfilled in real-world settings!

‘Modern’ mainstream economics is based on the belief that deductive-axiomatic modelling is a sufficient guide to truth. That belief is, however, totally unfounded as long as no proofs are supplied for us to believe in the assumptions on which the model-based deductions and conclusions build. ‘Mathiness’ masquerading as science is often used by mainstream economists to hide the problematic character of the assumptions used in their theories and models. But — without showing the model assumptions to be realistic and relevant, that kind of economics indeed, as Romer puts it, produces nothing but “blah blah blah.”

Without strong evidence, all kinds of absurd claims and nonsense may pretend to be science. Using math can never be a substitute for thinking. Or as Romer has it in his showdown with ‘post-real’ economics:

Math cannot establish the truth value of a fact. Never has. Never will.

  1. lobdillj
    October 12, 2018 at 2:40 am

    precisely!

  2. Craig
    October 12, 2018 at 3:48 am

    Neither induction nor deduction alone are sufficient….only the wisdom of an integrative thirdness greater oneness of both.

  3. October 12, 2018 at 6:18 am

    Paul M. Romer was awarded Nobel Prize of Economics (The Sveriges Prize in Economics Sciences in Memory of Alfred Nobel 2018) for his contribution for integrating technological innovations into long-run macroeconomic analysis.”

    More precisely, the official Press Release explains the reason of the nomination:

    “This year’s Laureates William Nordhaus and Paul Romer have significantly broadened the scope of economic analysis by constructing models that explain how the market economy interacts with nature and knowledge.

    “Technological change – Romer demonstrates how knowledge can function as a driver of long-term economic growth. When annual economic growth of a few per cent accumulates over decades, it transforms people’s lives. Previous macroeconomic research had emphasised technological innovation as the primary driver of economic growth, but had not modelled how economic decisions and market conditions determine the creation of new technologies. Paul Romer solved this problem by demonstrating how economic forces govern the willingness of firms to produce new ideas and innovations.

    “Romer’s solution, which was published in 1990, laid the foundation of what is now called endogenous growth theory. The theory is both conceptual and practical, as it explains how ideas are different to other goods and require specific conditions to thrive in a market. Romer’s theory has generated vast amounts of new research into the regulations and policies that encourage new ideas and long-term prosperity.

    There is no word about Romer’s criticism against mainstream macro economics.

    We have to argue two different points: (1) Had the nomination committee made a good judgment? Are the expressed reasons reasonable ones? (2) How does Romer himself estimate his work on “endogenous growth theory” now after he criticized the (mainstream) macroeconomics? Is he thinking that his work is free from his own critique.

    As for (1), I am thinking that the Nomination committee overestimated Romer’s contribution concerning Endogenous Growth Theory. It is true that Romer started the field of this hotly debated topic? But, his understanding or interpretation on technological progress is extremely biased and in this sense harmful for understanding economic growth from technological viewpoint.

    One example: In some cases, the labor productivity grows 15 to 20 percent annually without any investment in major instruments and machines and without new knowledge developed by Research and Development activities outside of production site. He is totally ignoring this aspect of technological development. Romer’s idea on technological progress loyally reflects that of American big companies’ top management. It admits no contribution of workers at the workshop. The Nomination committee should have reflected these biases when it made comments on the reasons of nomination. Is it all right if the Nomination committee selected a person who is suitable to make anti-mainstream campaign?

    (For more details, please read my long note [not intended to be formerly published]:
    Growth Theory As It Ought to Be: Comments on Kurz and Salvadori’s Two Survey Papers on Old and New Growth Theory
    https://www.researchgate.net/publication/311439320_Growth_Theory_As_It_Ought_to_Be_Comments_on_Kurz_and_Salvadori's_Two_Survey_Papers_on_Old_and_New_Growth_Theory )

    As for (2), I want to know how Lars Syll thinks on this point. Why does he make no comments on the reason of Romer’s nomination? If Lars Syll only exploits the topic like Nobel Prize as an occasion to pick up the points of his favorite arguments, can we say he is a fair person? Is he really honest to the readers? I feel he is cheating his readers, or at least misguiding them. We should know that the Nomination Committee of Economic Sciences Nobel Prize is a part of mainstream apparatus (Lars Syll knows this very well). This time is no exception.

    N.B. Lars Syll posted a similar article on October 11, 2018 (only yesterday). I made a comment on it and would like to avoid arguing the same point as the previous one.

    • October 12, 2018 at 6:36 am

      Sorry! There is no ” ? ” after “It is true that Romer started the field of this hotly debated topic.”

    • October 12, 2018 at 11:46 am

      “Why does he make no comments on the reason of Romer’s nomination?”
      Possibly because he was already planning to make comments about Romer’s nomination in a later blog post … since such a blog post went up on the 11th … and THIS blog post was simply taking pointing out that Romer had made the critique that is quoted in this blog post.

    • October 13, 2018 at 5:20 pm

      One more correction:
      Is it all right if the Nomination committee selected a person who is suitable to make anti-mainstream campaign?

      I should write:
      It is all right if the Nomination committee selected a person who is suitable to make anti-mainstream campaign.

      It seems I am a bit confused.

  4. Prof Dr James Beckman, Germany
    October 14, 2018 at 9:15 am

    I have long resided in Germany, where long-term employees demonstrably make contributions to productivity by their accumulated knowledge. It is the same idea as the craft unions (plumbers, electricians, etc) & of the professions where outside examinations are required in many parts of the world (medical/engineering specialties, law, etc). This apparently is inconvenient to corporate investors & managers elsewhere, both for its complexity & the difficulty in hiring/firing non-interchangeable human parts, I expect. Economics, with its penchant for simplification, has gone along.
    On the matter of relations between variables, we who do engineering economics automatically assume every variable is related to every other, notably any “dependent” or “independent” variable at past & future times. Of course, the relevant time-scales differ, from the creation of universes to the movement of sub-atomic particles.

  1. No trackbacks yet.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.