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Romer’s trouble with macro
from Asad Zaman
Let us start with Five Fundamental propositions, which would be startling to the general public, but familiar to my current audience of heterodox economists.
- Mainstream modern economic theory is complete garbage. This is true of Micro, Macro, Econometrics, Trade, Monetary, Industrial Organization — EVERYTHING.
- It is very EASY to prove this assertion. Fundamental principles on which the entire discipline is built are easily proven to be wrong. The axiomatic theory of human behavior encapsulated in homo economicus has no match to real human behavior. The theory of perfect competition devised to explain prices and markets has no relation to the realities of oligopolies, multinationals, excess production, and shaping of demand by advertisements and culture. The welfare theory implicit in maximization of lifetime utility is exceedingly harmful to our human welfare, which comes from social associations and character traits, rather than excess consumption. The optimization/equilibrium methodology is a complete failure. Humans do not and cannot optimize; they lack the information required to do so. Dynamic systems cannot be understood by looking at their equilibria. Standard econometrics techniques can be used to prove anything at all, given any data. In any place you look, the theory is flawed beyond belief. The young earth theory, as well as the flat earth theory are more defensible, in comparison.
- Many leading economists are aware of the astonishing conflicts between economics and simple facts of observation. See “Quotes Critical of Economics“ for a choice collection of quotes to prove this assertion.
- The Global Financial Crisis of 2007 created widespread public awareness of this catastrophic failure of Economics. The Queen of England went to London School of Economics to ask why no one saw this coming. The US Congress appointed a commission to study why economists not only did not foresee the crisis, they confidently predicted that such an event could not happen. read more
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Real-World Economics Review Blog 
Bravo! All us ‘truth-tellers’ and ‘shamans’ should be exposed to vigorous critique. Alas, we no longer teach the art of critique to our profession’s young. Though, thank goodness, some are born with a silver bodkin to help puncture our balloons.
“Dynamic systems cannot be understood by looking at their equilibria.” Truer words were never spoken. But then why do teaching economists, who identify themselves as heterodox, use text books that are having the static identity Y=C+I as point of departure? Why is that any less unreal than orthodox macro? Inquiring minds like to know.
We might benefit from asking ‘cui bono?’ – who benefits from the way economics is taught – since it seems not to serve those looking for a social physics.
I’m afraid not, JC. The dichotomy you’re seeking doesn’t exists. There are no textbooks to be found that take the economy as a dynamic system to be their point of departure. All economics teachers are alike where it concerns their paycheck. Seeking a “social physics” umbrella doesn’t help either in a system where all its activities are noted in a unit of account. The physical outcomes of those activities remaining unaffected even during the worst imaginable crash; which only is a crash of accounts. Hence it is solely the underlying accounting of the system hat should be the focus of teaching economics. And such a modus operandi is dynamic at its very core.
John Vertegaal, Precisely. And that’s why Steve Keen’s charts illustrating the accounting equation that assets and liabilities sum to zero is minimally enlightening while a study of its subset of cost accounting datums and the use of calculus on them enlightens the fact that the economic system is in an inherent state of profound scarcity disequilibrium regarding total individual incomes and total costs and so prices.
I must agree with John Vertegaal’s comments on the “crash of accounts”. Again this analysis can only be carried out in a transient discourse.
Considering all John Vertegall’s attacking my transient analysis of manufacturing, has he had a Damascene conversion. He is correct in recognising the significance of theoretical analysis of development over time. This is the only route to understanding economic systems.
My dynamic analysis doesn’t ride on any coattails, and most certainly not on fake-dynamic transient analysis. A truly dynamic economic analysis contains within its set of first principles the attribute of self propagation, i.e. an ability to return to its more or less improved original state in perpetuity, and/or define the conditions that prevent the latter. Transient analysis on the other hand is linear and dissipative, from its first principles to the point of petering out to nothing, without any ability to provide information of an inherent economic renewal. It’s just as useless for examining how a dynamic economy works as (comparative) static analysis.
The only meaningful identification of the economy’s elements is in terms of units of account. There isn’t a physical metric available to make use of in case of an economic crash. So naturally, all economic crashes are crashes of accounts. This doesn’t mean accounts are fake reality, but that all analyses assuming a deterministic physical metric are fake where an economy is the subject of concern.
Please refrain from yet again demonstrating your total ignorance of how the scientific method is explained by Popper and Lakatos: only empirical evidence invalidates hypotheses! If you wish to demonstrate your disbelief in the solutions to transient differential equations which describe manufacturing, then argue explicitly why you believe them to be invalid. So far all you have done is to repeatedly assert your prejudices, by shouting it can’t be true, despite all the evidence I have provided that transient analysis accords with the empirical evidence. If the mathematical analysis is beyond you, then get a mathematician to check it out for you. Then you may find out just how mistaken you are!
Salter’s hubris is startling as ever. Popper and Lakatos would be rolling over in their graves if they knew that a hypothesized as true manufacturing process, empirically unreal to start with because no distribution potentials for its output can possibly be made to appear from its givens, not only is subsequently held out as proof to a real-world truth because it isn’t invalidated empirically, but is even taken to be an eminent stand-in for the economy in its entirety. Salter’s la-la land economics; worthy, as claimed earlier, of a “Nobel” prize. Is anybody here falling for this sham?
More: Vertegaal stated: “Transient analysis on the other hand is linear …” which yet again demonstrates total ignorance of mathematics!
Ref. Vertegaal 6.19. Still talking nonsense as ever. Popper and Lakatos would be unable to recognise his interpretation of their concepts of falsifying hypotheses. I talk about manufacturing. I don’t know what he means by “no distribution potentials for its output can possibly be made to appear from its givens”. And “not only is subsequently held out as proof to a real-world truth because it isn’t invalidated empirically” is another misrepresentation. The mathematics predicts the results which Lakatos would describe as a progress research programme. Vertegaal is the one the talking of Nobel prizes NOT me. Having painted himself into a corner he clearly needs to continue with misrepresenting my analysis. I would suggest yet again that he gets a mathematician to verify the mathematics which are based on a first principles analysis.
JV – Thanks & Bravo!
Speaking as an engineer by training, what economics needs is a Handbook of Applied Economics equivalent to Perry’s Handbook of Chemical Engineering.
Great handbooks draw editors for each chapter from real life practitioners, often retired, who have actually built things; bridges, chemical processes, nuclear power plants, etc.
An economics handbook would draw chapter editors from chartered banking, investment banking, central banking, credit card issuers, payment processors, as well as insurers, pension fund managers, hedge fund managers, portfolio mutual funds, money markets. There would be sections on government policy, fiscal deficits, monetary authorities, and crisis management, but also banking best practices, empirical data, and rules of thumb for prudent lending ratios, risk management, and reducing fraud.
Such a handbook edited by retired professionals free from the perverse incentives of our status quo economic forums should be embraced as an authoritative counterbalance to academic journals and policy wonks. Just the brazenness of a handbook tittle that combines banking, finance, and asset management along with government fiscal and monetary policy along with risk management writ large would be a revelation.
@ peterblogda – but that is the whole point, economics is neither chemistry nor physics. It is about the human soul and its strengths and weaknesses. To try to make a science of this is to make an ass of science, to misunderstand its strengths and weaknesses. If we had an economics of and for the lived world, it is clear that the science aspects of economic activity could support and maybe clarify it. Just as chemistry may support and clarify a brilliant chef’s work – which is to produce joy rather than mere nutrition.
@JC Spender,
Actually you’re quite right except that’s wisdom. Wisdomics-Gracenomics is wisdom applied to the economy via the relevant aspects of its (wisdom’s) pinnacle concept of grace as in love in action/policy in the temporal universe. Wisdom is not just niceness or some airy-fairy nonsense. Its the thorough integration of the practical and the ethical/ideal.
Peterblogdonovich’s Handbook suggestion is a good one and if its final chapter were an exegesis of the aspects of the natural philosophical and pinnacle concept of wisdom, i.e. grace, it would be found that all of the observations and policy recommendations of the leading heterodox economists (like financial parasitism, UBI-Universal Dividend-QE for the Individual) align perfectly with that concept. The one synergistic policy they all have missed is the high percentage discount/rebate policy which is the very expression of the new monetary, economic and financial paradigm of Abundant Direct and Reciprocal Monetary Gifting.
The desire to simplify leads to unwarranted conclusions. Economics is not an exclusive-or as to whether it is a science or is not. Economics has two aspects, selection of alternatives and the results of the selections. The selection of alternatives is at times unpredictable and at other times it is predictable. The results of known selections are predictable. Analysis needs to deal with appropriately.
It can, or in the case of a paradigm change it’s a simple, singular concept that applied resolves numerous chronic problems within the old paradigm. In which case it is an integration of the simple and the complex. Conceptual opposition is the major signature of the need for paradigm change, and the integration of opposites to the point of thirdness greater oneness is the mark of paradigm change accomplished.
Peter – That would be great, but engineering science has a substantially, logically consistent foundation of metatheory and vast experimental data supporting best practices. Until there is a science of cultural economy based on substantially realistic metatheory and valid axiology, there will be no cure for the infection of culture now called economics (and its toxic scientistic fog of academic bullgas).
With best wishes for a peaceful and nuclear-free 2019 to all, I would say that we would be better off sticking with any Orthodox positions that are of some relevance to anything at all, let alone a science that is so subjective that it will take a lifetime of prayer to lead it to salvation.
Poor students!
Yes Helen, that is precisely what the endless debates about the particles of truth and untruth in orthodox and heterodox economic theories leads to. However, new paradigms historically leave all but the most antithetical to the new paradigm structures and theoretics virtually unchanged while, almost magically, transforming for the better the body of knowledge/area of human endeavor that the new paradigm applies to. It’s a testament to the power of a single concept, which is the essence of a new paradigm, to change an entire pattern while simultaneously leaving most of its temporal structures untouched.
Kudos ~
Peterblogdanovich’s suggestions are useful, in my view. Most every discipline with which I do work publishes handbooks. Anthropology, sociology, psychology, geography in the social sciences. All the physical sciences. Even history has handbooks; dozens of them. Handbooks are normally best thought of as books of case studies, encounter descriptions, project descriptions, work assignments, or training exercises. Such handbooks extend to most of the major sub-disciplines, as well. For example, economic Anthropology, social psychology, social stratification, molecular engineering, modular nuclear reactors, subatomic physics, organic chemistry, tectonics, etc. They’re great reference documents and excellent teaching tools, in most instances. There are several handbooks of macroeconomics available. Investigating whether any would help with the problems Romer identifies in macroeconomics would be worthwhile, in my view.
Integrating the opposites of technics and philosophy is the solution. After all, metaphorically speaking, you’ll never get to the goal of heaven until you awaken to the efficacy of grace.
Craig – Mucho kudos! I love that reminder. The solution must include axiology and meta-economics: a valid, substantially viable, explanatory articulation of bio-ethical values and a fundamental philosophy of cultural economy, i.e., communal human activity. We would then be able to think about and develop ever more effective qualitative ethical ecometrics with which to counter-balance merely quantitative econometrics. Economterics then might become truly useful, instead of foggy bursts of toxic bullgas. We could call the discipline cultural holonomics, a holotrophic science of human life. Anything less would be unrealistic, thus unscientific and counter-productive. Rite?
https://rwer.wordpress.com/2018/02/16/the-arrow-of-time-in-a-non-ergodic-world/#comment-132048)
[Salter:]
Quote at end of Peterblogdanovich’s comment:
“There’s a Nobel Prize waiting for the guy who fleshes this out … for economics.”
I hesitate to make such a claim, but, at least for production theory, this (irreversible time) has been fleshed out in Transient Development (RWER-81).
“[P]roduction theory” in la-la land; where cranking out output is apparently the norm, regardless of effective demand setting those conditions as it does in the real world. Nuff said… Aside from Salter never answering arguments directly, he twists them so out of shape they become unrecognizable, the above shows he’s a bold-faced shouting liar to boot. Way to go Frank, got to keep up your reputation
Well at times Vertegaal does make a valid reference.
Unfortunately this out of line contribution continues with Vertegeaal’s continuing refusal to deal with what was written rather than what he invents. I have not recognised any argument which can be answered directly, only assertions that it can not be true. He has never stated any factual argument only rhetoric. That he continues to demonstrate a reluctance to state any thing in my analysis which is false to fact and then calls be a liar is amazing. As I have said previously, I will respond to any actual point he makes, but he never gives any specific example.
Having thought more upon this, I hope the following is useful and more explanatory.
When I commented on Peterblogdanovich “arrow of time” contribution, I was commenting that the physics described was analogous in being transient phenomena to my analysis of the development of manufacturing. An important unique analysis by Solow (1957) is examined in Salter (2017). Unfortunately, the comment page for issue no. 81 has never been activated or I would have provided both a correction to my equation (31) where the dot over the 𝘲 has been translated to the right hand side of the equation and a more didactic descriptive explanation of the terse but significant aspects of my paper.
In my Figure 4, it can be seen that all of Solow’s functional forms clearly fail to represent the empirical evidence of his own data. My equation (31) from transient analysis provides a concrete representation of Solow’ data which on inspection of the graphs corresponds to Solow’s data. The functional forms rejected by the empirical data include the Cobb-Douglas formulation. However, possible the most important fact is that Solow’s data is of U,S, manufacturing from 1909 to 1949 (inclusive). This covers possibly the most turbulent years in economic history which include periods of normality, two world wars and the great depression and the recovery period up to the second world war. Despite the great disparities, the transient relationship of equation (31) corresponds to the empirical data recorded by Solow!
Romer’s (1990) analysis is based on the Cobb-Douglas formulation which is one of the relationships which is UNABLE to describe Solow’s data. One must therefore conclude that Romer’s analysis is NOT valid as the first sentence of his conclusions is “The model presented here is essentially the one-sector neoclassical model with technological change, augmented to give an endogenous explanation of the source of the technological change.” Romer makes no attempt to do anything more than present his hypothesis which can not correspond to reality as the Cobb-Douglas function is unable to describe actual data. Which brings us to the topic of this blog.
References:
Romer, Paul M. (1990). “Endogenous Technological Change”. In: Journal of Political Economy 98.5, Part 2, S71–S102. doi: 10.1086/261725.
Salter, F. M. “Transient development”, real-world economics review, issue no. 81, 30 September 2017, pp. 135-167, http://www.paecon.net/PAEReview/issue81/Salter81.pdf
Solow, R. M. (1957). ‘Technical change and the aggregate
production function’. In: The Review of Economics and Statistics 39(3), pp. 312–320.
Frank – I now must assume that you have no children or no concern for the realities and consequences of pandemic corruption. Otherwise, your approach would surely factor in the qualitative and quantitative causes and effects of mass-corruption and global manipulation & exploitation ruining “the world” and our ever more rapidly diminishing global QOL (via the exponentially increasing yet highly profitable ecocidal pollution of our only habitat, Earth’s rather thin veil of biosphere). Correct me if I’m wrong about that, in detail, please. Thanks, sincerely ~
To Mike Monterey, I am unsure of what I have said to allow you to draw your conclusions. Quite the opposite, I have children and grandchildren. My approach is not a theory of everything.
I come from an engineering background dealing with making more efficient use of energy. I want to see fossil fuels eliminated and large scale reforestation introduced. That means a vast increase in nuclear power beyond any currently planned. Only then will we be able to repair the damage to our environment.
Rite Peter. The winning-class can’t afford to give a world of losing-class suckers an even break. If 99% of us losing-class suckers woke up to the real nature of The Game, the winning-class would very soon be dead or deprived of their ill-gotten gains. Yet, sadly, as the late Carl Sagan realized, one of our worst problems is that we are too easily bamboosled, “and the longer and worse we’re bamboozled, the less we want to know about it.” Obviously, the reason is a toxic combination of guilt, shame and vanity. Otherwise, the con artists of the world would have no victims.
As former US Pres. Harry Truman said, when asked about The Fed system, “Well, I guess it’s like having the foxes run the hen house because they have lots of inside experience.” Apparently, the losing-class wasn’t paying attention. Oh, well… Sigh…