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Is ‘modern’ macroeconomics for real?

from Lars Syll

861cf344575acd50ed67b35d88615f2318610d8148e8c471ad10ca0132cda91eEmpirically, far from isolating a microeconomic core, real-business-cycle models, as with other representative-agent models, use macroeconomic aggregates for their testing and estimation. Thus, to the degree that such models are successful in explaining empirical phenomena, they point to the ontological centrality of macroeconomic and not to microeconomic entities … At the empirical level, even the new classical representative-agent models are fundamentally macroeconomic in content …

The nature of microeconomics and macroeconomics — as they are currently practised​ — undermines the prospects for a reduction of macroeconomics to microeconomics. Both microeconomics and macroeconomics must refer to irreducible macroeconomic entities.

Kevin Hoover

Kevin Hoover has been writing on microfoundations for more than 25 years, and is beyond any doubts the one economist/econometrician/methodologist who has thought most on the issue. It’s always interesting to compare his qualified and methodologically founded assessment on the representative-agent-rational-expectations microfoundationalist program with the more or less apologetic views of freshwater economists like Robert Lucas: 

hoovGiven what we know about representative-agent models, there is not the slightest reason for us to think that the conditions under which they should work are fulfilled. The claim that representative-agent models provide microfoundation​s succeeds only when we steadfastly avoid the fact that representative-agent models are just as aggregative as old-fashioned Keynesian macroeconometric models. They do not solve the problem of aggregation; rather they assume that it can be ignored. While they appear to use the mathematics of macroeconomics​, the subjects to which they apply that microeconomics are aggregates that do not belong to any agent. There is no agent who maximizes a utility function that represents the whole economy subject to a budget constraint that takes GDP as its limiting quantity. This is the simulacrum of microeconomics, not the genuine article …

[W]e should conclude that what happens to the microeconomy is relevant to the macroeconomy but that macroeconomics has its own modes of analysis … [I]t is almost certain that macroeconomics cannot be euthanized or eliminated. It shall remain necessary for the serious economist to switch back and forth between microeconomics and a relatively autonomous macroeconomics depending upon the problem in hand.

Instead of just methodologically sleepwalking into their models, modern followers of the Lucasian microfoundational program ought to do some reflection and at least try to come up with a sound methodological justification for their position. Just looking the other way won’t do. Writes Hoover:

garciaThe representative-­agent program elevates the claims of microeconomics in some version or other to the utmost importance, while at the same time not acknowledging that the very microeconomic theory it privileges undermines, in the guise of the Sonnenschein-­Debreu­-Mantel theorem, the likelihood that the utility function of the representative agent will be any direct analogue of a plausible utility function for an individual agent … The new classicals treat [the difficulties posed by aggregation] as a non-issue, showing no appreciation​ of the theoretical work on aggregation and apparently unaware that earlier uses of the representative-agent model had achieved consistencywith​h theory only at the price of empirical relevance.

Where ‘New Keynesian’ and New Classical economists think that they can rigorously deduce the aggregate effects of (representative) actors with their reductionist microfoundational methodology, they — as argued in my On the use and misuse of theories and models in economics — have to put a blind eye on the emergent properties that characterize all open social and economic systems. The interaction between animal spirits, trust, confidence, institutions, etc., cannot be deduced or reduced to a question answerable on the individual level. Macroeconomic structures and phenomena have to be analyzed also on their own terms.

  1. Mike Ryan
    January 13, 2019 at 5:13 pm

    This is ridiculous. Nothing more than a tower of babel. If a business person can’t understand what you are saying then you aren’t saying anything important. Not much different than the chants from Shamans. Why waste everyone’s time with bs that doesn’t apply to real life. Get a job for heaven sake.

    • January 13, 2019 at 7:35 pm

      YAY!!! Mike, that is 1 of the most potent comments I’ve seen yet. I know it makes sense, partly because I invented and ran 5 small biz startups. They all broke even within 6 months to a year. I marketed 3 coast to coast (B2B wholesale) and sold 2 of them. I became an axiologist & meta-economic meta-theorist because the damage caused by plutonomics is so severe, yet virtually ignored by a vast majority of economists and kleptocrats. Unfortunately, it seems they have suffered bullgas induced ethicide. Hence, they are not fit for any other jobs, in this world or elsewhere. Sad, eh?

  2. Helen Sakho
    January 13, 2019 at 6:58 pm

    I am afraid they do not seem to have the “micro” capacity! So the story continues. It must indeed be excruciatingly hard to write a new text book combing the macro with the micro, let alone to put forward new ideas. To get a new job you need a good CV which they do all seem to have built up over decades of useful self-positioning. So, hopefully they will some day.

    • January 13, 2019 at 7:37 pm

      Helen, I sympathise, but see my reply to Mike’s amazingly brilliant assessment, above. Thanks & best of luck, etc.

  3. January 13, 2019 at 7:45 pm

    Lars – Thanks again, but most of your scathing critiques could refer to M Hudson’s “Finance as Warfare” to cap the summation with more explanatory power. Yet, a real solution, a viable alternative would work even better. That requires a new foundation of meta-economic metatheory, based on real science and bio-ethical principles that enable effective qualitative analysis of all the psychosocial factors at play in interpersonal relations & cultures. In other words, without a logically consistent conceptual basis and realistic practitioners & teachers, there will be no valid science of economics. It really is that simple. Mike and Helen clearly see the nature of the basic deficiency of plutonomics, which is really what is currently taught & practiced.

  4. lobdillj
    January 13, 2019 at 10:04 pm

    I can’t find a definition of plutonomics in a dictionary. What is it?

    • January 15, 2019 at 3:58 am

      Plutonomics: The practice of rationalizing, fostering & perpetuating the multinational plutocracy’s plutonomy–parasitic banking and toxic national-debt-for-profit currency scams–by use of faux-science, preposterous hypotheses and econometrics while ignoring the realities and qualitative causal factors intrinsic to personal and communal cultural activity.

  5. Craig
    January 13, 2019 at 10:21 pm

    An integration of the valid insights of micro and macro-economics is clearly necessary. The realization that the point of retail sale is the single aggregative/macro-economic intersection point of the micro-economy and hence the place to implement monetary and economic policy is the key to beginning that process.

    • Craig
      January 13, 2019 at 10:37 pm

      That should be : The realization that the point of retail sale is the single aggregative/macro-economic intersection point of BOTH the micro-economy and macro-economy, and hence the place to implement monetary and economic policy is the key to beginning that process.

  6. January 14, 2019 at 1:13 pm

  7. January 15, 2019 at 3:43 am

    LD – Thanks for that whistleblowing update. It should be no wonder why Warren Buffett saw that his class, the hyper-rich winning-class already won the ecocidal financial war against the rest of us.

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