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Modern macroeconomics

from Lars Syll

There is a purist streak in economics that wants everything to follow from asumming things like ‘rationality’ and ‘equilibrium.’ That purist streak has given birth to a kind ‘deductivist blindness’ of mainstream economics, something that also to a larger extent explains why it contributes to causing economic crises rather than to solving them. But where does this ‘deductivist blindness’ of mainstream economics come from? To answer that question we have to examine the methodology of mainstream economics.

The insistence on constructing models showing the certainty of logical entailment has been central in the development of mainstream economics. Insisting on formalistic (mathematical) modeling has more or less forced the economist to give upon on realism and substitute axiomatics for real world relevance. The price paid for the illusory rigour and precision has been monumentally high.

Real business cycle theory (RBC) is one of the theories that has put macroeconomics on a path of intellectual regress for three decades now. And although there are many kinds of useless ‘post-real’economics held in high regard within mainstream economics establishment today, few — if any — are less deserved than real business cycle theory.

The future is not reducible to a known set of prospects. It is not like sitting at the roulette table and calculating what the future outcomes of spinning the wheel will be. So instead of — as RBC economists do — assuming calibration and rational expectations to be right, one ought to confront the hypothesis with the available evidence. It is not enough to construct models. Anyone can construct models. To be seriously interesting, models have to come with an aim. They have to have an intended use. If the intention of calibration and rational expectations  is to help us explain real economies, it has to be evaluated from that perspective. A model or hypothesis without a specific applicability is not really deserving our interest.

Without strong evidence all kinds of absurd claims and nonsense may pretend to be science. We have to demand more of a justification than rather watered-down versions of ‘anything goes’ when it comes to rationality postulates. If one proposes rational expectations one also has to support its underlying assumptions. None is given by RBC economists, which makes it rather puzzling how rational expectations has become the standard modeling assumption made in much of modern macroeconomics. Perhaps the reason is that economists often mistake mathematical beauty for truth.

In the hands of Lucas, Prescott and Sargent, rational expectations has been transformed from an – in principle – testable hypothesis to an irrefutable proposition. Believing in a set of irrefutable propositions may be comfortable – like religious convictions or ideological dogmas – but it is not  science.

So where does this all lead us? What is the trouble ahead for economics? Putting a sticky-price DSGE lipstick on the RBC pig sure won’t do. Neither will  just looking the other way and pretend it’s raining.

mod econ

Rethinking Economics actually gives a pretty good description of the state of modern macroeconomics here.

  1. Yoshinori Shiozawa
    August 29, 2019 at 5:50 pm

    Lars, Rethinking Economics is “an international network of students and citizens, working together to demystify, diversify, and invigorate economics.” Your posts may be demystifying but do not seem to be “invigorating.” They are endeavoring to “change economics for the better.” Why do you not talk about “changing economics for the better”?

    • Yoshinori Shiozawa
      August 29, 2019 at 6:09 pm

      Addendum: I am sorry. “They” in the last sentence meas rethinking Economics students, not Lars Syll’s posts.

    • Rob
      August 30, 2019 at 8:32 am

      @Shiozawa: Is your book available through any public libraries in Nagoya?

  2. Econoclast
    August 29, 2019 at 6:27 pm

    I find little to disagree with Lars here. I will add two nicely concise statements about economics:
    “People got no money, people got no jobs”, a statement made by reporter Charles P. Pierce sometime back.

    And from today:
    “Mainstream economic models leave this problem to “the invisible hand of the market,” assuming trends will self-correct over time. But while the market may indeed correct, it does so at the expense of the debtors, who become progressively poorer as the rich become richer. Borrowers go bankrupt and banks foreclose on the collateral, dispossessing the debtors of their homes and their livelihoods. The houses are bought by the rich at distress prices and are rented back at inflated prices to the debtors, who are then forced into wage peonage to survive. When the banks themselves go bankrupt, the government bails them out. Thus the market corrects, but not without government intervention. That intervention just comes at the end of the cycle to rescue the creditors, whose ability to buy politicians gives them the upper hand. According to free-market apologists, this is a natural cycle akin to the weather, which dates all the way back to the birth of modern economics in ancient Greece and Rome.”
    — Ellen Brown, “The Key to a Sustainable Economy Is 5,000 Years Old”, Truthdig, August 29, 2019.

  3. Helen Sakho
    August 30, 2019 at 12:50 am

    I find myself in agreement with some of the disagreements above. I recently used the last photo of the clown image in one of writings on the experience of some of my students a couple of decades ago when I was teaching an intense course on small business development at the time of a deep recession, hitting small businesses the hardest. The performing artist, who happened to be a comedian benefited from the above image…

    The clown has the decency to make his/her audience laugh while s/he cries privately before the final mask is fitted. This is more than one can say about Economics: It is not entertaining, elaborate, or educational.

  4. Frank Salter
    August 30, 2019 at 10:21 am

    So, where does lead us? For production theory the micro-economic “atom” is a a single production project from inception to termination. The quantity calculus shows that the abstract unit of output is labour-time. Individual production projects are aggregated to provide the outcome. This has been done in my paper “Transient Development” RWER-81. It describes abstract production theory.

  5. August 30, 2019 at 11:50 am

    Lars correctly points out the bizarre transformation Lucas and friends have forced upon the concept of “rational expectations”. (As a side, they are not the only culprits, we should add Fama and the macrofinance literature.) In fact, by neglecting the ontological basis of economics, a cult of “puzzle hunters and gatherers” has been established that feeds on the simple fact that economic models have stopped relating to reality: https://www.s-e-i.ch/Projects/AssetPrices/Documents/Type1.htm

    • Rob
      August 30, 2019 at 11:19 pm

      Enjoying the extract from your book. Noticed, “thread of thunder” (p. 29), which I think you meant to be “threat of thunder.” Great book.

  6. Rob
    August 31, 2019 at 12:44 am

    In fact, by neglecting the ontological basis of economics, a cult of “puzzle hunters and gatherers” has been established that feeds on the simple fact that economic models have stopped relating to reality. (Christian Mueller-Kademann, RWER: Lars Syll, Modern macroeconomics, 8/30/2019, Quotable Quotes!)

    .
    And when I follow your link I read:
    .

    Without claiming completeness, the following list [of decision making strategies] provides some of them. For reasons that will be explained below, we will call this list “decision enabling factors”:
    .
    • emotions (Damasio, 1995; 2012)
    • anchor values (Kahneman, Schkade and Sunstein, 1998)
    • endowment (Tversky and Griffin, 1991)
    • institutions
    • belief
    • credible information (Druckman,2001)
    • status quo (Samuelson and Zeckhauser,1988)
    • heuristics (Goldstein and Gigerenzer, 2002)
    • uncertainty aversion (Ellsberg, 1961)
    • inattention (Bacchetta and van Wincoop, 2005)
    • deliberate ignorance
    • science
    • whim (Keynes, 1936, pp. 162–163)
    • sentiment (Keynes, 1936, pp. 162–163)
    • chance (Keynes, 1936, pp. 162–163)
    • prejudice
    .
    In the presence of uncertainty these factors are not merely “explainawaytions” (Thaler, 2016, p. 1582) or stains on an otherwise-perfect homo economicus. Rather, they are indispensable tools for making decisions in most circumstances because they help to bridge the gap between the not-knowable outcome of a certain choice and its utility for the individual.
    .
    2.3 The epistemology of economics
    .
    Owed to human creativity, any economic model, law or constant must be considered historical in nature, or at best of transitory validity. It is impossible to discover fundamental or eternal laws because humans constantly create and change the society they are living in. The direction of change is genuinely unpredictable due to the impossibility to simulate the human brain which eventually gives rise to omnipresent uncertainty. This omnipresence of uncertainty, however, does not simply deal a blow to some economic methodologies, it also opens the scope for new research approaches.
    .
    2.3.1 A brief look in the rear mirror
    .
    As every science aims at uncovering the truth, each science has to answer the two basic questions as to what constitutes truth and how to find truth. (Christian Mueller-Kademann, 2019, Uncertainty and Economics : A Paradigmatic Perspective, Routledge Frontiers of Political Economy.)

    .
    I sure wish I read section 2.3.1 ;-) In any case, it is a real joy to see some actual realistic assumptions besides humans are “social insects” (e.g., ticks that act like Turring machines following if-then genetic algorithms) when we know scientifically through modern biology such are gross oversimplifications that tell us little (actually nothing) about complex human behavior beyond a few very narrow contexts.

  7. Ken Zimmerman
    September 2, 2019 at 2:50 pm

    Sciences’ and scientists’ focus is surviving long enough on the grants available to complete the work that’s of interest. That difficult life is made even more difficult by the recognition that scientific work fails much more often than it is successful. Failure is something that all scientists experience — but it’s hard to tell, looking at shiny conferences, polished presentations and glossy journals. Yet the whole point of science is that it is cutting edge. Comfortable science is an oxymoron. If we want to create new understandings, that means taking a leap in the dark — a leap we might not take if we’re too afraid to fail. It’s obvious that the greatest fear of economists is taking any leap in the dark and then failing. Thus far, in my view, most efforts at anything approaching science by economists have failed, but also almost immediately been “reinterpreted” as successes or covered up, or both. But failures are the most common route for scientists to create an observation, an experiment, or even an equation that works. Aside from what scientists learn from failures, failures also help scientists focus on how the work is performed, including precision and the importance of clean technique. It also encourages scientists to develop alternative approaches, including a ‘plan B.’ Most importantly, failure teaches persistence and resilience in the face of discouragement. These are skills many scientists rely on each day of their career — to try again with a grant application, to summon the courage to contact a potential collaborator, to reformat my rejected manuscript for another journal. The only economists who have these experiences and these skills, it seems are those who are denied, due to their theoretical heresy, access to topflight journals, research institutes, and conferences. No shiny conferences or glossy top journals for them. An additional lesson they learn from these failures is that their ‘science’ is rigged.

    • Rob
      September 3, 2019 at 12:22 am

      [S]cientific work fails much more often than it is successful. Failure is something that all scientists experience — but it’s hard to tell, looking at shiny conferences, polished presentations and glossy journals. Yet the whole point of science is that it is cutting edge. Comfortable science is an oxymoron. If we want to create new understandings, that means taking a leap in the dark — a leap we might not take if we’re too afraid to fail. It’s obvious that the greatest fear of economists is taking any leap in the dark and then failing Thus far, in my view, most efforts at anything approaching science by economists have failed, but also almost immediately been “reinterpreted” as successes or covered up, or both. ~ Ken Zimmerman

      .
      Courage and humility are not always found in the right mix to actually take leaps of faith and be open enough to failure enough to actually take legitimate critiques of one’s “theories” seriously. Battles of ego to often are the norm. These are not specifically the traits of scientists, but apply to all domains of life and our many endeavors. Far to often hubris prevents progress.
      .
      It is part of the scientific process that human nature and not some abstract scientific method — there is no one method, after all, but a cluster of epistemological character traits that comprise the so-called “scientific method” — that human egos enter into the process. When confronted with anomaly the initial response of those who have labored so hard on a “theory” is often to simply paste ad hoc assumptions upon ad hoc assumptions. Everyone versed in Kuhnian history knows the story.
      .

      But failures are the most common route for scientists to create an observation, an experiment, or even an equation that works. Aside from what scientists learn from failures, failures also help scientists focus on how the work is performed, including precision and the importance of clean technique. It also encourages scientists to develop alternative approaches, including a ‘plan B.’ Most importantly, failure teaches persistence and resilience in the face of discouragement. ~ Ken Zimmerman

      .
      In my view, Ken is right, and great scientists embody the spirit of Ken’s comment above — I know Ken, there is no such thing as a “great” scientist, per your own views ;-).
      .
      William Bateson thought so to:
      .

      Nevertheless, if I may throw out a word of council to beginners, it is: Treasure your exceptions! When there are none, the work gets so dull that no one cares to carry it further. Keep them always uncovered and in sight. Exceptions are like the rough brickwork of a growing building which tells that there is more to come and shows what the next construction it to be.
      — William Bateson (1908)
      .
      To understand evolution we must first understand the historical development of ideas on evolution. But to understand its history, we must first understand evolution. The paradox implies that the study of evolution and of its history must go hand in hand. (Forsdyke 2008: xi)
      .
      (….) For a scientist looking at history there are three overriding double questions: What did he (she) know and when did he know it? What did he think and when did he think it? What did he do and why did he do it? Answers to these questions give us information on process — the process of scientific discovery. If the elements of that process have remained essentially unchanged since Bateson’s day — an assertion assumed and not argued here — than a better understanding of ways this outstanding contributor to scientific progress operated may help us improve the process of discovery as it now operates. (Forsdyke xvii, Treasure Your Exceptions: The Science and Life of William Bateson. Springer.)

  8. Robert Locke
    September 2, 2019 at 5:02 pm

    In the 1980s, after engaging the minions of the New Economic History in their efforts to discredit traditional historians’ interpretations of the evolution of economic history, I decided to apply to the Economics section of the National Science Foundation for a grant to further my investigations into the failure of the New Economic History. I did not know that the NEH had taken over the National Science Foundation, so I found my request for a grant blocked on grounds of my methdology. I had to use the methods of the econometricians and the neoclassical economists in my grant proposal and not those of traditional historical researchers if I hoped to have the proposal funded.

    • Rob
      September 2, 2019 at 10:08 pm

      I did not know that the NEH had taken over the National Science Foundation, so I found my request for a grant blocked on grounds of my methdology. I had to use the methods of the econometricians and the neoclassical economists in my grant proposal and not those of traditional historical researchers if I hoped to have the proposal funded. (Robert Locke)

      .
      Interesting. The academic version of regulatory capture. Economics is a virus of the mind that corrupts the soul of science itself.

  9. Ken Zimmerman
    September 2, 2019 at 11:36 pm

    Robert and Rob, as an aside, I earned an MS in mathematics, but not really. I did the course work, passed the exams, chose and completed my required research but my final paper for the MS was rejected, three times. The rejection letter, which I’ve since misplaced cited as reason for rejection that my paper was “applied” mathematics while only theoretical (philosophical) papers were acceptable. This was the late 1970s. Philosophical of mathematics was king then. Thus the rejection. I got over the rejection. And the work I completed has shown itself useful. So, what Robert describes isn’t about economics, per se. It is about academic regimes and power politics. And, of course, money.

    • Rob
      September 3, 2019 at 12:27 am

      [W]hat Robert describes isn’t about economics, per se. It is about academic regimes and power politics. And, of course, money. ~ Ken Zimmerman

      .
      One of the more enduring themes I have learned and taken to heart in the comments from Ken and Robert are the importance of observation in historical context. Without these many a empty well will be plumbed.

      • Rob
        September 3, 2019 at 12:30 am

        As late as a week ago, such a phrase as “hopefully awaiting the gradual convergence of the physical sciences and the social sciences” would have provoked no more than an ironic tingle or two at the back of my neck. Now it howls through the Ponchitoula Swamp, the very sound and soul of despair.
        — Walker Percy, The Moviegoer cited in Mirowski’s More Heat than Light
        .
        Computer jocks … with no experience in field biology, have a large influence on the funds for research and training in “evolutionary biology,” so that fashionable computable Neo-Darwinist nonsense perpetuates itself. (Lynn Margulis, 1991, Big trouble in biology: Physiological autopoiesis versus mechanistic neo-Darwinism. In Doing Science, pp. 211-235. (Brockman J., ed.))

        .
        The latest empty well to be plumbed, in my view, is the metaphor that human beings are “social insects” (e.g., ticks that act like Turing machines following if-then genetic algorithms).

  10. September 16, 2019 at 1:51 am

    Stephen Colbert – The Late Show, 8 min, Sept 14, 2019https://www.facebook.com/colbertlateshow/videos/2271342293157687/?t=2

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