Home > Uncategorized > The future of macroeconomics

The future of macroeconomics

from Lars Syll

But why are DSGE models still in the mix at all, and in a key position? Given all the criticisms, what can such models tell us, even as a ‘first pass at important questions’? Multiple equilibria do allow for discussion of a wider range of scenarios, but any discussion of a particular scenario is still constrained by the requirements of general equilibrium theory. These requirements are at the root of the more fundamental critiques of DSGE. While Vines and Wills set out an impressive research agenda to flesh out this multiple-equilibrium approach, we need to reflect on the constraints imposed by general equilibrium theorising itself.

Image result for macroeconomics lars syllWe therefore need to revisit the fundamental problems with general equilibrium theory and the restrictions it imposes on what is admissible. Individual behaviour needs to be determinate such that indeterminacy can only enter due to an ad hoc restriction or else as a shock. Institutional structures need to be fixed, or else evolve in a deterministic way. Further, the very focus on equilibrium as an outcome of market forces severely constrains the subject matter. This is epitomised by the treatment of uncertainty as risk, or concealed risk. Without being able to absorb the significance of fundamental uncertainty for individual behaviour, for social structures and institutions, and for economics itself, the subject matter and the theoretical structures designed to capture it are inevitably constrained.

The force of these restrictions is embodied in the requirement for microfoundations, whereby all propositions need to be derivable from axioms with respect to individual behaviour. The issue of microfoundations (their role and content) lies at the heart, not only of critiques of general equilibrium theory but also of debate within mainstream macroeconomics itself.

Sheila Dow

Thanks to latter-day Lucasian new-classical-new-Keynesian-rational-expectations-representative-agents-microfoundations-economists, we are supposed not to – as our primitive ancestors – use that archaic term ‘macroeconomics’ anymore (with the possible exception of warning future economists not to give in to ‘discomfort.’)  Being intellectually heavily indebted to the man who invented macroeconomics – Keynes – yours truly firmly declines to concur.

Microfoundations – and a fortiori rational expectations and  representative agents – serve a particular theoretical purpose. And as the history of macroeconomics during the last thirty years has shown, this Lakatosian microfoundation programme for macroeconomics is only methodologically consistent within the framework of a (deterministic or stochastic) general equilibrium analysis. In no other context has it been possible to incorporate these kind of microfoundations, with its “forward-looking optimizing individuals,” into macroeconomic models.

This is of course not by accident. General equilibrium theory — built on heaps of known to be fictitious assumptions — is basically nothing else than an endeavour to consistently generalize the microeconomics of individuals and firms on to the macroeconomic level of aggregates.

But it obviously doesn’t work. The analogy between microeconomic behaviour and macroeconomic behaviour is misplaced. Empirically, science-theoretically and methodologically, mainstream microfoundations for macroeconomics are defective.  Tenable foundations for macroeconomics really have to be sought for elsewhere.

Defenders of microfoundations standardly say there is no alternativ. But of course there are alternative to mainstream general equilibrium microfoundations! Behavioural economics and Goldberg & Frydman’s “imperfect knowledge” economics being two noteworthy examples that easily come to mind.

And for those of us who have not forgotten the history of our discipline, and not bought the sweet-water nursery tale of Lucas et consortes that Keynes was not “serious thinking,” we can easily see that there exists a macroeconomic tradition inspired by Keynes (that has absolutely nothing to do with any “new synthesis” or “new-Keynesianism” to do).

Its ultimate building-block is the perception of genuine uncertainty and that people often “simply do not know.” Real actors can’t know everything and their acts and decisions are not simply possible to sum or aggregate without the economist risking to succumb to “the fallacy of composition”.

Instead of basing macroeconomics on ontological blindness and unreal and unwarranted generalizations of microeconomic behaviour and relations, it is far better to accept the ontological fact that the future to a large extent is uncertain, and rather conduct macroeconomics on this fact of reality.

The real macroeconomic challenge is to accept uncertainty and still try to explain why economic transactions take place – instead of simply conjuring the problem away by assuming uncertainty to be reducible to stochastic risk. That is scientific cheating. And it has been going on for too long now.

The Keynes-inspired building-blocks are there. But it is admittedly a long way to go before the whole construction is in place. But the sooner we get rid of the ontological blindness of mainstream macroeconomics and are intellectually honest and ready to admit that the microfoundationalist programme has come to way’s end – the sooner we can redirect are aspirations and knowledge in more fruitful endeavours. To accomplish this, the starting point needs to be — as Dow so eloquently puts it — “explicit statements about the nature of the real world.”

  1. Ikonoclast
    February 7, 2021 at 12:07 am

    The whole idea that economics and the economy exist as a self contained discipline and a self-contained system respectively is absurd. First, there is a natural system, the biosphere, which contains economics activity and upon which economic activity is dependent. Second, there is politics and force (power) which condition economic activity.

    In relation to the second, Chomsky writes of: “…American Liberalism, reiterated… in the Clinton doctrine, which held that the US has the right to resort to “unilateral use of power” to ensure “uninhibited access to key markets, supplies and strategic resources.” Not a right accorded to others, needless to say.”

    Under these conditions, the pretense that there can be “pure economics” and a “science” of economics is absurd. It’s equally important to point out that these conditions (use of force to secure and retain strategic access to markets, supplies and strategic resources) show no sign of abating any time soon in human affairs.

    The entire and so far successful attempt of capitalist economics has to been to ideologically and systemically “naturalize” itself, meaning make it seem natural and common sense to all its beneficiaries, and many of its bought-and-suborned wage-slaves and politicians, rather than a system of artifice, imposition, exploitation and appropriation.

    Capitalist economics is an ideology through and through. Many of its behaviors, for which its useful fools (the bourgeois economists) seek fundamental laws, are axiomatically-determined outcomes based on its rules, parameters and algorithmic directives. Denying this is like saying that it’s a fundamental scientific law of American Football that all points are scored by crossing the plane of the in-game field to the end zone or by other actions in or from the end zone, like the safety. These are obviously not fundamental scientific laws. They are axiomatic outcomes of the rules and parameters of the competitive-cooperative game.

    Behaviors in capitalist economics show a strong tendency to be axiomatic outcomes of the rules, parameters and algorithmic calculation prescriptions of cultural and institutional generation and instantiation. There are two limits sets to this proposition. The first limit set is the general set of natural limits (environmental limits and human biological limits). The second limit set is that of overt elite force. In the first case, the environment cannot be pushed beyond its natural limits. It will fail to supply resources and waste sinks adequately and it will “snap back” when pushed too far. Also, in the first case, humans cannot be pushed too far or they will starve, become exhausted or otherwise incommoded or discontented and they will “snap back”, in insurrection and rebellion which may be revolutionary or reactionary in nature). In the second case, the human elites apply force using security and military proxies, in the form of violence, killing, eviction, expulsion etc.

    How can such a system be said to only have economic laws? It is quite absurd. It has economic prescriptions, framed by political prescriptions and applications including violence, framed by natural laws which condition the asymptote possibilities of the human rule system chosen. We need to choose rule systems compatible with natural system limits and compatible with moral philosophy prescriptions which take precedence over mere economic precription. We already do this. Slave markets are not legal. Certain forms of pollution are not legal. We simply need to extend this thinking and reduce the ambit of the “algorithms of capitalism” and its false equation of equating many incommensurables in the numéraire.

    This equates ideationally to the most ambitious project since the scientific enlightenment. It will mean getting people to cease believing that money measures value. This is the deepest and most fallacious belief of the modern mind. It is inculcated from the day each child begins to observe adults and learn language. It will be tremendously difficult to remove this false belief, this profound false consciousness of the modern mind.

  2. February 7, 2021 at 12:30 am

    A market crash is not an equilibrium phenomenon. QED

  3. Gerald Holtham
    February 8, 2021 at 2:59 pm

    I agree entirely with Lars in the points he makes. To progress macroeconomics needs to study how people actually make decisions when faced with uncertainty. In Simon’s distinction, procedural rationality is a tenable hypothesis, substantive rationality and general equilibrium is a dead end.

  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.