Home > Uncategorized > Real business cycles — nonsense on stilts

Real business cycles — nonsense on stilts

from Lars Syll

rbcThey try to explain business cycles solely as problems of information, such as asymmetries and imperfections in the information agents have. Those assumptions are just as arbitrary as the institutional rigidities and inertia they find objectionable in other theories of business fluctuations … I try to point out how incapable the new equilibrium business cycles models are of explaining the most obvious observed facts of cyclical fluctuations … I don’t think that models so far from realistic description should be taken seriously as a guide to policy … I don’t think that there is a way to write down any model which at one hand respects the possible diversity of agents in taste, circumstances, and so on, and at the other hand also grounds behavior rigorously in utility maximization and which has any substantive content to it.

James Tobin

Real business cycle theory (RBC) basically says that economic cycles are caused by technology-induced changes in productivity. It says that employment goes up or down because people choose to work more when productivity is high and less when it’s low. This is of course nothing but pure nonsense — and how on earth those guys that promoted this theory (Thomas Sargent et consortes) could be awarded The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel is really beyond comprehension.

In yours truly’s History of Economic Theories (4th ed, 2007, p. 405) it was concluded that

the problem is that it has turned out to be very difficult to empirically verify the theory’s view on economic fluctuations as being effects of rational actors’ optimal intertemporal choices … Empirical studies have not been able to corroborate the assumption of the sensitivity of labour supply to changes in intertemporal relative prices. Most studies rather points to expected changes in real wages having only rather little influence on the supply of labour.

Rigorous models lacking relevance is not to be taken seriously. Or as a famous British economist once  had it:

Why it is better to be roughly right than precisely wrong | Real-World  Economics Review Blog

  1. Ikonoclast
    June 17, 2021 at 4:43 am

    Economics, or more correctly, political economy and geo-strategics (for they now combine and interpenetrate globally) is an n-body problem in a complex, chaotic or even indeterminate system where n is an incalculably large number. Counting mere “agents” which would include all algorithm-behaving entities (which includes all animals, computers, living entities and viruses [1]) would not even come close to giving an estimate of n.

    We couldn’t control this system even if we knew how to. And we certainly cannot know how to in any case. Civilization itself is an uncontrollable runaway system. The case is hopeless. This statement is roughly right. Claims that we can fix civilization this way or that way are precisely wrong, each in its own particular way.

    We can’t even solve a 3-body celestial mechanics problem with tightly defined parameters with a finite equation to give a perfectly true result. It is impossible that we can solve anything more complex. We can fudge along until we hit an asymptote as a limit of the system which both were unforeseen consequences. Each limit and asymptote was usually unknown to science until scientific advances or close empirical approach to the asymptote occured. The case really looks very hopeless.

    Can we do anyting? Maybe, but I am not sure how. Perhaps science can tell us what NOT to do but not what to do. For what to do we must use ethical and democratic precepts and heuristics (certainly not conventional economics) and just plain hope that moral philosophy and democracy will work. There doesn’t seem much hope of that so we are reduced to “hoping against (the low probability of) hope” as the saying goes..

    [1] Even a virus acts according to its dna or m-rna encoding which constitutes a recipe (an algorithm) for making more viruses.

  2. Ken Zimmerman
    June 17, 2021 at 12:15 pm

    If Keynes is correct, why do economists ‘waste’ enormous amounts of time, energy, and resources – not to mention human patience – on a repeated basis to be “precisely wrong” while with all their might wanting to be precisely right?

    • John Jensen
      June 18, 2021 at 5:30 am

      Ken: “why do economists ‘waste’ enormous amounts of time”? It’s not just economists, it’s all social scientists. I call it a search for “personal confirmation” bias – as academics we do what we do so we can prove we are right and get people to agree with us. And, we create theories and publish them as a way of collecting like minded people who each confirms the other’s biases. We all seem to like support groups and to collect “Likes” and aNobel would be a fantastic LIKE! What a Career booster! And, once we believe in something it’s really easy to further fool ourselves into finding all sorts of positive evidence (and even easier to ignore the contrary stuff) which further confirms our opinion that “we really are correct”. Others, who don’t confirm our beliefs, our biases, are likely smoking something! It sounds rather unscientific but we can easily add some formulas and statistics to make it sound more palatable. And, it’s a widespread phenomenon – to the point of there being a replication crisis.

    • June 18, 2021 at 10:28 am

      That’s a very valid question indeed. My personal guess is that they fight hard to avoid looking uncertainty straight in the face. The important issues in economics cannot neither be modelled nor forecast because of uncertainty (human creativity tops everything – even economists’ imagination). The sad fact only is that too many economists are not honest about that. Just ask (yourself) how much money any economist would bet on his or her model if there was money to lose if it was “wrong” and to win if it was “right” like in the sense physicists get the law of gravity right. It really is a laugh that so many economists pretend doing physics when modelling and yet they show no confidence nor interest in these models having anything to do with the actual economy.

  3. Gerald Holtham
    June 20, 2021 at 2:53 pm

    No mystery. Real business cycle theory has its origins in political ideology. It is framed by people who do not like and are very suspicious of active government, whether that means counter-cyclical policy or high taxes and spending. If they can argue that all economic phenomena are equilibrium phenomena, then government is not needed to stabilise the economy. Moreover they argue that government has no informational advantage over economic agents in general so cannot improve matters even if there was room for improvement. This is theorising with a political or ideological motive. Perhaps most theorising is but this is an egregious example of particularly unrealistic and irrelevant theorising, maintained for political purposes despite its implausibility.

  4. Norman L. Roth
    June 20, 2021 at 11:04 pm

    Here we go again ! I strongly advise you {plural} to consult Page 12 of TELOS & TECHNOS: The 197 page edition. I don’t now what page it is on in the 256 or 200 page editions. This section of Chapter 2, {THE CURRENT CONCEPTION OF THE STANDARD OF LIFE} is entitled “The Cult of Shocks as Proxies for the “Exogeneous” in the Neo-Classical Paradigm”. I also urge you to consult Gunnar Myrdal’s classic pulverizing of the abuse & misuse of the Equilibrium concept in 1957. M. Lars Syll can get it out of the Archives as I quoted it in a RWER article some years ago. I also urge you to consult Paul Samuelson”s notorious pseudo scientific abuse of Le Chatelier’s “law” from Physical Chemistry in T & T.
    I do not think that “Real Business Cycle Theory” was motivated so much by Laissez-Faire ideology as by a lust for the Scientific respectability that only a misguided show of quantitative predictability can bestow. The last Chapter of Philip Mirowski’s ‘MORE HEAT THAN LIGHT’ is especially enlightening on this subject. Only some one who may have been exposed to a good Jesuit education could have come up with it. Please GOOGLE {1} Norman L. Roth {2 }Norman L. Roth, Economics {3} Norman L. Roth, Technological Time. Thank you for your patience & attention.

  5. Gerald Holtham
    June 22, 2021 at 3:55 pm

    Real Business Cycle theory is much worse at prediction than naive Keynesian income-expenditure models (for which I make few claims). Yes, there is a bias for models with unique analytic solutions in economics but a desire for quantitative predictability would lead to much greater eclecticism than we observe. Lucas and Sargent never disguised their agenda: the market knows everything and the government knows nothing. Most of their models and the RBC school are constructed to reach that conclusion.

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