Home > Uncategorized > Economics — a severe case of misplaced idolatry of ‘rigour’

Economics — a severe case of misplaced idolatry of ‘rigour’

from Lars Syll

be-relevantThere is something about the way macroeconomists construct their models nowadays that obviously doesn’t sit right.

Empirical evidence — still — only plays a minor role in mainstream economics, where models largely function as a substitute for empirical evidence.

One might have hoped that humbled by the manifest failure of its theoretical pretences during the latest economic-financial crises, the one-sided, almost religious, insistence on axiomatic-deductivist modeling as the only scientific activity worthy of pursuing in economics would give way to methodological pluralism based on ontological considerations rather than formalistic tractability. That has, so far, not happened.

Fortunately — when you’ve got tired of the kind of macroeconomic apologetics produced by ‘New Keynesian’ macroeconomists and other DSGE modellers — there still are some real Keynesian macroeconomists to read. One of them — Axel Leijonhufvud — writes:

For many years now, the main alternative to Real Business Cycle Theory has been a somewhat loose cluster of models given the label of New Keynesian theory. New Keynesians adhere on the whole to the same DSGE modeling technology as RBC macroeconomists but differ in the extent to which they emphasise inflexibilities of prices or other contract terms as sources of shortterm adjustment problems in the economy. The “New Keynesian” label refers back to the “rigid wages” brand of Keynesian theory of 40 or 50 years ago. Except for this stress on inflexibilities this brand of contemporary macroeconomic theory has basically nothing Keynesian about it …

I conclude that dynamic stochastic general equilibrium theory has shown itself an intellectually bankrupt enterprise. But this does not mean that we should revert to the old Keynesian theory that preceded it (or adopt the New Keynesian theory that has tried to compete with it). What we need to learn from Keynes … are about how to view our responsibilities and how to approach our subject.

If macroeconomic models — no matter of what ilk — build on microfoundational assumptions of representative actors, rational expectations, market clearing and equilibrium, and we know that real people and markets cannot be expected to obey these assumptions, the warrants for supposing that conclusions or hypotheses of causally relevant mechanisms or regularities can be bridged, are obviously non-justifiable. Incompatibility between actual behaviour and the behaviour in macroeconomic models building on representative actors and rational expectations microfoundations is not a symptom of ‘irrationality’. It rather shows the futility of trying to represent real-world target systems with models flagrantly at odds with reality.

A gadget is just a gadget — and no matter how brilliantly silly DSGE models you come up with, they do not help us working with the fundamental issues of modern economies. Using DSGE models only confirms Robert Gordon‘s  dictum that today

rigor competes with relevance in macroeconomic and monetary theory, and in some lines of development macro and monetary theorists, like many of their colleagues in micro theory, seem to consider relevance to be more or less irrelevant.

  1. July 4, 2021 at 7:03 pm

    The current risk weighted bank capital requirements seem based on empiric studies of the opinions of Monday morning quarterbacks… in other words, what they opine after they saw what cause the last bank crisis

  2. July 5, 2021 at 11:14 am

    As a mathematical modeller I have concerns about how models are used in many fields. But how to express that concern in ways that non-mathematicians will understand?

    While we may criticise particular models, I want to pick up one your use of the term ‘idol’. My understanding is that an icon is something that we use to aid thought about the thing iconised and as such can be helpful, maybe even essential. The problem is that an icon can easily become an idol: that is, people come to worship the idol itself instead of the thing iconised. Thus (it seems to me) many academic physicists and economists – among others – reason about the model forgetting that it is just a model, much as some are said to confuse the map and the territory and so ‘think like a SATNAV’.

    As a possibly confusing aside, in British English there used to be a distinction between ‘rigor’ and ‘rigour’ that was a key part of mathematical education (at least at my school), but I’m guessing that hardly anyone would ‘get it’ if I’d simply said “surely you mean ‘rigor’ ” and advocated ‘proper rigour’ instead. But I do think that we all need some way of avoiding or at least ameliorating the baleful consequences of idolatry and rigor, especially now.

  3. Gerald Holtham
    July 7, 2021 at 4:46 pm

    One can only agree with Leijonhufvud and David Marsay. It is the young Turks who set the trends in academic subjects. The like to distinguish themselves from their elders by using techniques that the old timers have not mastered. In a trade that is unsure of itself there is always a premium on technique that distinguishes practitioners from general commentators and untellectuals. For that reason I am not hopeful there will be a reversion to emphasising wisdom and experience. The best hope of escape from the present infantilism is that a more useful and realistic approach surfaces which nontheless requires a fancy new branch of mathematics or programming. The kids will then get fired up in a more useful and productive way than at present.

  4. yoshinorishiozawa
    July 8, 2021 at 7:46 pm

    I feel we need much deeper reflections than criticizing mainstream economics. Many criticisms have been repeated again and again here. I wonder why they have very little effect s. This is my question I posed in ResearchGate on June 28, 2020.

    Why had Alex Leijonhufvud lost his intellectual influence in economics after mid-1980’s? What was the weakness of his research program?

    Alex Leijonhufvud was a great star in 1970’s for all those who want to develop economics beyond the economics that Keynes had inaugurated. His two books

    (1) On Keynesian economics and the Economics of Keynes (1968)

    (2) Information and Coordination (1981)

    were bibles for many young ambitious economists. Now, I read few papers which talk about Leijonhufvud and his theses. Marc Lavoie’s thick book Post-Keynesian Economics: New Foundations contains no papers or books of Leijonhufvud, no mention on him. J.E. King’s A History of Post Keynesian Economics since 1936 neither. In contrast to two Post Keynesians’ books, Michel De Vroey’s A History of macroeconomics from Keynes to Lucas and Beyond contains a chapter on Clower and Leijonhufvud. Does this mean that heterodox economics is more forgetful than people more near to mainstream? Or has it no concern on the foundations of their theories? In my opinion, to know the reasons of Leijonhufvud’s failure is the first step to the successful resurgence of heterodox economics. What do you think of it?

    See https://www.researchgate.net/post/Why_had_Alex_Leijonhufvud_lost_his_intellectual_influence_in_economics_after_mid-1980s_What_was_the_weakness_of_his_research_program

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