Home > Uncategorized > The representative consumer has to die

The representative consumer has to die

Recently, Robert Lucas, who was called an economist, died. This is not about him, but about his kind of economics as tweets and obituaries show that it is not yet generally understood what kind of science the neoclassical macro-economist like him produced. Their most egregious failure: after decades of work, they do not even have a shimmer of anything which could pass for a neoclassical way to estimate the macro economy, even when their ideas are squarely at odds with the macro economy as we measure it. Theory without measurement.

Lucas used – like many others – the concept of the representative consumer. A macro economic model which presupposes that the economy consists of 1 person, A Robinson Crusoe model – or fantasy? Which is faulty, as the essence of a macro economy – its foundational essence, its sine qua non, its deepest core – is that a macro-economy consists of multiple persons who are interrelated by economic, political and legal ties. And by monetary ties, too. Money is undefined in the 1 person economy of much neoclassical macro. I now: nowadays we have HANK models, Heterogenous Agent models which have more than 1 consumer/producer, like: capitalists owning all the capital used to employ others and workers only owning capital they use themselves, to give it a Marxist twist. That’s better – but not yet good enough.

What’s special about macro-economics? Macro economics studies interpersonal concepts like:

  • Inequality (wealth, income). For the record: we do measure macro-inequality.
  • Unemployment (requires employers and employees and is carefully conceptualized, including ‘broad unemployment’, and measured)
  • Paradoxes (like the paradox of thrift: when everybody starts to save a larger part of his or her monetary income, monetary expenditure and income goes down and nobody saves more money)
  • Fallacies of composition. This is the ‘as a single H2O atom can’t freeze, water can’t freeze either’ fallacy. Often, the paradox of thrift is mentioned as an economic example. But that’s only one of a whole set of (monetary) examples. Going directly to the representative consumer model: this assumes that as single person doesn’t trade in a monetary sense and doesn’t need money, the macro economy also doesn’t need money as we know it and measure it and use it. This also compasses the idea of emergent variables. The ‘skateability of a frozen lake’ is an emergent variable, so is a financial crisis in a monetary economy.
  • Sectoral flows, i.e. flows between sectors of the economy which below to different clusters and have different elasticities of demand and production, different locations and use different technologies with differences between capital and labor coefficients, as measured by the share of capital income and labor income. Input-output models are based on this idea and they are based on the main macro-economic measurement system, the national accounts which contains sectoral accounts (which, hence, does NOT model the economy as a single entity).
  • Business cycles as intersectoral, intertemporal and monetary events (even when, inspired by the work of Wesley Mitchell, this is the way it’s measured by the NBER, USA cycles are measured as inherently historical processes)
  • The factors of production are Labour, Physical capital and Land and Natural Resources. The (ownership of) Land and Natural Resources is an element of (international) macro economics. Needless to say that Land and Natural Resources are excluded from neoclassical macro in the style of Robert Lukas.
  • Rent income

The list is not exhaustive. But instead of studying such measured real world phenomena, neoclassical macro economists chose to analyze economic LaLa Land – again, without constructing even a shimmer of a way to measure their idea of macro. Fun fact: some of the models use ‘labor’ as a variable but forget to define it as hours or persons. That should not even happen in an economics 101 paper. Vague, fussy and useless. Forget it.

P.S. – in my tropical island fantasies, I’m not alone…

  1. May 19, 2023 at 12:20 pm

    While I liked your overall analysis a lot, a major factor of production overlooked on your list is energy. I know you said it was not an exhaustive list but leaving energy out of the mix or equations is actually a serious oversight.

    I was reminded of Steve Keen’s saying.

    A worker — labour — without energy is a corpse and machinery — part of physical capital — without energy is a sculpture.

  2. merijntknibbe
    May 19, 2023 at 1:29 pm

    A) You’re right
    B) As a historian: interesting about this: https://academic.oup.com/ahr/article-abstract/128/1/177/7098054 (‘When hay was King’)
    C) I’m busy with ‘A short history of hay, haying and hay lands in the Netherlands, 1500-2020’ and you remind me not to leave ‘hy as source of energy’ unattended.

  3. gerald holtham
    May 20, 2023 at 5:54 pm

    Lucas was quite explicit saying: “we are basically story-tellers, creators of make-believe economic systems.” Lucas’ stories had a political objective. He deplored government intervention in the economy and constructed fables where government intervention was either ineffective or counter-productive. He no doubt held these beliefs sincerely and thought his fables, like those of Aesop had a good effect on society. Given the scientific emptiness of the fables and his indifference to empirical analysis it is bewildering how influential they were even outside an ideological coterie. It can only be explained by the weird sociology of the economics trade, particularly academic economics. Practical economists were not immune to the Lucas virus but having to deal with the real world provided some inoculation. Still, it’s a very sorry tale. And the Nobel prize elevated the farce beyond satire

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