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description= 15 posts published by Lars Syll during March 2012;
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new classical and new keynesian variables are treated as if drawn from a known data generating process that unfolds over time and on which we therefore have access to heaps of historical time series if we do not assume that we know the data generating process if we do not have the true model the whole edifice collapses and of course it has to i mean who really honestly believes that we should have access to this mythical holy grail the data generating process modern macroeconomics obviously did not anticipate the enormity of the problems that unregulated efficient financial markets created why because it builds on the myth of us knowing the data generating process and that we can describe the variables of our evolving economies as drawn from an urn containing stochastic probability functions with known means and variances this is like saying that you are going on a holiday trip and that you know that the chance the weather being sunny is at least 30 and that this is enough for you to decide on bringing along your sunglasses or not you are supposed to be able to calculate the expected utility based on the given probability of sunny weather and make a simple decision of either or uncertainty is reduced to risk but as keynes convincingly argued in his monumental treatise on probability 1921 this is no always possible often we simply do not know according to one model the chance of sunny weather is perhaps somewhere around 10 and according to another equally good model the chance is perhaps somewhere around 40 we cannot put exact numbers on these assessments we cannot calculate means and variances there are no given probability distributions that we can appeal to in the end this is what it all boils down to we all know that many activities relations processes and events are of the keynesian uncertainty type the data do not unequivocally single out one decision as the only rational one neither the economist nor the deciding individual can fully pre specify how people will decide when facing uncertainties and ambiguities that are ontological facts of the way the world works some macroeconomists however still want to be able to use their hammer so they decide to pretend that the world looks like a nail and pretend that uncertainty can be reduced to risk so they construct their mathematical models on that assumption the result financial crises and economic havoc how much better how much bigger chance that we do not lull us into the comforting thought that we know everything and that everything is measurable and we have everything under control if instead we could just admit that we often simply do not know and that we have to live with that uncertainty as well as it goes fooling people into believing that one can cope with an unknown economic future in a way similar to playing at the roulette wheels is a sure recipe for only one thing economic catastrophy share on facebook opens in new window facebook share on x opens in new window x share on bluesky opens in new window bluesky the state of microfoundations and macroeconomics robert solow says it all 16 mar 2012 at 15 15 posted in economics theory of science methodology 3 comments the purported strength of new classical and new keynesian macroeconomics is that they have firm anchorage in preference based microeconomics and especially the decisions taken by inter temporal utility maximizing forward loooking individuals to some of us however this has come at too high a price the almost quasi religious insistence that macroeconomics has to have microfoundations without ever presenting neither ontological nor epistemological justifications for this claim has put a blind eye to the weakness of the whole enterprise of trying to depict a complex economy based on an all embracing representative actor equipped with superhuman knowledge forecasting abilities and forward looking rational expectations it is as if after having swallowed the sour grapes of the sonnenschein mantel debreu theorem these economists want to resurrect the omniscient walrasian auctioneer in the form of all knowing representative actors equipped with rational expectations and assumed to somehow know the true structure of our model of the world how that could even be conceivable is beyond my imagination given that the ongoing debate on microfoundations if anything shows that not even we the economists can come to agreement on a common model following the greatest economic depression since the 1930s the grand old man of modern economic growth theory nobel laureate robert solow on july 20 2010 gave a prepared statement on building a science of economics for the real world for a hearing in the u s congress according to solow modern macroeconomics has not only failed at solving present economic and financial problems but is bound to fail building dynamically stochastic general equilibrium models dsge on assuming the economy populated by a representative agent consisting of one single combination worker owner consumer everything else who plans ahead carefully and lives forever do not pass the smell test does this really make sense one cannot but concur in solow s surmise that a thoughtful person faced with the thought that economic policy was being pursued on this basis might reasonably wonder what planet he or she is on already in 2008 solow had in the state of macroeconomics journal of economic perspectives 2008 243 249 told us of what he thought of microfounded modern macro when modern macroeconomists speak of macroeconomics as being firmly grounded in economic theory we know what they mean they mean a macroeconomics that is deduced from a model in which a single immortal consumer worker owner maximizes a perfectly conventional time additive utility function over an infinite horizon under perfect foresight or rational expectations and in an institutional and technological environment that favors universal price taking behavior no one would be driven to accept this story because of its obvious rightness after all a modern economy is populated by consumers workers pensioners owners managers investors entrepreneurs bankers and others with different and sometimes conflicting desires information expectations capacities beliefs and rules of behavior to ignore all this in principle does not seem to qualify as mere abstraction that is setting aside inessential details it seems more like the arbitrary suppression of clues merely because they are inconvenient for cherished preconceptions friends have reminded me that much effort of modern macro goes into the incorporation of important deviations from the panglossian assumptions but a story loses legitimacy and credibility when it is spliced to a simple extreme and on the face of it irrelevant special case this is the core of my objection adding some realistic frictions does not make it any more plausible than an observed economy is acting out the desires of a single consistent forward looking intelligence it seems to me therefore that the claim that modern macro somehow has the special virtue of following the principles of economic theory is tendentious and misleading the other possible defense of modern macro is that however special it may seem it is justified empirically this strikes me as a delusion so i am left with a puzzle or even a challenge what accounts for the ability of modern macro to win hearts and minds among bright and enterprising academic economists there has always been a purist streak in economics that wants everything to follow neatly from greed rationality and equilibrium with no ifs ands or buts the theory is neat learnable not terribly difficult but just technical enough to feel like science moreover it is practically guaranteed to give laissez faire type advice which happens to fit nicely with the general turn to the political right that began in the 1970s and may or may not be coming to an end earlier this week new keynesian macroeconomist simon wren lewis asked me to explain why other ways of doing macro have purportedly died out and the microfoundations approach has become so dominant in my admittedly tentative answer i wrote 1 one could of course say that one reason why the microfundations approach is so dominant is as krugman has it on his blog today trying to embed your ideas in a microfounded model can be a very useful exercise not because the microfounded model is right or even better than an ad hoc model but because it forces you to think harder about your assumptions and sometimes leads to clearer thinking but i don t really believe that is an especially important reason on the whole i mean if people put that enormous amount of time and energy that they do into constructing macroeconomic models then they really have to be substantially contributing to our understanding and ability to explain and grasp real macroeconomic processes if not they should after somehow perhaps being able to sharpen our thoughts be thrown into the waste paper basket something the father of macroeconomics keynes used to do and not as today being allowed to overrun our economics journals and giving their authors lots of academic prestige 2 a more plausible reason is that microfoundations is in line with the reductionism inherent in the metohodological individaulism that almost all neoclassical economists subscribe to and as e g argued by johan åkerman and ekkehart schlicht this is deeeply problematic for a macroeconomics trying to solve the summation problem without nullifying the possibility of emergence 3 it is thought to give macroeconomists the means to fully predetermine their models and come up with definitive robust stable answers in reality we know that the forecasts and expectations of individuals often differ systematically from what materialize in the aggregate since knowledge is imperfect and uncertainty rather than risk rules the roost 4 microfoundations allegedly goes around the lucas critique by focussing on deep structural invariant parameters of optimizing individuals preferences and tastes as i have argued this is an empty hope without solid empirical or methodological foundation the kind of microfoundations that new keynesian and new classical general equilibrium macroeconomists are basing their models on are not at least from a realist point of view plausible as all students of economics know time is limited given that there has to be better ways to optimize its utilization than spending hours and hours working through or constructing irrelevant macroeconomic models founded on microfoundations more chosen from considerations of mathematical tractability than applying to reality i would rather recommend my students allocating their time into constructing better real and relevant macroeconomic models models that really help us to explain and understand reality of course i could just as well have directed wren lewis to robert solow s article there the answer to his question was given already four years ago share 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