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Dec 17, 2013 | Economist's View
Antonio Fatas:
Four missing ingredients in macroeconomic models: It is refreshing to see top academics questioning some of the assumptions that economists have been using in their models. Krugman, Brad DeLong and many others are opening a methodological debate about what constitute an acceptable economic model and how to validate its predictions. The role of micro foundations, the existence of a natural state towards the economy gravitates,... are all very interesting debates that tend to be ignored (or assumed away) in academic research.I would like to go further and add a few items to their list... In random order:
1. The business cycle is not symmetric. ... Interestingly, it was Milton Friedman who put forward the "plucking" model of business cycles as an alternative to the notion that fluctuations are symmetric. In Friedman's model output can only be below potential or maximum. If we were to rely on asymmetric models of the business cycle, our views on potential output and the natural rate of unemployment would be radically different. We would not be rewriting history to claim that in 2007 GDP was above potential in most OECD economies and we would not be arguing that the natural unemployment rate in Southern Europe is very close to its actual.
2. ...most academic research is produced around models where small and frequent shocks drive economic fluctuations, as opposed to large and infrequent events. The disconnect comes probably from the fact that it is so much easier to write models with small and frequent shocks than having to define a (stochastic?) process for large events. It gets even worse if one thinks that recessions are caused by the dynamics generated during expansions. Most economic models rely on unexpected events to generate crisis, and not on the internal dynamics that precede the crisis.
[A little bit of self-promotion: my paper with Ilian Mihov on the shape and length of recoveries presents some evidence in favor of these two hypothesis.]
3. There has to be more than price rigidity. ...
4. The notion that co-ordination across economic agents matters to explain the dynamics of business cycles receives very limited attention in academic research. ...
I am aware that they are plenty of papers that deal with these four issues, some of them published in the best academic journals. But most of these papers are not mainstream. Most economists are sympathetic to these assumption but avoid writing papers using them because they are afraid they will be told that their assumptions are ad-hoc and that the model does not have enough micro foundations (for the best criticism of this argument, read the latest post of Simon Wren-Lewis). Time for a change?
Jeffrey Stewart"Krugman, Brad DeLong and many others are opening a methodological debate about what constitute an acceptable economic model and how to validate its predictions." -M. Thoma
The major problem is right here. Predictions as a theory evaluation criterion is misguided, ideological bunk. As long as neoclassical economists are focused on predictions, they are free to avoid analyzing capitalism as it really exists.
The main topic for scientific economics is EXPLAINING the normal, profitable operation of capitalism and why it breaks down. Neoclassical economists will never uncover the truth about capitalism as long as they utilize models whose exact relationship to capitalist reality is at best unknown and at worst absurd. That is, as long as they focus on predictions instead of explanations they are engaged in a apologetics and not science.
Dan
4. The notion that co-ordination across economic agents matters to explain the dynamics of business cycles receives very limited attention in academic research. ...
YES!!!!
And who exactly does the coordinating? well, families of course, and managers and owners and corporations - with in whatever rules and societal norms exist - AND the Government.The Government is a central component of a modern economy including and centrally as a coordinating agent on behalf of all the little agents. The Reagan revolution solved the 70s by throwing out government - who will save us from the 00s and increase effective coordination???
Also, can we just through out the idea of equilibrium? It's not all bad, but somehow I have a strong suspicion that Econ would be better off without it.
DrDick
I think he is really on target with the issue of the systematic connection between the dynamics of booms and the following crisis, as well as the stochastic elements in the business cycle. Both seem well supported by the observed patterns over the past 40 years. I also think far too little attention has been given to economic collusion, despite the fact the Adam Smith observed that it is near universal among capital.
bakho
One of the keys to recession is the change in velocity. In the last recession we saw great increase in the money supply reflected in decreases in velocity. Models that considered velocity nearly constant failed.
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Benedict@Large : \
On an adjacent post, someone remarked that economics wasn't a science. This isn't true. The problem is that too many of the people practicing economics (including most of the mainstream ... present company excepted) aren't scientists, and are only doing so because monied interests are paying their way to be in the way.
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Jul 17, 2013 | Bloomberg
Is economics a science or a religion? Its practitioners like to think of it as akin to the former. The blind faith with which many do so suggests it has become too much like the latter, with potentially dire consequences for the real people the discipline is intended to help.
The idea of economics as religion harks back to at least 2001, when economist Robert Nelson published a book on the subject. Nelson argued that the policy advice economists draw from their theories is never "value-neutral" but foists their values, dressed up to look like objective science, on the rest of us.
Take, for example, free trade. In judging its desirability, economists weigh projected costs and benefits, an approach that superficially seems objective. Yet economists decide what enters the analysis and what gets ignored. Such things as savings in wages or transport lend themselves easily to measurement in monetary terms, while others, such as the social disruption of a community, do not. The mathematical calculations give the analysis a scientific wrapping, even when the content is just an expression of values.
Similar biases influence policy considerations on everything from labor laws to climate change. As Nelson put it, "the priesthood of a modern secular religion of economic progress" has pushed a narrow vision of economic "efficiency," wholly undeterred by a history of disastrous outcomes.
Rational Responses
The economic zeal reached its peak several years back, when a number of economists openly celebrated what they called economic imperialism -- the notion that the inherent superiority of their way of thinking would lead it to displace all other social sciences. Academics sought to bring the advanced calculus of rationality -- with its assumption that everything can be explained by people's perfectly rational responses to incentives -- to the primitives in fields ranging from sociology to anthropology.
The imperial adventure lost much of its momentum in the wake of the 2008 financial crisis. More attention has turned to the psychological, or behavioral, revolution, which has established that the rational ideal of economic theory isn't even a good starting point as a crude caricature of the way real people act. We're often goal-oriented, of course, but we seek those goals through imperfect heuristic rules and trial and error, learning as we go. If anything, rationality is the anomaly in human life.
Of equal significance is a growing acceptance of Nelson's larger point: that economics is riddled with hidden value judgments that make its advice far from scientific. In one notable development, the Journal of Economic Perspectives published a paper by economists Daron Acemoglu and James Robinson that examines how value judgments -- in this case, the dismissal of political repercussions -- have undermined well-intentioned economic interventions.
Most economists, for instance, see the weakening of trade unions in the U.S. and other Western nations in the past few decades as a good thing, because unions' monopoly power over wages impairs companies' ability to adapt to the demands of the market. As Acemoglu and Robinson point out, however, unions do a lot more than influence the supply and cost of labor. In particular, they have historically played a prominent role in creating and supporting democracy, in limiting the political power of corporations, and in mitigating income inequality.
Narrow policy analyses have repeatedly led economists to push for policies that have had unexpected consequences for the balance of political power. Acemoglu and Robinson cite the push to privatize industries in Russia in the 1990s. The idea was that private ownership, no matter how it came about, would ultimately benefit the entire economy. In practice, a rigged process gave rise to an illegitimate oligarchy and an increase in inequality that set the stage for the ascendance of President Vladimir Putin's authoritarian regime.
Tragic Flaw
More recently, the gospel of economic efficiency helped lay the groundwork for the financial crisis, mostly by encouraging overconfidence in the wonders of financial engineering. Theory-induced dreams of market discipline provided justification for stripping away entirely sensible regulations, such as barriers between commercial and investment banking, and for avoiding oversight of the booming trade in derivatives. One result was an extremely wealthy financial lobby that is still working hard to block reform.
In all these cases, the tragic flaw lies in the heady confidence that comes with a one-size-fits-all theoretical framework. There's a real danger in seeing economics as an objective science from which all values have been stripped. Nelson preferred an older, more modest perspective on economics espoused by Frank Knight, a founder of the University of Chicago's free-market school of thought. Knight expressed the view that truly careful social and economic analysis emphasizes the limits to human knowledge and "the fatuousness of over-sanguine expectations" from economic-policy designs, including those favoring free enterprise.
In short, economists would do well to derive their prescriptions from observations of how the world really works, with a healthy respect for its complexity. Faith is no substitute for informed inquiry.
(Mark Buchanan, a theoretical physicist and the author of "Forecast: What Physics, Meteorology and the Natural Sciences Can Teach Us About Economics," is a Bloomberg View columnist.)
To contact the writer of this article: Mark Buchanan at [email protected]
To contact the editor responsible for this article: Mark Whitehouse at [email protected]
About Mark Buchanan"
Mark Buchanan, a theoretical physicist, is the author of the book "Forecast: What Physics, Meteorology and the ... MORE
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