So, these are some of my arguments for why I think that Simon Wren-Lewis, Paul Krugman and all other neoclassical macroeconomists ought to be even more critical of the present state of macroeconomics than they are. 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 hypothesis 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 brilliantly silly models do not help us working with the fundamentl issues of modern economies.Read it at Lars P. Syll's Blog
Krugman’s vindication of neoclassical macroeconomics – brilliantly silly
by Lars P. Syll | Professor, Malmo University