Bridget Rosewell — Macro-Economic Modelling and Its Uses

An International Macro Symposium conference this week hosted by the ESRC and the Oxford Martin School has brought home to me how little things have changed in some quarters. There is still a belief that with some tweaks the old modelling frameworks can capture the elements that were missing before the crisis, and a deeply held belief that agents that maximise are the key components of the economy.

What became clearer to me in the discussions in the symposium is why I think this is wrong. I’ll start with maximisation, partly because it is such a key part of the economist’s toolkit. Surely, we say, people will learn, and will find out how to describe reality and react to it in ways that can be captured in models. To the extent that they fail, this is already dealt with by thinking in terms of bounded rationality and limited information. And of course agents can differ in their tastes in some way. But this misses the point. All such approaches fail to distinguish between individual and collective behaviour. Once my choices are affected by yours, outcomes can exhibit contagion and cascades and the order in which decisions are made in time and space will affect any individual outcome. In these circumstances, it is not clear what role maximisation actually plays in defining a macroeconomic outcome. Sure people may intend to do so, but most decisions are not being made in any way that such a hypothesis would recognise and each decision in turn informs the constraints on the next one. So the path taken would be hard to characterise in equilibrium terms.

Synthesis
Macro-Economic Modelling and Its Uses
Bridget Rosewell

What do you know. A systems thinker. And according to her report, she is not alone.