Jason Smith comments on David Glasner's recent post.
Here is my comment, which I tried to post there without success. The problem is not unique to that site and it affects other blogs using Blogger, although not MNE. Seems to be a Blogger issue:
I think that what Glasner is saying in summary is that the representative agent plays a key role in general equilibrium theory in economics to make GE modeling tractable. The basic idea is that "free" economies tend to general equilibrium naturally, even though they may never actually converge on it at a point in time.
Then the question logically arises that if human agency expressed in markets is always tending toward GE, whhy the chronic boom-bust cycles that affect free market economies.
Glasner is saying that the reasons given are either implausible or conveniently accidental, and not the result of human agency, which is assumed to be "rational." The representative agent is an aggregate of rational actors rationally pursuing somewhat homogenous preferences targeted at utility maximization.
The implication is that such models are really just tautologies that can't be tested because of the role the representative agent plays in the model. The definition of representative agent embeds equilibrium in the assumptions. The model is internally consistent and can't be disproved from within.
In fact, we regularly heard that the model did not fail when it failed to predict the GFC because the shock that resulted in the crisis was "exogenous to" the model. How can a model be expected to foresee "acts of God." Econ is not fortune-telling.
Then, when narrative alternative explanations were offered, such as the financial fraud that the FBI warned was rampant at the end of 2004, the retort was, "Where's your model?"
Information Transfer Economics
The representative macro-theory agent differs from micro-theory agents
Jason Smith
See also
Lars P. Syll’s BlogRepresentative agent models — macroeconomic foundations made of sand
Lars P. Syll | Professor, Malmo University
—Angus Deaton and John Muellbauer, Economics and Consumer Behavior, page 81.
5 comments:
I have come to the view that DSGE macro is non-falsifiable; you cannot even say that it is wrong.
Take a look at the "natural rate of interest". There is a San Fran Fed paper showing its evolution. It went conveniently negative at the time of the crisis. This means that the DSGE models conveniently "predict" the subsequent slow growth. As long as you move the state variables in this fashion, your model will always fit observed data historically. They are unfortunately useless for forecasts, since you need to predict the path of these hidden variables.
I had this same issue -- blogger wouldn't let me comment on some blogspot blogs. However, for me it was a browser issue. Only Firefox had problems; other browsers worked.
I believe Glasner's point is that the representative agent assumes away all of the details of what establishes a general equilibrium (GE). The original question is how does GE work, so that's why Glasner calls it question begging (and then uses the analogy of the homunculous, which assumes away the problem you are trying to address).
This argument is parallel to Kirman's argument (in his paper "Whom or what does the representative indiviudal represent?") that rep. agent theories are attempts to sneak around the SMD theorem.
The basic fact that I believe covers all of this is that the behavior of micro agents and the behavior of the macro economy may not have very much to do with each other. In the SMD theorem, you can only guarantee the aggregate economy has a downward sloping demand curve (well, actually just a boundary condition of infinity at zero price), homogeneity of degree zero and Walras' law. Gary Becker makes the argument in 1962 (that I independently came to) that those demand curves arise from properties of the opportunity set, not the details of the agents.
There is such a big disconnect between macroeconomics and microeconomics/human behavior that they might as well be independent theories.
I don't think Glasner wants to go that far, though :)
Thanks, Jason. Interesting to know it's not just me that has had issues with Blogger. I ran into this issue some time ago when I was using Chrome as my preferred browser. I use Chrome, Safari and Firefox at the same time to manage different areas of interest. I tried Firefox with no luck there either. Then I tried Safari. Success — for a while. Now that is not working on some blogs at Blogger. Kind of maddening to write a comment and then have it get lost in the tubes. Glad you saw it here anyway. And thanks for sharing your thoughts on the post.
Heterodox schools tend to agree on separating micro and macro into different fields rather than assuming macro to be micro writ large because it involves aggregation. Some heteros even suggest calling macro "political economy," since it is not only heavily influenced by policy but also is aimed at influencing policy. In the big picture, macro is about resolving the trifecta of growth, employment and price stability, which are also major concerns of economic policy. Economic schools can be viewed as distributed across the political spectrum based on their foundational assumptions. Key assumptions are normative and ideological, based on different views of society wrt to policy.
I don't have a problem with using any model as long as its use is represented clearly and carefully, and claims based on the model don't go beyond what the model actually says about what is being modeled. When that doesn't happen, it's often a signal that the model is not being used "scientifically" as claimed, but rather to advance an ideological position consciously or unconsciously.
The problem with getting economists to question the conventional view is also reputational, I suspect. There is an interesting video clip of a lecture by central banker Bernard Lietaer where he first says that MMT is correct in its monetary description. In another place he recalls being told by Paul Krugman, "Never touch the money system." It's a career killer.
It's also been a firmly held orthodox assumption that money is a veil over barter and neutral in the long run. This is why so-called New Keynesians are not really Keynesians, as some of them admit. They are more Samuelsonians. :)
A central point of the General Theory is that a monetary economy differs substantially from a barter economy and money exerts important influences in a monetary economy that affect both finance and economics. Keynes founded modern macroeconomics and regarded as essentially different from micro in monetary economies especially where governments play decisive roles.
In Keynes's view macroeconomics was not an exact science after the manner of natural science, but rather a contingent one in which more than one outcome was possible, based on circumstances that are uncertain. There is no tendency to general equilibrium "in the long run" as a natural feature of the system resulting in spontaneous order.
In any model different inputs result in different outputs. The orthodox position views government as distorting the natural forces at work so its input needs to be minimized. Keynes showed that government can play a positive role through monetary and fiscal policy based on a correct understanding of how sectors interact in the income equals expenditure model in a modern monetary economy.
Using its fiscal stance as a tool, government has discretionary power to influence demand and encourage optimal use of available resources. Offseting demand leakage to saving by adjusting fiscal stance countercyclically is already incorporated through automatic stabilization and changing revenue flow. Governments automatically inject more and withdraw less in contractions.
The debate now is mostly about monetary versus fiscal policy. Keynes is usually associated with fiscal intervention but that is exaggerated by opponents to “Keynesianism.” “Keynesianism” in this view is much more about the independence of macro from micro and fiscal policy being more important tool than monetary policy. Most conventional economists are OK with some form of monetary policy operated by “grown-ups” at a politically independent central bank but they are suspicious of fiscal policy in the hands of politicians who they feel will inevitably be tempted to use it as political tool, if not a weapon.
So economists try to develop models that support their position. As a result of adhering to conventional assumptions like GE and microfoundations, as well as money neutrality, conventional economists make many assumptions that are clearly not true even at the micro level, such as there not being involuntary unemployment.
For example, assuming price adjustment rather than quantity adjustment, some conventional economists claim that the reason for all employment being voluntary is worker's refusal to lower their wage demands sufficiently to elicit offers. But price adjustment doesn't happen in economies in which many prices are administered and where firms adjust quantity instead, including quantity of labor.
If wages are reduced in bargaining, then income declines. If employers lay off workers, then income also falls. This affects demand and employers maintain present operational levels or increase them based on demand.
The contribution of Keynes (and others) has been to that "it's the demand, stupid." Moreover, when liquidity preference aka saving desire increases in nongovernment, government has the ability to offset demand leakage to saving in order to keep available resources in use, including human resources.
From some reason that is falling on deaf ears. When heterodox economists make objections, the report if often, "Where's your model," when that is is precisely the problem. Any model that does fit conventional methodological assumptions is rejected. IN the conventional view, "the methodological issues are settled."
The chief reasons appears to be political. Many conventional economists are doubling down, in fact, in the face of a deflationary trend that is going global and threatens debt deflation.
Economics is complicated because it not just about economics.
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