Monday, April 4, 2016

Jason Smith — There is no interpretation, only equation

Jason Smith comments (unfavorably) on Godley & Lavoie.
That dystopian vision can be replaced with something that could be consistent with a much more realistic economy by adding in the constant $\Gamma$. With $\Gamma$, households are paid with direct deposits at banks that are backed by their holdings of government bonds via fractional reserve banking. People buy and sell stuff at any point during a quarter. Velocity of scrip is still proportional to the "velocity" of government bonds ... but as G&L say, this is a toy model.
Information Transfer Economics
There is no interpretation, only equation
Jason Smith


Brian Romanchuk said...

Once again, he's largely missing the point. His complaint about G&L is that any number of behaviours are consistent with the mathematical model. But that's true about any mathematical model - there's an infinite number of systems whose behaviour can be approximated by compound growth (at least over short periods). So what?

The objective of an economic model is to gauge how changes to policy will affect behaviour. We need to be be able to interpret the model so that we can map policy changes to parameter/structure changes. If all we want to do is reproduce the data, we can just read the Flow of Funds data as it comes out.

Matt Franko said...

"The objective of an economic model is to gauge how changes to policy will affect behaviour."

I dont see a model out there that can do this... if that is what the objective is...

I wasnt alive but you can go back and look at Kennedy's speech where he says we will go to the moon... then look at John McLame's speech in 2008 where he said we should offer a $200m (LOL!) prize to a firm that could go to Mars or some shit...

It seems at least very indirect to me to say "how will policy changes affect?" or attempt to affect behavior the stochastic view comes in there like "what are the range of possible outcomes...?" ... rather than take a more deterministic approach like "this is what we are going to do...."

Like Bush going to war: "were going to war.... go shopping..." he's thinking 'boy, I hope America shops enough to generate enough taxes to fund the war..." very indirect, stochastic type thinking...

Neil Wilson said...

"The objective of an economic model is to gauge how changes to policy will affect behaviour."

Which is very difficult with aggregate models since policy applies to individuals, and you don't really know how that alters the aggregation function.

circuit said...

Neil: I'm with Brian on this. Are you suggesting macroeconomics is impossible? Surely not, I hope. It seems to me that understanding both how aggregate economic variables interrelate and how they can be made to change is both possible and necessary. If not, then we're in trouble.

Tom Hickey said...

Seems to me that macro wrt to forecasting is tenuous wrt to policy because what happens depends on many factors that are not consistent enough to allow for very precise prediction and variables too numerous or complex to be tractable.

The value of macro modeling is in setting forth possibilities and contingencies. Accounting identities are the boundary conditions that must always be satisfied for consistency but there are many ways that this could take place depending on social, political and economic circumstances, some of which are not even considered by the models for reasons of tractability, for instance. But there was enough for some to foresee the GFC and also post-crisis advice about using fiscal to resolve it, along with financial reform to preclude the conditions that led to it, which most economists had not included in their analysis.

Assuming a simple ISLM model, natural rate of interest and employment, etc, and using interest rates as a lever to nudge the economic hasn't worked out so well. Why choose it? Well, it's much more tractable economically and feasible politically than fiscal.

So using macro as a policy instrument is not impossible but it is limited — similar to forecasting the environment, the weather out more than a few weeks on one hand and earthquakes on another.

Arguably, the world is in the state it is owing to following bad policy advise based on conventional macro modeling. Neoliberal austerity is a case in point. "It's the assumptions, stupid."

Economists, especially as policy advisers, need to be more humble. But the problem is that if they are, then the political folks are likely to run away with policy and that probably would be worse. So it's damned if you do and damned if you don't. But at least the economists should get the economic right to start with, which conventional economists don't.

Brian Romanchuk said...

Jason's argument, as I understood it, is that all we have are equations, and we cannot attach interpretations to it. I have said similar things in other contexts. We have accept that a mathematical model is a mathematical model, and the solution just reflects the assumptions. (Mainstream economists tend to project mystical properties onto their models.)

But we still have to relate real world relationships to those simplified economic models. So we do have to have some interpretation of what the equations mean.

If we make a policy change that affects individuals, we then have to interpret how those individual changes map to a change in an aggregate model, so we at least can have a rough directional idea of the effect of the policy -- even if we cannot forecast the future exactly. (This was how Godley used his models.) Sure, we might fail to do anticipate the effects correctly. But the macro equations themselves cannot offer any guidance by themselves, since they do not incorporate the micro behaviour that we are changing.

Jason seems to be arguing that his theories do provide such guidance. I have my doubts about that, but I have not looked deeply into what he is doing.