David F. Ruccio — Phlogiston, the identification problem, and the state of macroeconomics

The problem is similar in macroeconomic models, and Romer finds that many mainstream economists rely on models that require and presume exogenous shocks—imaginary shocks, which “occur at just the right time and by just the right amount” (hence phlogiston)—to generate the desired results. Thus, in his view, “the real business cycle model explains recessions as exogenous decreases in phlogiston.”

The issue with phlogiston is that it can’t be directly measured. Nor, as it turns out, can many of the other effects invoked by mainstream economists. Here’s how Romer summarizes these imaginary effects/ A general type of phlogiston that increases the quantity of consumption goods produced by given inputs:

• An “investment-specific” type of phlogiston that increases the quantity of capital goods produced by given inputs
• A troll who makes random changes to the wages paid to all workers
• A gremlin who makes random changes to the price of output
• Aether, which increases the risk preference of investors
• Caloric, which makes people want less leisure

So, there you have it: in Romer’s view, contemporary mainstream economists rely on various types of phlogiston, a troll, a gremlin, aether, and caloric. That’s how they attempt to solve the identification problem in their models.…

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Phlogiston, the identification problem, and the state of macroeconomics
David F. Ruccio | Professor of Economics, University of Notre Dame