Saturday, May 23, 2015

Simon Wren-Lewis — Consensus in macroeconomics

Simon Wren-Lewis seemingly assumes (wrongly) that economics is a natural science. So the rest of the argument about plurality of expert opinion is wrong.

This is basis of the contention that SWL thinks is bogus. Heterodox economists don't assume that economics is a natural science and neoclassical economists do. It's a methodological assumption, just like methodological individualism upon which microfoundations and rational utility maximization are constructed. No matter that such assumptions are called into question by other social sciences, law and government, and business practice.

If only it were that simple, psychology and the social sciences including economics would be achieving the precision of the natural sciences and social engineering would be straightforward. Firms would be run by economists. That is not the case. This is why the debate over economic methodology is contentious.

"It's the assumptions, stupid." What justifies the assumptions? What are the hidden assumptions? This is no longer confined within economics as a discipline. It is philosophy of science, philosophy of social science, and philosophy of economics.

Philosophy is a critical exercise.  "The unexamined life is not worth living." — Socrates

A fundamental question is, "How do you know?" There are a lot of good reasons that the methodological assumptions of economics are incorrect, including that it is a natural science. Neoclassical economists want to sweep this off the table as "already settled." That just dogmatism rather than either science or critical philosophy.

Moreover, SWL admits that there are major disagreements in the mainstream and charges his opposition with being unscientific. How contentious is that?

Mainly Macro
Consensus in macroeconomics
Simon Wren-Lewis | Professor of Economics, Oxford University


NeilW said...

SWL is part of the Labour vs Tories mindset in the UK and he wants his class to do the ruling while letting the 'children' play at democracy.

It's the old trick of pointing at disagreements in a very small area. How many angels on a pinhead is all that is allowed to be discussed because everything else is settled.

It's precisely like the religious debates of 500 years ago, and funnily enough amongst the same class of people.

SWL is the modern day Sir Thomas More. We just need him to publish a book called 'Utopia' and the comparison would be complete.

John said...

It's what Freud called "the narcissism of small differences". Even a charlatan whose mind was in a permanent drug induced haze understood this kind of stuff.

During the general election campaign, for example, Labour condemned the Tories for expanding the amount of public money going to private outsourcing in the NHS. Under the Tories, apparently it is now 6%. Under Labour it was 5%. Or giving the go ahead to a few more city academies than they would. The whole thing was a total farce.

What would Wren-Lewis be a martyr for? DSGE? Money neutrality? Central bank independence? Like More, he'd order torture to ensure the recantation of heretical beliefs. It's tough being part of the ruling class. You have to keep all those tiresome plebs in line. SWL is a don at Oxford. Minsky was in the backwoods of St Louis. Dig the bastard up, decapitate him and put his head on a spike so that the rest of these upstarts get the message.

Ron Waller said...

I think it is simple enough to make economics a natural science. But like the other sciences, the work has to start from the beginning.

First things first. What is the goal of macroeconomics? This is one that all economists should be able to agree on. It goes something like this: the goal of economics is to create a system that maximizes prosperity (measured in real GDP growth) in a stable and sustainable manner.

This is a promise that was made by neoliberals like Friedman, Reagan and Thatcher. One still (ironically enough) made today. I keep hearing neoliberals talk of prosperity while the economy goes down the drain. (But that nonsense is politics, not science.)

One related principle is distribution of income (and wealth.) Over the past 35 years, all the benefits from GDP growth (wealth creation) and productivity growth (machines and energy doing more of the work) went to the top 20% income earners. Given growth is exponential, this process is not sustainable. The wealth of the top 20% will eventually eclipse the wealth of all other segments of society (unless the deprivation of wealth causes a never-ending slump.) The only sustainable process of distribution is one where all segments of society are enriched. (This can be called Keynes' Law of Distribution.)

Since a low-tax small-government economy, positioned on the far-right of the left-right economic spectrum, does not properly distribute income and wealth, some form of government intervention is required. This is easily enough done through the process of progressive taxation. Therefore all the "efficient taxation" ideology (tax consumption, not income) is invalidated because the top 20% makes over 50% of all income and consume the least of all other quintiles. Therefore low income taxes and regressive consumption taxes cause inequality and prevent proper distribution of wealth. (Not that consumption taxes don't have a function.)

(As for tautological market fundamentalist ideology that states a free-market economy is the most efficient is not something to be taken seriously. Hypotheses have to be supported with evidence before they can be accepted by the scientific community. Notice Darwin didn't simply hypothesize the theory of evolution. He gathered a significant amount of evidence before the hypothesis [scientific theory] was accepted.)

Ron Waller said...

Next is the Copernican fundamental: does the Earth revolve around the Sun or the Sun the Earth. Or in economic terms: does the supply create the demand or the demand the supply. There is ample evidence that shows the demand-side approach was much more effective. If one uses a thought experiment, where an economy in the future has machines doing so much of the work it creates permanent depression-level unemployment, only the demand-side approach will work. The supply-side approach will fail because the economy will collapse in a downward spiral: there is no work people can do to create the demand.

As for a model of the economy, this is something that has to start simple and the mathematical relationships built up over time. The most simple model is that the economy is like a engine that has many levers that can either accelerate or decelerate economic activity. There are three kinds: fiscal, monetary and regulatory. These polices can either be expansionary or contractionary. (This is my read on Keynes.)

(Notice how neoclassical economists make unfounded hypotheses and then extrapolate from them. Like their belief in the long-term neutrality of money. One school [forget the name] says we can raise interest rates in a slump without causing a depression because people eventually ignore the interest rates set by the central bank. But historical data shows that monetary policy is entirely expansionary/contractionary and related to interest rates.)

So, one takes these simple ideas and then sifts through the last century or so of economic data from around the world and supports them with a mountain of evidence. Then the onus is on other economic science researchers to disprove the model. Today economists use rhetoric and cooked stats to play politics with economics. It is easy enough to expose. Eventually the economic scientific community will shred any lame efforts to derail the development of economic science, like they have done in all other fields where charlatans and quacks were forced out.

My theory is that if people begin building the science the support for it will come. The Nobel prizes will come. And macroeconomics as we know it will be tossed into the dustbin of history.