Demolition work on the rotten edifice of "modern macroeconomics" continues apace. The emperor, it turns out, is not merely without clothes. Upon closer inspection, he appears to be simply an empty cardboard box with the words "Emperor Inside" scrawled across its surface in felt-tip pen. Paul Romer's devastating critique really deserves to be the final word on the matter. But even Paul leaves one stone unturned, an element of modern macro so transparently intellectually dishonest that it may properly be termed a hoax: its so-called "microfoundations."Mean Squared Errors
No modern macro model is complete without a pean to the virtues of its own microfoundations. It seems that the word "microfoundations" is not allowed to appear unaccompanied by at least one self-congratulatory adjective -- "careful," "well-specified," even (shudder) "rigorous." But, as diligent readers of George Orwell will recall, war is not peace, freedom is not slavery, ignorance is not strength, and representative agent models are not rigorously microfounded.
But let's back up a step. What is this "microfoundations" business anyway, and why should anyone not currently seeking a tenure-track appointment in econ care even a tiny bit? Here's a short version of the very long story:
The Microfoundations Hoax
JEC
60 comments:
Very good texts - who's the author of this blog?
I don't know. I searched around for it but nothing turned up.
All Romer is doing is calling BS on Rationalist Theory in general... lets not get carried away...
You guys wont see it that way as you would have to give up on your beloved Darwin...
"Our closest relative, the peaceful Bonobo ape. "
Microfoundations....
Those who believe in micro-foundations tend to suffer from premature aggregation.
"Our closest relative, the peaceful Bonobo ape. "
Microfoundations....
Is not a foundation as it does not predate humans or is an ancestor ;)
@Ignacio
"Is not a foundation as it does not predate humans or is an ancestor ;)"
Exactly right!
Matt, you are making the same error as the people who say " How could we have evolved from apes because apes are still here?!!"
Evolution is NOT an ape becoming a human, that would be some sort of transubstantiation, but instead it is apes and humans having a common predecessor.
Greg I'm saying that that part of evolution is also rationalism... ie 'anti-empiricism'...
Here is an excerpt from an interesting article on genetics in natgeo:
"Ordinarily the progeny of any sexually reproductive animal receives one copy of a gene from each parent. Some genes, however, are “selfish”: Evolution has bestowed on them a better than 50 percent chance of being inherited. Theoretically, scientists could combine CRISPR with a gene drive to alter the genetic code of a species by attaching a desired DNA sequence onto such a favored gene before releasing the animals to mate naturally. Together the tools could force almost any genetic trait through a population."
Why this reference to 'evolution has bestowed on them...." here?
It adds NO VALUE to the science....its otherwise a good paragraph...
this is like a religious person saying "God has bestowed on them...."
Its religion not science... stick with what can be proven thru empiricism....
to me this is the general point Romer is making which is applicable across the board...
Empiricism is more important than just applying it to economic theories...
"this is like religious..."
You are right. This is what you call 'rationalism' does sometimes. We agree on the fundamentals Matt.
This is why when the Fed does the QE and the economists all say it will cause inflation, buy gold, etc... and then they do it and prices are seen to collapse they can just maintain the same theories with impunity...
That has more to do with professional deformation, prestige risk etc.
The main stopper of change is admitting one is wrong, admitting one's life work may be wrong is hard to change opinion (apropos of 'string theory', or SUSY, mentioned in other threads, which is being under attack due to empirical failure to corroborate last times).
Is basically an ego thing. Ontop of that in the case of CB's they have to keep the expectation that they know what they are talking about and the blind faith "the market" has on them (they have rationalised all this into a whole ideology about expectations and crap).
Is all a mess.
Well I am pretty heavily invested in "F=ma"... I'm invested in the G gravitational constant... etc... V=IR...
If somebody came along and showed how we could modulate gravity thru EM fields or something and then F didnt equal m*a all the time I wouldnt slit my wrists... I'd be very interested to learn more about it...
I wouldnt say 'well in 1600 Newton said blah, blah..."
I'd re-set my t=0 to today and go forward from there with the new knowledge...
These people are just f-ed up...
although FD I have had massive amount of time domain analysis in my training where you re-set t=0 all the time... could be cognitive bias....
You're not going to like the geoid model, Matt.
https://en.wikipedia.org/wiki/Geoid
Best to see "microfoundations" as an extension of Neo-Liberal or as I prefer Neo-Libertarian selective special pleading i.e selfishness or anti-affiliative/collaborative behaviour. This relates directly to outdated Neo-Darwinian evolutionary theory where genetic change through both affiliative/collaborative and "anti-social behavior (malignant viruses)" microbes engaging in rapid horizontal gene transfer is taboo and has to wait on the flimsy possibility of random variation (market innovation and selection).
Here is Raymond Plant, Professor of Jurisprudence and Political Philosophy at Kings College, London, expanding on the issue in regard to social justice using Alan Gewirth's (a former Professor of Philosophy at Chicago University) rational/empiric argument The Principle of Generic Consistency as set out in his 1978 book "Reason and Morality":-
http://www.tandfonline.com/doi/abs/10.5235/204033211796290290
"Greg I'm saying that that part of evolution is also rationalism... ie 'anti-empiricism'..."
Im not sure I follow you. Are you saying that the idea of a common ancestry of apes and humans is not empirical? The DNA evidence is overwhelming..... to the point of being as absolutely true as anything we know. We know that DNA makes us what we are. We even know how to engineer DNA. Are you trying to argue that if we cant find a fossil of THE common ancestor that we are simply dealing with maybes? I hope not.
I agree with you regarding the use of language like "evolution has bestowed upon...." but no serious evolutionary scientist would ever argue that that language is anything but simply a "figure of speech" as you like to say. None see evolution as some force which gives and takes away anything, unlike those who make references to God in the same manner. Thats why claims that evolution is like a religion are specious.
Empiricism: "a theory that states that knowledge comes only or primarily from sensory experience."
Rationalism: "the view that 'regards reason as the chief source and test of knowledge' or 'any view appealing to reason as a source of knowledge or justification'."
Both quotes from Wikipedia. Empiricism (contains a link to Rationalism): https://en.wikipedia.org/wiki/Empiricism
Think of it this way. Rationalism, like black, is one end of the continuum. Empiricism is the other, like white. Between them, there are gradations of grey.
It's hard to understand what Franko believes, but my guess is that he finds Rationalism defective. In fairness, he probably has a point.
From that, however, he seems to conclude that one must quickly travel the whole length of the spectrum, without any stop to catch a breath, until we reach Empiricism.
For some reason -- remember: this is just my guess -- Franko sees "your beloved Darwin" as the embodiment of Rationalism. But Darwin didn't just pull evolution off his ass. He did do plenty empirical work, which Franko never mentions: the voyages of HMS Beagle and years of comparative anatomy back in England.
Because there's something inherently evil/crazy in evolution -- I repeat: an instance of pure Rationalism, in Franko's imagination -- without it Eugenics and Nazism would have never been possible.
Again, that ignores the historical fact (empirical fact, people!) that Eugenics is older than Darwinism: one finds it in Plato, over two thousand years before Darwin. But one cannot quote names or dates (like I just did) or even empirical facts, because, for some reason unclear to me, quoting names and dates is also Rationalism (and religious thinking!), and Rationalism is evil, evil I tells ya.
Sigh.
"Are you saying that the idea of a common ancestry of apes and humans is not empirical?"
Yes.
Magpie if we dont know something, going all around saying we know something is never a good thing...
If we dont know, then we should just say we dont know... nobody knows everything...
Its like in economics, these people are all going around saying they have "models" and are making policy recommendations based on these "models" which is in reality trial and error, but they never admit that they are doing trial and error...
When was the last time you saw a central banker before a US congress committee say 'we dont know' or 'what we are doing is trial and error....'
How does a BS detector work? It has to work via observation and probably maths imo... as you cant refute a rationalization with another differing rationalization....
Stanford Encyclopedia of Philosophy
Rationalism vs. Empiricism
Peter Markie, Curators’ Distinguished Teaching Professor, University of Missouri at Columbia
The rationalist-empiricist debate was a debate that took place in the 18th century. It led to a dead-end. Epistemology has moved on. For example, Kant suggested a synthesis to resolve the issues raised in this debate. The present debate has moved in the direction of cognitive science, which suggests that Kant was likely on the right track although he did not know why at the time, like Darwin before the development of genetics and molecular biology.
For example, the issue in science now is about what is supported by "data" and what is not. Data has its own epistemological issues.
When can be we be said to "know" something science. When adequate data support the model. This is called an empirical warrant. The formal consistency of the mold is called a logical pedigree. A successful scientific theory must have both a logical pedigree wrt its algorithm and an empirical warrant wrt to data in evidence of it. A hypothesis is a model of a state of affairs that putatively corresponds to a fact as shown by data, that is, evidence. A chief requirement for data serving as evidence is observation either directly or using instrumentation.
Magpie,
Darwin didnt even know about genetics that was developed later...
He wrote "The Origin of the Species"
Lets say the weather forecasters model on Monday morning says the hurricane is going to hit Miami on Friday... then on Wednesday it says Charleston on Sunday.... what do they tell everybody that its Jacksonville on Saturday?
c'mon nobody qualified works that way....
"Well we previously told everybody Miami so we better take that into account!"
LOL!
Why are we still talking about Darwin? He deserves credit for the discovery of natural selection, which is different from success through competition, which was not innovative. But Darwin did not understand the mechanics behind evolutionary theory the way that we do now.
The social "Darwinians" have nothing to do with actual evolution, zip, zero, nada. They are simple asserting the law of the jungle.
Here is Ray Dalio, Principles, Part 2:
In other words, I believe that understanding what is good is obtained by looking at the way the world works and figuring out how to operate in harmony with it to help it (and yourself) evolve. But it is not obvious, and it is sometimes difficult to accept.
For example, when a pack of hyenas takes down a young wildebeest, is this good or bad? At face value, this seems terrible; the poor wildebeest suffers and dies. Some people might even say that the hyenas are evil. Yet this type of apparently evil behavior exists throughout nature through all species and was created by nature, which is much smarter than I am, so before I jump to pronouncing it evil, I need to try to see if it might be good. When I think about it, like death itself, this behavior is integral to the enormously complex and efficient system that has worked for as long as there has been life. And when I think of the second- and third-order consequences, it becomes obvious that this behavior is good for both the hyenas, who are operating in their self-interest, and in the interests of the greater system, which includes the wildebeest, because killing and eating the wildebeest fosters evolution, i.e., the natural process of improvement. In fact, if I changed anything about the way that dynamic works, the overall outcome would be worse.
I believe that evolution, which is the natural movement toward better adaptation, is the greatest single force in the universe, and that it is good. It affects the changes of everything from all species to the entire solar system. It is good because evolution is the process of adaptation that leads to improvement. So, based on how I observe both nature and humanity working, I believe that what is bad and most punished are those things that don’t work because they are at odds with the laws of the universe and they impede evolution.
Here is Darwin's theory in a nutshell:
Darwin's Theory of Evolution by Natural Selection
More individuals are produced each generation that can survive.
Phenotypic variation exists among individuals and the variation is heritable.
Those individuals with heritable traits better suited to the environment will survive.
When reproductive isolation occurs new species will form.
These are the basic tenets of evolution by natural selection as defined by Darwin. The following is a quote from Darwin.
"Variation is a feature of natural populations and every population produces more progeny than its environment can manage. The consequences of this overproduction is that those individuals with the best genetic fitness for the environment will produce offspring that can more successfully compete in that environment. Thus the subsequent generation will have a higher representation of these offspring and the population will have evolved."
https://www.ndsu.edu/pubweb/~mcclean/plsc431/popgen/popgen5.htm
Well fyi Dalio laid off half his staff this week....
Tom they can't "compete" after 8 years of ZIRP.... They are all dropping like flies...
Tom they are asserting Darwin... Hate to break the news to you...
Why are we still talking about Marx?
Why are we still talking about Keynes?
"Well we told them Miami on Monday...." = " Well Keynes said....."
"More individuals are produced each generation that can survive."
Oh... Ok... Then F the poor....
?????????
Yeah we only throw away more food than we eat ... Buuuuuut .... Not all can survive....
Tom they are asserting Darwin... Hate to break the news to you...
And they have no idea what they are talking about. It's the informal fallacy of appeal to authority and they don't even have the authority right. Same as the conventional economists' appeal to the authority of Adam Smith about the so-called invisible hand, when Adam Smith never asserted the idea as they hold it.
It's stupidity.
Why are we still talking about Marx?
Because contemporary economists have not yet caught up with some of the significant things he brought out. Although they are dated and need to be updated, as contemporary Marxists and Marxians have, contemporary economists have ignored them as irrelevant.
BTW, sociologists do use ideas derived from Marx applied to historical and contemporary data.
As Michael Hudson and others have pointed out, neoclassical economics was a step basked from classical economics in important respects that contradict the contemporary ideology of economic liberalism.
Biology moved froward from Darwin with genetics and molecular biology, while neoclassical economics moved backwards with methodological individualism and marginalism based on it..
Why are we still talking about Keynes?
Who is talking about Keynes in a Post Keynesian setting? Oh right, the deficit doves who think that the budget needs to be balanced over the cycle like Keynes did.
The MMT position is that this is flat out wrong.
Bill Mitchell actually ignores Keynes and traces his own intellectual development from Marx through Kalecki rather than Keynes, whom he criticizes as a deficit dove.
"As Michael Hudson and others have pointed out, neoclassical economics was a step basked from classical economics" should be back instead of basked.
that the budget needs to be balanced over the cycle
That this claim is the height of absurdity can be concluded by just looking at the data.
What's the total outstanding public debt in the US.? $18 trillion? Well, that's the balance of two centuries of deficits minus surpluses. Clearly the budget never balanced (far from it) over the several cycles. Deficits won by a gigantic margin. And the U.S. Economy didn't collapse: it just became the largest in the world (perhaps to be superseded by China, another country that does not care about "balancing budgets over the cycle").
New Keynesian economists who constantly make such claims of about "balancing over the cycle" are simply clueless. Throw them out and take MMT in, as soon as possible.
"If I have seen further it is by standing on the sholders of Giants."
Issac Newton, Letter to Robert Hooke (15 February 1676)
Previous contributions need to be recognized and they should be represented for what they were rather than misrepresented either out of ignorance or sophistry. People like Darwin, Marx and Keynes made significant contributions that need to be acknowledged but they should not be worshipped as ultimate authorities when the world has moved on.
"It's stupidity."
Well I'm not going to argue with you there....
"standing on the shoulders of Giants"
More like crushing the pea-brains of these morons going all around saying "we're out of money!"
Tom, imo that's a bad thing when these MMT elites go around saying that "we're standing on the shoulders of giants blah blah...."
Its weak.
They say this in response to morons asserting that they havent got anything new... its absurd... then they weakly reply "oh no!... we are standing on the shoulders of giants! youre right Mr. Academe!... youre right Mr New Keynes! youre right Mr. Post Keynes!... youre right Mr. blah blah!... hey lets invite James Grant to our conferences!"
Its pathetic...
It's good to remind that most of the ideas on which MMT is based are not new but have a long history. Plato and Aristotle got it right about the legal basis of money, for example. Marx and the Institutionalists going back to Veblen also showed how methodological individualism is wrong in that social relations are determinative. Keynes called attention to the difference between a monetary production economy and a barter economy and why modeling contemporary economics based on barter was doomed to failure. Marriner Eccles and Beardsley Ruml called attention to the ridiculousness of the notion that the currency issuer can run out of currency, as Ben Franklin had pointed out long before.
If MMT were entirely new, there might be some excuse that economists had overlooked these matters. But when most of them were known already, there is no excuse. It's professional malfeasance and they should all be fired.
Tom none of those other people (sans the Greeks) made those statements when we were not under the metals... this is a differentiation...
Even the Eccles guy and the Ruml guy were operating a system under the metals if you look at Eccles complete writings he was monetarist....
These MMT people are the first ones to say it post 1971 so they have complete justification to say their thinking is new imo....
F all those other old people... you cant look at how they were approaching this they were operating under metals... we have different conditions now...
Youre saying that because a weather forecaster said two days ago that it would rain today they still have to say it is going to rain today even though the updated forecast calls for 100% clear skies today... nobody does this...
Tom those old people offer us nothing in this.... nothing... from a deterministic perspective...
Matt, I agree that everything changed in 1971, but that doesn't mean that all previous ideas about finance and economics became completely irrelevant thereafter.
Just as important is the shift in the monetary system post-1971 is the dominance of the global economy and almost no economists are basing economics on the global economy as closed system. Finally, economics is the only field that purports to be scientific that disregards consilience, that is, that scientific knowledge must mesh as a whole and that anomalies among field must be accounted for.
Most economists are living in their own imaginary worlds.
Tom those old people offer us nothing in this.... nothing... from a deterministic perspective...
Write up the functions.
Working on it...
Right. No use asserting determinacy without some equations with measurable variables.
"hat the budget needs to be balanced over the cycle like Keynes did."
As far as we know Keynes never said that.
Truth by repeated assertion.
As far as we know Keynes never said that.
OK, I exaggerated somewhat in simplifying. I was thinking of Bill's post, The roots of MMT do not lie in Keynes, which is more nuanced.
Bill concludes with this:
In this regard, the work of Abba Lerner in the 1940s on Functional Finance is much more seminal to the development of MMT than was Keynes’ offerings, which I believe are antithetical to the foundational blocks of MMT.
Progressive narratives should aim to educate the public as to the need in normal times for continuous fiscal deficits. Then we would start getting somewhere.
Lerner repeatedly attributed the main ideas of Functional Finance to Keynes, even after Keynes's death. So one of Mitchell & Lerner is not reliable on the intellectual history, and I don't pick Lerner. For some reason Mitchell doesn't like Keynes, and even though he calls "Keynes’ offerings" "antithetical to the foundational blocks of MMT" - a remarkably silly statement imho, refuted by the many times that Mitchell quotes Keynes with approval, I think he has moderated somewhat and moved closer to the other MMTers over the years. Of course one shouldn't establish a personality cult of Keynes. But one can err in the other direction too.
Peter Cooper, Balancing the Budget Over the Cycle
Neil Wilson comments there:
Half the reason there is an obsession with balanced budgets is because Keynes mentioned it at some point.
The context in which he did – a Gold Standard world – is generally ignored.
Neil disagrees with that comment above. During the last go round on this at billyblog, Neil adduced the best evidence for this view - an old paper by Kregel. But it falls short. IIRC, Kregel was arguing as a corrective against simpleminded "hydraulic Keynesianism", which doesn't exist any more, and one must remember this; otherwise Kregel clearly overstates his case, for nobody has an actual Keynes statement that is strong enough. Found another old paper arguing sort of against Kregel's position that I thought got it better. I may try to dig it up.
Bill Mitchell, Keynes would not support fiscal austerity
As Keynes’ view unfolded over the bleak 1920s in Britain he did argue that governments should run deficits when private spending declined and reduce those deficits when future growth was strong enough. The intent was that the budget was to be more or less balanced over the business cycle.
He never argued that governments should start cutting back deficits now and create surpluses just in case private spending growth is strong in the future. He readily understood how pro-cyclical policy would undermine private confidence.
In the context of today, with private spending still weak, notwithstanding some evidence that private investment might strengthen over the next few years, Keynes would worry about the negative consequences of a further weakening of aggregate demand and national income generation arising from a harsh fiscal contraction.
Further, in the context of the time, the classical economists (who Keynes’ discredited) advocated balanced budgets each year – the sort of rules that are now being discussed by conservatives.
So Keynes was reacting to that and noted that such a rule would be inflexible and damage the chances of the economy achieving full employment. His view was that budgets might be balanced over the business cycle if that was consistent with full employment.
He also favoured running balanced budgets on the recurrent (operational) budget – that is, consumption spending and allowing the capital works budget to vary over the cycle. This was consistent with his view that the principle fiscal intervention should come from regionally-targetted public works schemes aimed at maximising the employment dividend from the fiscal outlays.
The capital budget would be the vehicle for balancing over the cycle if that was appropriate. If you examine the current Australian government policy and its proposed fiscal retrenchment you will not see that sort of approach being adopted.
But Keynes would never has agreed to the blind administration of a fiscal rule of the type the Australian government or other governments are pursuing. He would never have agreed to “forward-looking” pro-cyclical fiscal policy.
Yet there are some statements by Keynes that seem to be incompatible with many of the ideas proposed by Lerner, the post-keynesian school in general and MMT in particular. Maybe that's what led Bill Mitchell to his positions.
Take for instance this passage of the "General Theory" (1936 edition, pp. 82 and ff., as quoted by Richard Werner):
“The notion that the creation of credit by the banking system allows investment to take place to which ‘no genuine saving’ corresponds can only be the result of isolating one of the consequences of the increased bank-credit to the exclusion of the others.…It is impossible that the intention of the entrepreneur who has borrowed in order to increase investment can be come effective(except in substitution for investment by other entrepreneurs which would have occurred otherwise) at a faster rate than the public decide to increase their savings. … No one can be compelled to own the additional money corresponding to the new bank-credit,unless he deliberately prefers to hold more money rather than some other form of wealth.…Thus the old-fashioned view that saving always involves investment, though incomplete and misleading, is formally sounder than the new fangled view that there can be saving without investment or investment without ‘genuine’ saving.”
This passage led Schumpeter to comment thus (in his "History of Economic Analysis"):
"(The) deposit-creating bank loan and its role in the financing of investment without any previous saving up of the sums thus lent have practically disappeared in the analytic schema of the General Theory, where it is again the saving public that holds the scene. Orthodox Keynesianism has in fact reverted to the old view …. Whether this spells progress or retrogression, every economist must decide for himself”
"Right. No use asserting determinacy without some equations with measurable variables."
Thats a gross over-statement Tom...
And btw you guys are starting one of those unqualified "Jacksonville on Saturday!" conversations again with this Keynes stuff...
Neil: "The context in which he did – a Gold Standard world – is generally ignored."
Keynes has nothing to add to the post 1971 discussion...
Here: "It is impossible that the intention of the entrepreneur who has borrowed in order to increase investment can be come effective(except in substitution for investment by other entrepreneurs which would have occurred otherwise) at a faster rate than the public decide to increase their savings:
= "banks lend out the deposits!" = gold standard conditions...
Thats a gross over-statement Tom...
Then you need to specify what you mean by determinism in this context.
For example, chaotic systems are deterministic mathematically but owing to measurement issues appear to be random.
Are you referring to a chaotic system?
Matt, I am not trying to give you a hard time, I'm just trying to clarify what you are a saying. I have no idea what is it. From what I gather from other comments, I suspect it is not just me.
Jose Guilherme: Yet there are some statements by Keynes that seem to be incompatible with many of the ideas proposed by Lerner, the post-Keynesian school in general and MMT in particular.
Yes, sure. But (a) people change their minds (b) Lerner didn't say that Keynes was always right, even eventually right. Pioneering work in any field is often awkward, inconsistent, confused or confusing. So I think the better course is to emphasize what ones predecessors got right (otherwise knows as where they agreed with you) rather than crowing over what they got wrong. If that's "Whig history", good.
But also (c) one should be careful about claiming incompatibility, rather than searching for consistent interpretations. It is true that the creditary/financial/banking emphasis of his earlier work "practically disappeared" as Schumpeter said, and "Orthodox Keynesianism reverted to the earlier view." Minsky noted it could safely do so, for a while after the 40s, because of the wide and large holding of government debt, very different from the 20 & 30s.
What Keynes seems to be saying in that passage is not "the earlier view" deposits create loans, savings causes investment. One should assume he still holds that loans create deposits, investment (borrowing, government spending) causes savings. SO I think he is noting that unless there are genuine savings desires, this can cause crowding out, inflation etc. That's why he was for targeted spending, once the depths of the depression was over, not "orthodox Keynesianism" demand management, which did cause inflation and stagflation then and later. Keynes and Lerner did understand that in the 40s and 50s - as MMTers noted - but understood that it did NOT contradict the basic Keynes/Kalecki/MMT/FF framework.
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