Roger Farmer takes down NAIRU.
As Lars points out this would be inconsequential now and merely of historical interest if assumptions about NAIRU and the Phillips curve were not integral in building New Keynesian models that are still influential in policy.
Lars P. Syll’s Blog
More NAIRU bashing
Lars P. Syll | Professor, Malmo University
Lars P. Syll’s Blog
More NAIRU bashing
Lars P. Syll | Professor, Malmo University
NAIRU ― letting one more nonentity go
ReplyDeleteComment on Lars Syll on ‘More NAIRU bashing’
NAIRU is an inept analytical construct just like supply-demand-equilibrium. Nothing real corresponds to it. This, though, does not stop economists from discussing the issue with the same fervor as medieval theologians discussed the question whether Adam had a navel or not.
The common methodological blunder of theologians and economists consists in the inability to recognize that they are dealing with NONENTITIES. As John Stuart Mill observed long ago: “Mankind in all ages have had a strong propensity to conclude that wherever there is a name, there must be a distinguishable separate entity corresponding to the name; ...”. It is one of the great achievements of science to identify nonentities and put them to rest (e.g. epicycles, ether, phlogiston, perpetual motion machines, absolute space). Scientists have still a lot of nonentity-busting to do in economics but the NAIRU issue has now been settled, see
‘NAIRU and economists’ lethal swampiness’
http://axecorg.blogspot.de/2017/03/nairu-and-economists-lethal-swampiness.html
For more details see
‘NAIRU and the scientific incompetence of Orthodoxy and Heterodoxy’
http://axecorg.blogspot.de/2017/02/nairu-and-scientific-incompetence-of.html
‘Modern macro moronism’
http://axecorg.blogspot.de/2017/02/modern-macro-moronism.html
‘NAIRU: an exhaustive dancing-angels-on-a-pinpoint blather’
http://axecorg.blogspot.de/2017/02/nairu-exhaustive-dancing-angels-on.html
‘NAIRU does not exist because equilibrium does not exist’
http://axecorg.blogspot.de/2017/02/nairu-does-not-exist-because.html
‘Why you should NEVER use supply-demand-equilibrium’
http://axecorg.blogspot.de/2017/02/why-you-should-never-use-supply-demand.html
‘Keynes’ Employment Function and the Gratuitous Phillips Curve Disaster’
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2130421
Egmont Kakarot-Handtke
"As Lars points out this would be inconsequential now and merely of historical interest if assumptions about NAIRU and the Phillips curve were not integral in building New Keynesian models that are still influential in policy."
ReplyDeleteThe fact that theory X is a component of theory Y which itself is false does not prove that theory X is false. Members of the flat earth society may us the standard two times table to back their claims. That does not prove that two plus two does not make four.
We should be grateful NAIRU bashing nonsense has not infected central banks: certainly not the Bank of England.
ReplyDeleteOne of the claims made by NAIRU bashers which they seem to think is original is that labor shortages are not the only contributor to inflation. To which my response is: “Yes stupid, we’re all well aware of that”.
Around five years ago, inflation in the UK was above the 2% target, but the BoE did NOT raise interest rates because it had a good look into the causes of inflation at that time and decided (rightly as it turned out) that that inflation was mainly cost push, not demand pull.
Ralph Musgrave
ReplyDeleteYou confound TWO issues. The question is: Is the labor market theory as embodied in the NAIRU-Phillips curve true or false? The well-defined criteria for a true theory are material and formal consistency.
The fact of the matter is that the NAIRU-Phillips curve is provable false, that is, it does not satisfy the criteria of material and formal consistency.
It is an entirely DIFFERENT matter what the Bank of England did around five years ago. If they in fact applied the NAIRU-Phillips curve this does NOT prove that the underlying labor market theory is true. It shows only that the BoE believed in a provable false theory.
The two issues of true or false theory and right or wrong policy have to be strictly kept apart. Incompetent economists constantly mix them up, see ‘Schizonomics’
http://axecorg.blogspot.de/2017/03/schizonomics.html
Egmont Kakarot-Handtke
The fact that theory X is a component of theory Y which itself is false does not prove that theory X is false. Members of the flat earth society may us the standard two times table to back their claims. That does not prove that two plus two does not make four.
ReplyDeleteThat's true, Ralph. But New Keynesian models DSGE are not good at forecasting, and that is likely the result of dodgy assumptions rather than poor measurement.
Tom Hickey, Ralph Musgrave
ReplyDeleteThere are MULTIPLE interlocking methodological blunders in New Keynesian models. For example, Roger Farmer’s version consists of THREE components each of which is false.
― The Walrasian framework which is given with this axiom set: “HC1 economic agents have preferences over outcomes; HC2 agents individually optimize subject to constraints; HC3 agent choice is manifest in interrelated markets; HC4 agents have full relevant knowledge; HC5 observable outcomes are coordinated, and must be discussed with reference to equilibrium states.” (Weintraub)
The representative economist has not realized it but methodologically these premises are forever unacceptable. It should be pretty obvious that the Walrasian axiom set contains THREE NONENTITIES: (i) constrained optimization (HC2), (ii) rational expectations (HC4), (iii) equilibrium (HC5). Every model that contains a nonentity is A PRIORI false.
― “… an investment equals saving equilibrium condition (IS curve) describing the optimal consumption/savings decision of the representative individual …”. Every I=S/IS-LM model since Keynes and Hicks is false.
― “… a short-run Phillips Curve that expresses actual inflation as a function of expected future inflation and the output gap.”. Every Phillips Curve since Phillips’s original is false.
For details and references see ‘Modern macro moronism’
http://axecorg.blogspot.de/2017/02/modern-macro-moronism.html
It holds as a GENERAL rule for every model: If it isn’t macro-axiomatized, it isn’t economics.
Egmont Kakarot-Handtke