Lars P. Syll — RBC models — nonsense on stilts

I don’t think that there is a way to write down any model which at one hand respects the possible diversity of agents in taste, circumstances, and so on, and at the other hand also grounds behavior rigorously in utility maximization and which has any substantive content to it. — James Tobin

Determining causality is a bitch in social science since many factors generally contribute to causality involving social behavior. Studying a single individual and making assumptions about future behavior based on habits and revealed preferences might hold but transferring this to groups of individuals involves the fallacy of composition. This makes the assumption of methodological individualism and microfoundations problematic.

Assuming methodological individualism ignores that regularity in social behavior is more likely induced by stable institutional arrangements than individual factors involving assumptions of homogeneity that rather obviously do not hold in the real world.

Choosing a single variable or a few variables as causal factors operating universally and timelessly to produce regular results is seldom realistic. This is clearly done for convenience, to make the math tractable, rather than as a matter of induction based on empirical data or abduction based on reasoning to the best explanation. 

In many cases the process of identifying assumptions in conventional economics seem to be driven by ideology, with conclusions supported by authority, which is justification by power and gatekeepers rather than either reasoning or evidence.

In addition to the problem identifying assumptions, there is also the issue of assuming ergodicity (time average of a same is equal to the ensemble average) in processes that are conditioned historically and dynamically.

Moreover, the greater the scope the less accurate the solution is likely to be. This is a reason that social sciences have tended to focus on case studies rather than general theories.

Lars P. Syll’s Blog
RBC models — nonsense on stilts
Lars P. Syll | Professor, Malmo University

Bill Mitchell — Mainstream macroeconomics in a state of ‘intellectual regress’

At the heart of economic policy making, particularly central bank forecasting are so-called Dynamic Stochastic General Equilibrium (DSGE) models of the economy, which are a blight on the world and are the most evolved form of the nonsense that economics students are exposed to in their undergraduate studies. Paul Romer recently published an article on his blog (September 14, 2016) – The Trouble With Macroeconomics – which received a fair amount of attention in the media, given that it represented a rather scathing, and at times, personalised (he ‘names names’) attack on the mainstream of my profession. Paul Romer describes mainstream macroeconomics as being in a state of “intellectual regress” for “three decades” culminating in the latest fad of New Keynesian models where the DSGE framework present a chimera of authority. His attack on mainstream macroeconomics is worth considering and linking with other evidence that the dominant approach in macroeconomics is essentially a fraud.…

Bill Mitchell – billy blog
Mainstream macroeconomics in a state of ‘intellectual regress’
Bill Mitchell | Professor in Economics and Director of the Centre of Full Employment and Equity (CofFEE), at University of Newcastle, NSW, Australia

Lars P. Syll — Macroeconomic ad hocery

Lars gives new meaning to "Lucas critique." Smackdown.

Lars P. Syll’s Blog
Macroeconomic ad hocery
Lars P. Syll | Professor, Malmo University

David Glasner — John Cochrane, Meet Richard Lipsey and Kenneth Carlaw

So [John] Cochrane wants to take this bickering out of the realm of punditry and put the conflicting models to an objective test of how well they perform against the data. Sounds good to me, but I can’t help but wonder if Cochrane means to attribute the academic ascendancy of RBC/New Classical models to their having empirically outperformed competing models? If so, I am not aware that anyone else has made that claim, including Kartik Athreya who wrote the book on the subject. (Here’s my take on the book.) Again just wondering – I am not a macroeconometrician – but is there any study showing that RBC or DSGE models outperform old-fashioned Keynesian models in explaining macro-time-series data? 

But I am aware of, and have previously written about, a paper by Kenneth Carlaw and Richard Lipsey (“Does History Matter?: Empirical Analysis of Evolutionary versus Stationary Equilibrium Views of the Economy”) in which they show that time-series data for six OECD countries provide no evidence of the stylized facts about inflation and unemployment implied by RBC and New Keynesian theory. Here is the abstract from the Carlaw-Lipsey paper.

David Glasner also cites Brain Arthur on complexity economics, for which he acknowledges MNE.

Uneasy Money
John Cochrane, Meet Richard Lipsey and Kenneth Carlaw
David Glasner | Economist at the Federal Trade Commission

JKH also posted today at MR on John Cochrane.

John Cochrane’s “Monetary Policy with Interest on Reserves”