historical analysis — What happened in the 1970s? A Macro-Historical Perspective

We can better understand the political-economic transformations of the 1970s if we approach these transformations from a macro-historical perspective. We can benefit from developing a framework for understanding the significance of war, debt, and liquidity relative to the cyclical transformations and recurrent crises that have characterized global capitalism from the nineteenth century to the present. By identifying and evaluating macro- level cycles, we can shed light on non-cyclical developments that make the political economics of the 1970s unique.

I want to focus on the state and state-backed finance, specifically on the expansion and transformation of internationally hegemonic governments in their price-stabilizing and employment-stabilizing capacities as lenders, borrowers, spenders, and, most recently, dealers of last resort1. Highly significant developments in the means of hegemonic price stabilization occurred in the 1970s and 1980s. Rejecting some standard interpretations, I argue that the 1970s is not a failure, but a great success, perhaps the greatest to date, of Keynesian policy in maintaining status quo hegemony.

historical analysis — social, economic and ideological Inquiry
What happened in the 1970s? A Macro-Historical Perspective

Greg Hannsgen — Fiscal Policy Debates and Macro Models Abound in the News

Many of the themes in fiscal policy, economic growth, and distribution that we have been working on here have been in the news lately. Scholars from many fields are weighing in. One common theme is dynamics and their importance:

Multiplier Effect
Fiscal Policy Debates and Macro Models Abound in the News
Greg Hannsgen

Simon Wren-Lewis issues a challenge to heterodox economicsts

Following this post, I’ve been reading the blogs of quite a few heterodox economists. There is a lot that I have read which is challenging, and which has made me think about things in different (for me) ways, which is good. But there is also lots of stuff that seems less helpful, which when it is repeated over and over becomes (for me) somewhat annoying.

Stuff like we cannot possibly take microfounded macro seriously, because it is based on an all-embracing representative actor equipped with superhuman knowledge and forecasting abilities. To which I feel like shouting – where else do you start? I always say to PhD students, start simple, understand the simple model, and then complicate. So we start with a representative agent. What else could we do? We could start with aggregate relationships, but unless these are purely statistical, they will almost certainly appeal to theory about what individuals do.

What about superhuman knowledge and forecasting abilities? That seems like an extreme position. But the alternative is to assume we know what kind of mistakes agents will make. Where does this knowledge come from? I’m sure different agents are using different models from the one I’m using, but I have no idea what these models are. To keep things simple, I therefore assume I do not know what mistakes they will make, which implies rational expectations. If I want to be more realistic, I can look at the huge mainstream literature on models of learning. It is not a field I know well, but if there is a message there that we should go back to assuming adaptive expectations, I have missed it.

Read it at mainly macro
The heterodox versus the superhuman representative agent
by Simon Wren-Lewis | Professor, Oxford University

Here's your chance, folks. There are already some good comments. Ramanan's comment appears to be spot on, but Wren-Lewis has ignored it so far, although he has responded to others. It seems that this is not the way he thinks.

Hopefully, at least one of the MMT economists will take up the challenge in a blog post and address Wren-Lewis specifically. This is getting legs in the blogosphere.

Lars Syll — The nodal point of the macroeconomics debate

Microfoundations today means more than anything else that you try to build macroeconomic models assuming “rational expectations” and hyperrational “representative actors” optimizing over time. Both are highly questionable assumptions.

Read it at Lars P. Syll's Blog
The nodal point of the macroeconomics debate
by Lars P. Syll | Professor, Malmo University

To deliver macroeconomic models building on rational expectations microfoundations the economists have to constrain expectations on the individual and the aggregate level to be the same. If revisions of expectations take place they typically have to take in a known and prespecified precise way. This squares badly with what we know to be true in real world, where fully specified trajectories of future expectations revisions are no-existent 

Further, most macroeconomic models building on rational expectations microfoundations are time-invariant and so give no room for any changes in expectations and their revisions. The only imperfection of knowledge they admit of is included in the error terms, error terms that are assumed to be additive and to have a give and known frequency distribution, so that the models can still fully pre-specify the future even when incorporating these stochastic variables into the models.

This is also the basis of George Soros's general theory of reflexivity. IN The Alchemy of Finance, for example, Soros views economics and finance as a complex information system in which feedback is a principal determinant. 

Feedback is a reflexive information flow alters dependent information flows in ways that cannot be anticipated any more than actual events can be known advance. There are not only known unknowns but also unknown unknowns affecting complex information systems, and social sciences have to take this into account in their theories and modeling. To the degree they don't they will produce insufficient explanations and this will be revealed by failed predictions. 

This is basically an epistemological problem with implications for probability and statistics, as Lars points out. The present approach to microfoundations glosses over the epistemological issues since it is essentially static with respect to information in presuming both a representational agent and rationality in the way it does. Understandable methodological choice in light of model tractability, but inadequate to model complex information systems.

For an investigation of the epistemology see How George Soros Knows What He Knows: Towards a General Theory of Reflexivity by Flavia Cymbalista, Ph.D.

Reflexivity In Social Systems: The Theories Of George Soros by Stuart Umpleby, George Washington University

Mathematical analysis of Soros’s theory of reflexivity by C.P. Kwong

Lars Syll on the topics of the day

Lars has several posts up relevant to present discussion. The good news is that we are now in the process of drilling down, and some of the mainstreamers are starting to feel the heat thanks to the bloodhounds like Lars that are on the scent and now nipping at their ankles.

The confidence fairy

This post is short and consists mostly of a dynamite Kalecki quote from "Political aspects of full employment" (1943) showing how the neoliberal argument is political rather than economic. It's short and a must-read.

Dumb and dumber in modern macroeconomics

This post answers Simon Wren-Lewis's latest with a couple of devastating quotes from Robert Solow aimed at the mainstream assumption of a representative agent maximizing utility rationally.

Krugman responding to my critique

Paul Krugman responds today to the gadget critique of Lars posted here yesterday in his blog post, Gadgets Versus Scratchpads (More Wonkery), where he argues unconvincingly that IS-LM is not a gadget. Lars promises a response tomorrow. Stay tuned.

Meanwhile, Brad DeLong jumps in with "Microfounded" And Useful Models

To have fake micro foundations for your model is not a feature, but a bug.

Benchmarking macroeconomic theory against reality

I am now using Friday’s blog space to provide draft versions of the Modern Monetary Theory textbook that I am writing with my colleague and friend Randy Wray. We expect to complete the text by the end of this year. Comments are always welcome. Remember this is a textbook aimed at undergraduate students and so the writing will be different from my usual blog free-for-all. Note also that the text I post is just the work I am doing by way of the first draft so the material posted will not represent the complete text. Further it will change once the two of us have edited it. Anyway, this is what I wrote today which was highly constrained by meetings and travel for much of the day.

Read it at Bill Mitchell — billy blog
Benchmarking macroeconomic theory against reality
by Bill Mitchell

Any macroeconomic theory should help us understand the real world and provide explanations of historical events and reasonable forward-looking outlooks as to what might happen as a consequence of known events – for example, changes in policy settings. A theory doesn’t stand or fall on its absolute predictive accuracy because it is recognised that forecasting errors are a typical outcome of trying to make predictions about the unknown future.

However, systematic forecast errors (that is, continually failing to predict the direction of the economy) and catastrophic oversights (for example, the failure to predict the 2008 Global Financial Crisis) are an indication that a macroeconomic theory is seriously deficient.

Some weekend reading — Daniel Little on social causation

On Thursday, March 8, 2012, I posted Daniel Little — Coleman on the elementary actor. Here is some follow-up on the methodological debate among sociologists, in particular between methodological individualists and institutionalists.

In Causal Pathways through Colman's Boat, Daniel Little examines the relationship of macro explanations and microfoundations.

In Microfoundations and Meso Causation, Daniel Little examines how macro explanations are not incompatible with microfoundations even when not traced out specifically in detail as narrow conceptions of methodological individualism require.

See also Daniel Little, New ideas about structure and agency for more on the debate between methodological individualism and institutionalism.

Finally, here Daniel Little's Current issues in causation research report on Causality and Explanation in the Sciences (2011), which summarizes the major current positions regarding causal explanation in the sciences.

From this, it should be pretty clear that most of the causal "intuitions" one sees on blogs by the non-rigorous are, well, not rigorous.

Peter Cooper shows how this methodological analysis applies to macroeconomics from an MMT viewpoint in Thinking in a Macro Way.

These few short posts cover a lot of territory if you have a chance to get to them.