Brian Romanchuk — Representative Agent Macro And Recessions

J.W. Mason kicked off the latest skirmish in the never-ending macro wars with his Jacobin article "A Demystifying Decade for Economics." (Note: at the time of writing, the article was taken down until its publication in Jacobin.) This prompted a Twitter debate about representative agent macro, which eventually led to this Beatrice Cherrier article on heterogeneous agent models. In my view, the debate about representative agent models is a red herring. Mainstream macroeconomists main skill is in framing debates in a fashion that is congenial to the mainstream; however, the preferred framing leads to dead ends. My current research focus is on recessions, and although I have not gone too far in refreshing my survey of mainstream macro, the value of mainstream macro theory in this debate is limited....

Bond Economics
Representative Agent Macro And Recessions
Brian Romanchuk

Jason Smith — The representative macro-theory agent differs from micro-theory agents

Jason Smith comments on David Glasner's recent post.

Here is my comment, which I tried to post there without success. The problem is not unique to that site and it affects other blogs using Blogger, although not MNE. Seems to be a Blogger issue:

I think that what Glasner is saying in summary is that the representative agent plays a key role in general equilibrium theory in economics to make GE modeling tractable. The basic idea is that "free" economies tend to general equilibrium naturally, even though they may never actually converge on it at a point in time.

Then the question logically arises that if human agency expressed in markets is always tending toward GE, whhy the chronic boom-bust cycles that affect free market economies.

Glasner is saying that the reasons given are either implausible or conveniently accidental, and not the result of human agency, which is assumed to be "rational." The representative agent is an aggregate of rational actors rationally pursuing somewhat homogenous preferences targeted at utility maximization.

The implication is that such models are really just tautologies that can't be tested because of the role the representative agent plays in the model. The definition of representative agent embeds equilibrium in the assumptions.  The model is internally consistent and can't be disproved from within.

In fact, we regularly heard that the model did not fail when it failed to predict the GFC because the shock that resulted in the crisis was "exogenous to" the model. How can a model be expected to foresee "acts of God." Econ is not fortune-telling.

Then, when narrative alternative explanations were offered, such as the financial fraud that the FBI warned was rampant at the end of 2004, the retort was, "Where's your model?"

Information Transfer Economics
The representative macro-theory agent differs from micro-theory agents
Jason Smith

See also

Lars P. Syll’s Blog
Representative agent models — macroeconomic foundations made of sand
Lars P. Syll | Professor, Malmo University

"We believe that the confounding of the aggregate with the individual is as dangerous as it is pervasive...."
—Angus Deaton and John Muellbauer, Economics and Consumer Behavior, page 81.

Richard's Real Estate And Urban Economics Blog
A book that changed my life

Richard Green

Jason Smith — The emergent representative agent [1]

Wonkish, but of interest if interested in mathematical modeling in economics.

Information Transfer Economics
The emergent representative agent [1]
Jason Smith

Mark Buchanan — Macro muddles

Some nice Peter Dorman quotes about macro assumptions. Mostly boils down to methodological convenience, ideology and investment protection trumping scientific curiosity and admission of failures and attempts to correct them. A useless bunch that should have been fired long ago, as Bill Mitchell has been saying for some time.

The Physics of Finance
Macro muddles
Mark Buchanan

Lars P. Syll — Economics textbooks – how to get away with scientific fraud

Lars is on a tear.

As is well-known, Keynes used to criticize the more traditional economics for making thefallacy of composition, which basically consists of the false belief that the whole is nothing but the sum of its parts. Keynes argued that in the society and in the economy this was not the case, and that a fortiori an adequate analysis of society and economy couldn’t proceed by just adding up the acts and decisions of individuals. The whole is more than a sum of parts.

This fact shows up already when orthodox – neoclassical – economics tries to argue for the existence of The Law of Demand – when the price of a commodity falls, the demand for it will increase – on the aggregate. Although it may be said that one succeeds in establishing The Law for single individuals it soon turned out – in the Sonnenschein-Mantel-Debreu theorem firmly established already in 1976 – that it wasn’t possible to extend The Law of Demand to apply on the market level, unless one made ridiculously unrealistic assumptions such as individuals all having homothetic preferences – which actually implies that all individuals have identical preferences.

This could only be conceivable if there was in essence only one actor – the (in)famousrepresentative actor. So, yes, it was possible to generalize The Law of Demand – as long as we assumed that on the aggregate level there was only one commodity and one actor. What generalization! Does this sound reasonable? Of course not. This is pure nonsense!

How has neoclassical economics reacted to this devastating finding? Basically by looking the other way, ignoring it and hoping that no one sees that the emperor is naked.

Economics textbooks – how to get away with scientific fraud

Lars P. Syll | Professor, Malmo University