Back from conference at Dallas Fed on "Consumer Decisionmaking: Perspectives of Behavioral Economics." Keynote speaker George Akerlof spoke on his recent book with Robert Shiller, _Animal Spirits_. However, beyond his speech he spoke more forcefully, declaring at one point, "economic theory is going into a black hole," both micro and macro.
Yes.
ReplyDeleteThe only debate is whether or not it has crossed the Swarzchild radius.
When a textbook on economics reads more like a textbook on Axiomatic Set Theory ( eg. Suppes) rather than a textbook on Classical Mechanics (eg. Goldstein) something has to be seriously wrong.
http://en.wikipedia.org/wiki/Cult
Ed Prescott on RBC models ('86):
ReplyDelete"The models constructed within this theoretical framework are necessarily highly abstract. Consequently, they are necessarily false, and statistical hypothesis testing will reject them."
I am familiar with many views on what constitutes the scientific method, but nowhere outside of economics have I heard anyone ever claim that being necessarily false is it. And claim that there is only one true way of being necessarily false. And also win the highest honor in the profession.
Max jr
ReplyDeleteThanks for the quote from Prescott. Had never seen that one before. Both hilarious as well as deadly telling.
But surely there is hope for macro in the form of the post-Keynesian stock-flow consistent modeling. This is at least somewhat more grounded in reality, in the form of respecting double-entry book-keeping.
ReplyDeleteSorry, NK people. I find myself totally rejecting the idea of indigenous money; the idea that money comes into existence as needed to quantify contracts. That system simply does not apply when the value of the money is being manipulated by multiple agents.
ReplyDeleteIn order for money to serve as a unit of account it must be value controlled by a sovereign or it must be commodity based. The current system does not suffice. Economics is very much dependent upon a unit of account that retains value or that loses value in a reasonably predictable manner while disallowing theft. Economists seem unable to deal with theft. Seems to me that theft is the "black hole". When "the financial sector" is able to hijack the monetary systems the world of economics comes crashing down.
Trucker,
ReplyDeleteI mostly agree although I think the theft problems need to be be solved on a political level first. I'll take a short-cut here because you are familiar with my views regarding the investment-class having too much clout, and... in short, let me just say that if the working-class had a stronger voice the government would hold itself more accountable via the natural push and pull between opposing forces. The problem is in part that we have 2 political parties representing one socio-economic group with the divisions being based on mostly social issues. If there were a political party representing the working-class (not the middle-class) a portion of the government would then hold the financial services folks accountable and in the not too distant future... currencies could be made obsolete and then of course everyone could be held accountable, digitally.
Then maybe we could start to sort out the rest of the mess. As things stand, even though it is totally correct that flawed economic principles have distorted the values of all things, especially where human 'capital' is concerned, the current political conditions are well short of conducive to change, as you well know.
Ray
Barkley,
ReplyDeleteThe Prescott quote is verbatim from his 1986 paper Theory ahead of business cycle measurement
Most youngsters, when asked to defend these models, reflexively point to Friedman 1953. But Prescott is contradicting Friedman.
Friedman argued in favor of simplified or idealized assumptions so long as they lead to conclusions that were approximately true. Prescott, however is doing no such thing. He is saying that even though he starts from premises that are false, and reaches conclusions that are also false, his model is nevertheless true.
The most charitable interpretation I can think of is that Prescott believes that 'true' and 'false' are synonyms.
Trucker - You are one of the few who have insight into the real problem. Keep observation reverberating!
ReplyDeleteTrucker,
ReplyDeleteYour comment shows more insight than most posts. Keep up the keen observation. The problem of enhancing the amount of "apparent money" with derivatives was a key shortcoming that drove us into this mess.
Max Wertheimer, "On Truth":
ReplyDelete"Science is rooted in the will to truth. With the will to truth it stands or falls. Lower the standard even slightly and science becomes diseased at the core..."
Take that, Edward Prescott.
Bob Solow responded to these claims from Prescott in his Nobel lecture:
ReplyDelete"When I say that Prescott's story is hard to refute, it does not follow that his case can be proved. Quite the contrary: there are other models, inconsistent with his, that are just as hard to refute, maybe harder. The conclusion must be that historical time series do not provide a critical experiment. This is where a chemist would move into the laboratory, to design and conduct just such an experiment. That option is not available to economists. My tentative resolution of the dilemma is that we have no choice but to take seriously our own direct observations of the way economic institutions work. There will, of course, be arguments about the modus operandi of different institutions, but there is no reason why they should not be intelligible, orderly, fact-bound arguments. This sort of methodological opportunism can be uncomfortable and unsettling; but at least it should be able to protect us from foolishness."
"Since what I have just said goes against the spirit of the times, I would like to be very explicit. No one could be against time-series econometrics. When we need estimates of parameters, for prediction or policy analysis, there is no good alternative to the specification and estimation of a model. To leave it at that, however, to believe as many American economists do that empirical economics begins and ends with time series analysis, is to ignore a lot of valuable information that can not be put into so convenient a form. I include the sort of information that is encapsulated in the qualitative inferences made by expert observers, as well as direct knowledge of the functioning of economic institutions. Skepticism is always in order, of course. Insiders are sometimes the slaves of silly ideas. But we are not so well off for evidence that we can afford to ignore everything but time series of prices and quantities."
PS Over at Mark Thoma's, Bruce Wilder reposted excerpts from my earlier comments.
Thanks Bruce! Glad you agreed with my views. I enjoy reading your comments too.
And:
Schwarzchild radius => event horizon => point of no return
As Trucker said: theft. Or I would moderatingly suggest: corruption.
ReplyDeleteAlmost the entirety of India and China's economies operate on a basis of corruption. So economic theory is invalidated for 2.3 Billion people(?) Not to mention the bedevilment inherent in the American and European systems...
Actually in reply to Solow, there have recently been a few people starting to do experiments that deal with certain macroeconomics issues and behaviors, although obviously they are not field experiments involving entire real world macroeconomies. In some sense that is what goes on all the time as we observe different policies being tried in different places, but as Solow could easily respond, each of these cases is highly individualized and not very replicable.
ReplyDeleteBarkley,
ReplyDeleteCan you provide more explicit details of why Akerlof says it is going into a black hole. Did he expand on this, or was it just a side comment.
Thanks
More than a side comment, but not much in terms of details other than that he saw it as both micro and macro. What was more striking was the intensity with which he said it and reiterated, which really cannot be conveyed.
ReplyDelete