Look almost no one reads this blog and almost exactly no one reads the comments. I agree with this comment. In particular, I agree with the comment on Krugman. I don't know quite how to put this First I note that I my efforts at economic theory are not taken seriously. However, like Krugman, I use the mathematical techniques whose usefulness I challenge. I stress again that I am not claiming I use them as well as he does.
Robert, this was a nice post, again, but I have two comments I would like to make.
New-classical, real business cycles, dynamic stochastic general equilibrium and new-Keynesian micro-founded macromodels are bad substitutes for real macroeconomic analysis.
Not only do they trivialize uncertainty into risk. These models also try to describe and analyze complex and heterogeneous real economies with a single rational-expectations-robot-imitation-representative-agent. That is, with something that has absolutely nothing to do with reality. And - worse still - something that is not even amenable to the kind of general equilibrium analysis that they are thought to give a foundation for, since Hugo Sonnenschein (1972) , Rolf Mantel (1976) and Gerard Debreu (1974) unequivocally showed that there did not exist any condition by which assumptions on individuals would guarantee neither stability nor uniqueness of the equlibrium solution.
Opting for cloned representative agents that are all identical is of course not a real solution to the fallacy of composition that the Sonnenschein-Mantel-Debreu theorem points to. Representative agent models are rather an evasion whereby issues of distribution, coordination, heterogeneity - everything that really defines macroeconomics – are swept under the rug.
Conclusion – don’t believe a single thing of what these microfounders tell you until they have told you how they have coped with – not evaded – Sonnenschein-Mantel-Debreu!
Of course, most macroeconomists know that to use a representative agent is a flagrantly illegitimate method of ignoring real aggregation issues. They keep on with their business, nevertheless, just because it significantly simplifies what they are doing. It reminds – not so little – of the drunkard who has lost his keys in some dark place and deliberately chooses to look for them under a neighbouring street light just because it is easier to see there!
Although I certainly agree with Krugman’s harsh judgements on microfoundations of macroeconomics – and it goes for both the “new-Keynesian” and new-classical variety – Krugman’s explications on this issue is really interesting also because they shed light on a kind of inconsistency in his own art of argumentation. During a couple of years Krugman has in more than one article criticized mainstream economics for using too much (bad) mathematics and axiomatics in their model-building endeavours. But when it comes to defending his own position on various issues he usually himself ultimately falls back on the same kind of models. This shows up when he repeatedly refers to the work he has done with Gauti Eggertsson – work that actually, when it comes to methodology and assumptions, has a lot in common with the kind of model-building he otherwise criticizes.
On most macroeconomic policy discussions I find myself in agreement with Krugman. To me that just shows that Krugman is right in spite of and not thanks to those models he ultimately refers to. When he is discussing austerity measures, ricardian equivalence or problems with the euro, he is actually not using those models, but rather simpler and more adequate and relevant thought-constructions in the vein of Keynes.
# posted by Lars P Syll : 9:38 AM