Robert's Stochastic thoughts: Contra Krugman II

Sunday, July 15, 2012

Contra Krugman II

I generally agree with Paul Krugman, so it is exiting that I am outraged by something he wrote (I've calmed down now).

Paul Krugman says that scratchpads are useful. They are sloppy easy models which are not taken seriously. Or maybe which shouldn't be taken seriously, but it's not a big problem that many powerful people take them literally. I lose my temper.

Short version: If an economist alone in the woods keeps the limitations of a scratchpad in mind while a tree falls does it make policy sound ?

For the actual post click this link.

update:
"Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back", but they can't be trusted to remember the necessary conditions for the academic's theorems.

1 comment:

Anonymous said...: Professor Lars Pålsson Syll writes in "The nodal point of the macroeconomics debate"
16 July, 2012
http://larspsyll.wordpress.com/2012/07/16/the-nodal-point-of-the-macroeconomics-debate/

"This summer both Oxford professor Simon Wren-Lewis and Nobel laureate Paul Krugman have had interesting posts up discussing modern macroeconomics and its alleged needs of microfoundations.

Most “modern” mainstream neoclassical macroeonomists more or less subscribe to the view that microfoundations somehow has lead to better models enabling us to make better predictions of future macroeconomic events...Yours truly basically side with Wren-Lewis and Krugman on this issue, but I will try to explain why one might be even more critical and doubtful than they are re microfoundations of macroeconomics.

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.

The concept of rational expectations was first developed by John Muth (1961) and later applied to macroeconomics by Robert Lucas (1972). Those macroeconomic models building on rational expectations-microfoundations that are used today among both “new classical” and “new keynesian” macroconomists, basically assume that people on the average hold expectations that will be fulfilled. This makes the economist’s analysis enormously simplistic, since it means that the model used by the economist is the same as the one people use to make decisions and forecasts of the future.

Macroeconomic models building on rational expectations-microfoundations assume that people, on average, have the same expectations. Someone like Keynes for example, on the other hand, would argue that people often have different expectations and information, which constitutes the basic rational behind macroeconomic needs of coordination. Something that is rather swept under the rug by the extremely simple-mindedness of assuming rational expectations in representative actors models, which is so in vogue in “New Classical” and “New Keynesian” macroconomics. But if all actors are alike, why do they transact? Who do they transact with? The very reason for markets and exchange seems to slip away with the sister assumptions of representative actors and rational expectations.

Macroeconomic models building on rational expectations microfoundations impute beliefs to the agents that is not based on any real informational considerations, but simply stipulated to make the models mathematically-statistically tractable. Of course you can make assumptions based on tractability, but then you do also have to take into account the necessary trade-off in terms of the ability to make relevant and valid statements on the intended target system. Mathematical tractability cannot be the ultimate arbiter in science when it comes to modeling real world target systems. One could perhaps accept macroeconomic models building on rational expectations-microfoundations if they had produced lots of verified predictions and good explanations. But they have done nothing of the kind"; 12:31 AM