Tuesday, November 27, 2012

Bob Lucas on macro

I find Bob Lucas more intriguing than any other economist of the last few decades. I'm always interested to read what he has to say, for example in this recent interview (hat tip to Steve Williamson). Some excerpts, and my quick reactions follow. Here's Lucas on the Lucas Critique:
[T]he term "Lucas critique" has survived, long after [the] original context has disappeared. It has a life of its own and means different things to different people. Sometimes it is used like a cross you are supposed to use to hold off vampires: Just waving it it an opponent defeats him. Too much of this, no matter what side you are on, becomes just name calling.
This is basically what I was conjecturing in this blog post. Of course Lucas gets to say it more matter-of-factly, because...well, his name is on the Critique. Anyway, here's Lucas on DSGE modeling:
Virtually all macroeconomic models today are dynamic, stochastic and general equilibrium (where here "general equilibrium" means you have the same number of equations and unknowns)...If we narrow the definition of DSGE by using "general equilibrium" to refer to competitive or Nash equilibria where the strategy sets of each agent are made explicit in an internally consistent way then we have Kydland-Prescott and other RBC descendants and not much else.
This is interesting, for several reasons. One is that Lucas expands the definition of "general equilibrium" to include Nash equilibria, which is not the way I've ever seen it done; I have always understood the term "general equilibrium" to be synonymous with "Walrasian equilibrium".

Also, it's interesting that Lucas says that RBC models are essentially the only equilibrium models (of the business cycle, presumably) in which "the strategy sets of each agent are made explicit in an internally consistent way". Is this true? I don't think it is true. For example, take a Calvo model. In a Calvo, model, agents' ability to set prices is restricted by a mysterious, exogenous "Calvo Fairy"...but, given the existence of such a "Fairy", the strategy sets of agents in the model are quite explicit and quite internally consistent. In a Prescott-type RBC model, agents' decisions are constrained by exogenous "technology"; you might think that this is more plausible of an assumption than a "Calvo Fairy", but in terms of its effect on the internal consistency of the strategy sets of the agents in the model, it seems no different.

Or maybe I'm reading Lucas wrong here?

Lucas on the causes of business cycles:
I was [initially] convinced by Friedman and Schwartz that the 1929-33 down turn was induced by monetary factors...I concluded that a good starting point for theory would be the working hypothesis that all depressions are mainly monetary in origin. Ed Prescott was skeptical about this strategy from the beginning... 
I now believe that the evidence on post-war recessions (up to but not including the one we are now in) overwhelmingly supports the dominant importance of real shocks. But I remain convinced of the importance of financial shocks in the 1930s and the years after 2008. Of course, this means I have to renounce the view that business cycles are all alike!
In 1980, Lucas had written:
If the Depression continues, in some respects, to defy explanation by existing economic analysis (as I believe it does), perhaps it is gradually succumbing under the Law of Large Numbers.
But with the post-2008 recession looking so similar to the Depression, it seems to have become clear to Lucas that the Law of Large Numbers will no longer do the trick. There must in fact be two types of recessions, with one (more frequent, less severe) type caused by "real shocks", and the other (rarer, more severe) type caused by "financial shocks". 

That Lucas has now twice changed his ideas about the underlying causes of the business cycle - the most important question in all of business cycle theory - is in my opinion a reason to admire him. When the facts change, Lucas changes his mind, as any scientist should.

Incidentally, the idea that "financial shock" recessions are different would tend to put Lucas more on the Reinhart-Rogoff side of things. Though Lucas doesn't mention here whether he thinks financial-shock recessions should last longer.

But the fact that history can cause even the smartest of macroeconomists to change his mind about the fundamental question of his field not once, but twice over the course of his lifetime is a stark illustration of the poverty of data that business-cycle theorists have to work with. In a sense, all we can do is watch history go by and hope it repeats itself enough for us to get a handle on what's happening.

Finally, Lucas on microfoundations:
The "[micro]foundations" of...models don't guarantee empirical success or policy usefulness. 
What is important...is that if a model is formulated so that its parameters are economically-interpretable they will have implications for many different data sets. An aggregate theory of consumption and income movements over time should be consistent with cross-section and panel evidence...An estimate of risk aversion should fit the wide variety of situations involving uncertainty that we can observe...Estimates of labor supply should be consistent aggregate employment movements over time as well as cross-section, panel, and lifecycle evidence...This kind of cross-validation (or invalidation!) is only possible with models that have clear underlying economics: micro-foundations, if you like. 
This is bread-and-butter stuff in the hard sciences. 
This I completely and utterly agree with. The power of microfoundations is that they allow unification. They give you the hope of explaining many phenomena in terms of one underlying phenomenon. In fact, there really should be no conceptual difference between the terms "microfoundations" and "unification". Microfounded models - when they work -are inherently more useful and powerful than equivalent "ad-hoc" models.

Of course, as Lucas points out, this makes microfounded models inherently more vulnerable to falsification than other models. An "ad-hoc" non-microfounded model only has to explain one thing, but a microfounded model has to explain many things. This means that as soon as the microfounded model fails to explain any one of the things it purports to explain, you have to conclude that the model is flawed, and look for a better model. (In practice of course, not everyone actually does this when they ought to...)

Anyway, it's always valuable and fascinating to read Lucas' thoughts. I seem to agree with him on quite a number of important things, though not on issues related to the assumptions or the value of the RBC modeling paradigm...Not that many people especially care whether I agree with Bob Lucas, mind you, but hey, it's my blog!


  1. Warning: Physics Troll :)

    I think this is the best explanation I have heard of the concept behind the relationship of microfoundations to the Lucas Critique.

    However, since changing the scale of your theory (going from micro to macro) destroys information (e.g. atoms go from having electron structure to being zero size points in the Ideal Gas Law), many of these details can only help to unify different micro-phenomena. They only explain macro-phenomena after being stripped of these details through the scale change.

    Atomic theory has been a massive boon to the understanding of thermodynamics, but thermodynamics was well developed before atoms had unified chemical phenomena.

    1. Exactly - hence the problems with the use of representative agents hiding most of the really interesting questions.

    2. This comment has been removed by the author.

    3. Can you deduce the behaviour of a swarm of bees by examining the behaviour of an individual bee?

      No - because the behaviour of each bee is not independent of the behaviour of the other bees.

      P.S. This is why methodological individualism can lead to dangerously wrong conclusions. (True you can model the behaviour of the swarm with a corrected model of how individuals behave, but without reference to swarm behaviour it is very difficult to get it exactly right because small effects can have big consequences.)

    4. "This is why methodological individualism can lead to dangerously wrong conclusions."

      So can comparing the behavior of bees to how humans make decisions.

    5. ????

      Idiom, anology? Ever heard of bubbles. Do you really want to label yourself as a narrow literalist?

    6. This comment has been removed by the author.

    7. Bees are not the only critters that "swarm", therefore the macro swarming behavior cannot depend that strongly on the underlying micro degree of freedom (bee).

      Observed correlations between the degrees of freedom in the economic microtheory are probably not strongly dependent on the details of that microtheory. If they were, then you have strongly coupled scales -- such a system would likely not admit a macro description at all.

      It is a possibility in economics, but if the behavior of gasses depended on the details of atoms at all scales, then we likely wouldn't be able to describe an ideal gas.

      (I may be wrong about this, but I think in models where we understand there is micro behavior that produces correlations in the macro behavior ... Langton's ant, for example ... we actually can't derive the latter from the former except by brute force simulation.)

    8. Ben Johannson7:01 AM

      This is wrong. You cannot make a comparison between physics and economics and expect to get anything useful out of it. Thermodynamics (the micro in your example) contributed toward understanding of atomic theory (your macro) because so far as we are aware the laws of physics do not change, which is why physics is actually relatively simple.

      But in economics rules which apply at the micro level often do not translate to the aggregate. The Paradox of Thrift is an enormous glaring flaw in attempting to make it so, as is comparing government budgets to those of households or firms. Recall the bild assertion by the Tories that austerity would spark investor (microeconomic actors) confidence, and their spending would generate economic growth. What actually happened was that withdrawing government spending reduced incomes which reduced employment which reduced output (macro!).

  2. Anonymous8:59 PM

    the evidence on post-war recessions (up to but not including the one we are now in) overwhelmingly supports the dominant importance of real shocks.------- In fact, the opposite is true. Most recessions are monetary or financial shocks.

    Real microfoundations require a deeper understanding of the interactions of neuroeconomics, social psychology, institutions etc. This is completely beyond Mr. Lucas.
    Like RBCers, Lucas is nothing but a right-wing ideologue.

    1. Anonymous10:05 PM

      I am super skeptical of this. Please give me one neuroeconomic insight that has interesting or profound effect on the macro-economy that cannot be derived from conventional economics. The point of useful economic models is to allow for some generality, if you start discussing things at a neural level you have to get insanely specific and rigidly non flexible.

    2. I thought the evidence from many post-war recessions was that they were deliberately engineered by the Fed to fight inflation (hence the V-Shaped recoveries when the brakes were removed). Why does he think otherwise?

    3. "Please give me one neuroeconomic insight that has interesting or profound effect on the macro-economy that cannot be derived from conventional economics."

      The assymetry between the reaction to losses and gains.

    4. "The assymetry between the reaction to losses and gains."

      Can you elaborate? Any risk-averse individual (a standard assumption in neoclassical microeconomic) will exhibit such assymetry. How did neuroeconomics change our view?

    5. Anonymous11:16 AM

      "The assymetry between the reaction to losses and gains."

      That is actually an insight from behavioral, not neuraleconomics. What this broadly is, is in fact prospect theory: http://en.wikipedia.org/wiki/Prospect_theory

      And yet I do not see how this is useful for a macro model, what quantitative insight would this change significantly?

    6. Please find me a model that responds assymetrically to changes - i.e. that responds over time in a rachet like manner with gradual rises and sudden plunges - not in response to shocks but endogenously.

    7. This comment has been removed by the author.

    8. This assymetry is not the same as a tast for risk aversion. It is a sudden change in risk aversion in response to experience.

    9. i.e. in one word Minsky.

    10. Was Minsky a neuroeconomist?

    11. Neuroeconomics is not the same as behavioral economics.

      By the way, what does all that have to do with Lucas?

    12. Ben Johannson7:11 AM

      The proximate cause of all recessions is an overly high rate of saving in the private sector. There are many different catalysts for such behavior, but it is that behavior which initiates and sustains economic downturns. Economic distress emanates from a lack of aggregate demand.

    13. Nathanael1:31 AM

      Ben, that's wrong in a subtle way. The proximate cause of all recessions is a shortage of spending in the private sector. It is possible to generate that without a high rate of saving, under circumstances involving manipulation of the money supply.

      However, your description is *usually* right -- but it's still misleading. A "high rate of saving" can mean that the billionaires are hoarding all the money, and can't find ways to spend it fast enough, while the rest of the population would love to spend money or save money, but is deep in debt and can't really do either. That is what's actually going on right now.

  3. Noah am disappointed that Lucas gave a 2003 presidential address to the American Economics Association in which he said the issue of stabilizing business cycles had been largely solved and economists should concentrate their efforts on growth.

    If I were asking interview questions . . .

    1. When was the Japanese meltdown again?

  4. Anonymous10:37 PM


    Do you disagree with Krugman's take on the RBC?

    So do you think that all recessions between 1930 to 2008 were caused by technological shocks? Seems silly to me...


    1. Do you disagree with Krugman's take on the RBC?

      No, I pretty much agree with his take.

      So do you think that all recessions between 1930 to 2008 were caused by technological shocks? Seems silly to me...

      Yes, very silly.

    2. Anonymous12:23 AM

      Hi! I'm an idiot about economics and don't really understand this post too clearly, but I was still somehow surprised to see you say "As usual, I agree with him on most things," even with the exception that follows, maybe because I associate him with stuff like this:

      I don't think that has anything to do with "value of the RBC modeling paradigm," but like I say I'm not too clear about all this.

    3. Basically, Lucas seems to have been really impressed by the idea that "real shocks" cause recessions - the basis of the RBC paradigm. This doesn't seem plausible to me at all. Then, he seems to have been overly impressed by the supposed internal consistency and "Lucas Critique Invariance" of the RBC models themselves, which A) I doubt, and B) I don't think matter as much as Lucas thinks they matter.

      The two Lucas quotes that Brad DeLong cites there are interesting because in the first quote he seems very convinced that recessions are caused by real shocks, and that someone who believes otherwise must be bulshitting. But in the second quote, he goes back to thinking that recessions are caused by some sort of demand shocks that call for demand-side remedies. So I think this shows how he is conflicted between the evidence of his eyes (which tells him recessions are caused by demand shocks), and his love of the whole RBC view of the world.

    4. In any case, I changed the comment to be more specific about where Lucas and I diverge...

    5. his love of the whole RBC view of the world

      man with a hammer syndrome, as correctly identified by Munger (Psychology of Human Misjudgment). Hope this speech frames your approach in your book on the history of modern macro.

      for your book on Macro, I would suggest that you reach out to Munger, now, asking for a private interview to be used later. Munger will talk to you and answer your letters, as I know from personal experience.

      I would suggest you do the same with Soros.

    6. I don't think Lucas refers to technology shocks only when he talks about "real" shocks. The list inclued changes in taxes, government spending, energy costs, etc. Nevertheless, I think it is hard to argue that the 1981-1982 recession was due to a real, rather than a monetary shock.

    7. I remember that in the mid-1980's I was trying to study (as an outside observer; I am not an economist) what economists knew about the '70's stagflation, and it looked like they had come to the conclusion that there are two sorts of shock, supply-side and demand-side. Perhaps we should overlay another grid: real/financial. Then we would have four types of shock, and four different policy sets to deal with them, as a rough first approximation. It could be that the way forward for many macro questions (not all) is a return to "old-school" Keynesian hydraulics with a lot more attention paid to the Bagehot-Fisher-Minsky-Koo dissection of financial disasters, because these are becoming an evermore global, frequent and obvious stupidity and a terrible hindrance. I think that even the intro textbooks should start pushing it in as a major chapter.

    8. I don't think Lucas refers to technology shocks only when he talks about "real" shocks. The list inclued changes in taxes, government spending, energy costs, etc. Nevertheless, I think it is hard to argue that the 1981-1982 recession was due to a real, rather than a monetary shock.

      What kind of shock was the Jimmy Carter presidency?

      It is amazing to me that economists are so stupid that they have models that vary behavior according to future expectations about the price of wheat but not whether we have a fool as President or a madman running around in the mid-east with nuclear weapons.

    9. Nathanael1:28 AM

      What's a "real shock"?

      I don't think "technological shocks" have ever caused a recession, and I don't think "taste" shocks could even conceivably cause a recession (people's propensity for consumption doesn't vary that much!).

      On the other hand, the 1973 Oil Crisis could logically count as a real shock -- people in the US weren't expecting the behavior of OPEC and had no idea how to react to it. That's a very classic supply shock, though.

      It also seems like that sort of thing can only cause a recession under rare circumstances: specifically, the good with the supply shock has to be *very important* to the economy, and it has to have *no good substitutes* in the period of years. Oil in the US in 1973 fits both criteria. However, you'd be hard pressed to find another example of a supply shock causing a recession, though you might be able to dig one up from ancient Rome or something.

  5. "...or Nash equilibria where the strategy sets of each agent are made explicit in an internally consistent way"

    What I always disliked about the way a Nash equilibrium was always considered the solution, was that it ignored (rampant) asymmetric information. You can't just choose the best strategy given your competitors' strategies, if you don't know what your competitors' strategies are. So, often rational individuals, even if all perfectly optimizing – given what they know – can choose actions that aren't a Nash equilibrium. I was more interested in seeing what rational, perfectly optimizing competitors would do than what the Nash equalibria were.

    I told this to one of my game theory professors, who specialized in the area, and he replied that researchers in this area keep this in mind. I'm not so sure how common that is.

    1. Do you mean games in which different players think that the strategy space is different?

    2. Anonymous11:19 AM

      There are all kinds of game theoretical models with imperfect or asymmetric information.

    3. No, they could think it's the same strategy space, and it could be the same strategy space, but optimizers don't arrive at the Nash Equilibrium simply because they don't know what the strategy of the other person will be.

      Take, for example, the game rock, paper, scissors. Here there is no Nash Equilibrium. There's no strategy where both players are doing what's best given what the other player is doing. But suppose you add "turtle" – a fist with your thumb sticking out. Turtle is a tie against anything. If the paper falls on it, he just crawls out from under. Yet he's docile and harmless.

      With turtle, the Nash Eq. would be turtle-turtle. But a rational optimizer would optimize just as much against a random rational optimizer by picking rock, and so rational optimizers can not end up with a NE.

      Or look at the battle of the sexes game. If I knew I was playing with an economist steeped in game theory, I know she'd very likely choose opera, so of course I'd choose opera, and there would be no NE – which shows that knowledge of the other players personality and psychology can lead to a non-NE.

      Of course, whether any of this really matters, and is not just playing chess for fun – which is what game theory often seemed like in my two PhD courses, depends on what real world games are really like. There there is often tremendous asymmetric information, poor information, misinformation, and deception. But also, lots of incentives also for long term cooperation, reputation, and relationships – a great example is the centipede game – where you'd pretty much never see the NE. People would just decide to cooperate, at least eventually, and would keep doing so as long as the other person did, which could be for a long long time.

    4. Anonymous11:23 AM

      Last time I checked, there was a Nash equilibrium at rock, paper, scissors. Of course, it is in mixed strategies.

    5. Good point, I haven't looked at game theory for many years. If both players choose a mixed random strategy of 1/3R, 1/3P, 1/3S, that's a NE.

    6. Nathanael1:23 AM

      Thanks for some interesting thoughts, Mr. Serlin.

      From what I can tell, theorists in mathematical game theory really *do* keep the limitations of Nash equilibrium in mind, and have been working to develop further useful concepts. I can't speak to the economic game theorists, because I admit I haven't been following them as much as perhaps I should!

  6. hi i don't know if this station takes requests but i would love to see you jump into the thomas nagel mind and cosmos tiff

    1. Haha I ain't touching that one with a 10 foot pole...

  7. "Though Lucas doesn't mention here whether he thinks financial-shock recessions should last longer."

    He blames government policies for the slow recovery:


    1. Well, see that DeLong link...it's not clear what Lucas really believes about this...he makes conflicting statements. I think this really just means he doesn't know what's causing the slow recovery, or slow recoveries in general.

  8. Anonymous7:35 AM

    Friedman and Schwartz was always a simplification meant to frame a monetarist point of view, a counterpoint point for using monetary intervention instead of fiscal intervention. It is understandable that economists adopt simplifications necessary to build a model. Not understandable is losing sight of the fact that the simplification is just that, a simplification that is not robust.

    I get that historically monetarists had to criticize Keynesian fiscal policy in order to promote their cherished alternative monetary solutions. However, to completely deny that Keynesian fiscal policy worked and worked very well is simply ideological revisionism. Good policies and good solutions to real problems are dismissed out of hand. The Lucas comment about accepting Friedman and Schwartz is telling. This places Lucas in the realm of a narrowly focused expert who can explain at a high level, his own narrow models within the Friedman monetary framework. His limitation and narrow focus does not leave him in a position to evaluate competing ideas. That requires a different type of expert who understands multiple models and multiple policies to an adequate depth.

    Experts have limits to their expertise. Lucas may have been an expert on past conditions, but conditions since 2008 have moved away from his expertise. He may once again become relevant if we return to the economic conditions of the late 1990s. It is important that our policy elites recognizes the limitations of the experts who advise them.

    As a fence sitter, someone who prefers the triumvirate of monetary, fiscal and regulatory policy to a "monetary policy rules all" approach, I find the drift to an ideological position of a narrow focus on monetary policy with no interest at all and an arrogant and dismissive attitude to other ideas disturbing. Especially those in the monetarist camp who have championed even convoluted and questionably effective monetary policies over simpler fiscal and regulatory policies with historically proven effectiveness have done a lot of harm to a lot of people under our current economic conditions. Policy elites must recognize the shortcomings of "experts" and seek broad advice from those who understand policy more broadly, not narrowly focused on monetarism.

    jonny bakho

  9. sibusisodan8:07 AM

    You've totally avoided the real question here: namely, who's the poor soul on the receiving end of the Force Lightening in the photo above, and what did they do to deserve it?

  10. Noah

    I know your stated goal is to write a history of modern macro, with Lucas at the center.

    May I suggest a title: Lucas Lied (about everything, all the time).

    It seems to me an impossible task, when you have nothing but such poor interviews as this on which to go. Lucas is just one of many in a long line of ringers---people who have argued against Keynes mostly to make a name for themselves and who have dissembled every step of the way.

    I hope your opening chapter is about the best story about Lucas. He was once offered as a witness on economics in an antitrust case in Chicago. The district court judge refused to let him testify because he was unqualified and his opinions were absurd. Posner, who fancies himself as a right wing economist on the 7th Circuit, wrote an opinion affirming that doesn't even mention him by name, as I recall.

    It is too funny that trial lawyers, like this humble servant, know more about economics than Robert Lucas.

    1. Now that you've humbly informed Noah that you know more about economics than Lucas I'm sure he, Noah, is on his seat's edge waiting for more unsolicited, humble advice as per above.

  11. Noah

    Brad is a little nicer to Lucas, writing yesterday

    I conclude, as always, that to the economics profession mathematical analysis of stylized models is taken seriously exactly so long as the conclusions fit the prejudices of economists. Thus when an economist says "Mathematical analysis which you wouldn't understand of my model shows that X is a bad policy" you should hear "I don't like X."

    1. Anonymous11:23 AM

      I am not sure if I have seen you make a single substantive comment, it is all just ideologically charged rhetoric and regurgitated talking points. You are coming off as infinitely more ideological than Lucas.

    2. Anonymous12:50 PM

      you will not understand this comment, but the human endeavor most like economics is golf, which is play entirely on a six inch course lying between one's ears.

      By that I mean that modern economics is entirely a game of confidence and expectations. I don't believe for a moment that Lucas offers anything substantive or that there is much substantive to talk about. My POV is that it is about leadership, vision, not Nash equilibrium.

      The best economists are Soros and Munger, who have far better ideas than those you will find in the writings and talks of Lucas or Cochrane or SW, but who is naming names.

      I have no ideology about the subject at all, beyond noting that it is a much harder game than all but a few, like Keynes and Noah, recognize.

      For example, I don't think that printing money now will help all that much because it will not due enough for confidence. The task before us to restore confidence and economic health is monumental, hardly ever addressed by any economic blog, from Klugman on the left to Taylor on the right.

      In sum, I believe the How trumps the What. If Obama was convincing as a leader he would succeed by either raising or lowering taxes, for leadership is that much more powerful than policy. Feynman says that you test by experiment and experience. I have lived long enough to have experienced leadership. RR did everything wrong economically but trumped with leadership. Think about that lesson.

      What I do know and oppose are people like Lucas who say they know the way. They don't. No one does. We are in the "fog of war." Under such circumstances, pointing out flaws such as incentive caused bias (including ambition) is my task.

      Alexander Hamilton

    3. Having a moment further to write, the historical record shows that FDR and Truman and Lincoln triumphed because of leadership, not policies.

      Same for Washington and Hamilton (contrast with Jefferson and Madison who together gave us the War of 1812)

    4. Nathanael1:11 AM

      Leadership is policies and policies are leadership. I have no idea what the distinction you are making is.

      I don't think that you can do things through sheer charisma, though charisma is valuable.

      There are things which actually matter: for instance, you have to put wealth in the hands of the poor people in order to have a functioning economy over the long term; you can't let it all concentrate in the hands of very rich hoarders. It doesn't much matter how you do that, but you do have to do that.

      Ronald Reagan wrecked the country using policies which were calculated to create short-term success and long-term failure -- these are a specific class of policies, and they do exactly that. The same class of policies was used by the "ancien regime" in France during the 100 years before the French Revolution; the key features are "kicking the can down the road" and fraud.

    5. Nathanael1:12 AM

      I seem to agree with you on a great deal, Mr. Hamilton, so I may just be confused about what you were trying to say with reference to "leadership".

  12. Noah,
    I wonder if one day we discover the Grand Unifying Model in Economics. Somehow I think it is going to be elusive. Much like the one that Physicists have been trying to find (does not mean that we stop trying, I suppose. I just don't know how much time should be spent on it).

    In the meantime, people should read what Paul Samuelson had to say about Milton Friedman (generally praiseworthy) and Robert Lucas (generally useless). Paul Samuelson and his position in economics is really untouchable. (Look at what Krugman had to say here: http://krugman.blogs.nytimes.com/2010/04/20/samuelson-memorial-2/ )

    More importantly this interview of Samuelson, sort of puts into perspective what he thought of various contributors in Econ:


    1. idiot6:22 PM

      I'm the anonymous commenter who admitted above to being an idiot, but I guess it would be best to distinguish me from the rest of the anonymice with a different fake name.

      Anyways, I enjoyed that Atlantic article. Samuelson's point seems to be that Lucas didn't have any practical policy suggestions, good or bad, whereas Friendman at least occasionally had good ones, because he was "street wise."

      My impression is that Noah is mostly interested in theory, so who cares, or that he figures Lucas may have contributed to something that might possible become useful someday.

      Also, here's yet another Lucas-dissing link, since that seems to be the thing: http://www.huppi.com/kangaroo/L-chilucas.htm

  13. Anonymous11:22 AM

    Spoiler alert: A Walrasian equilibrium is Nash.

    1. Spoiler alert: A cat is a mammal.

  14. Anonymous10:48 AM

    Lucas' comments just corroborate the need for efficient (Bayesian) estimation of DSGE models.

  15. Preston Urka12:01 PM

    ... Finally, Lucas on microfoundations:
    What is important...is that if a model is formulated so
    that its parameters are economically-interpretable they
    will have implications for many different data sets...This
    kind of cross-validation (or invalidation!) is only possible
    with models that have clear underlying economics: micro-
    foundations, if you like.
    This is bread-and-butter stuff in the hard sciences....

    As a 'hard' scientist (see Noah's bestiary), it pains me to read what Lucas considers bread-and-butter stuff - he misunderstands completely.

    Chemistry, Physics, etc, did not start out with a Grand Unified Theory; they started out with Newton's Theory of Gravity, Maxwell's Electromagnetism, .... and are still working on putting them into a GUT.

    Einstein showed that gravity is more generally represented as the curvature of space, but bridges are still designed using Newton's theory - should we be afraid of crossing them?

    The 'bread-and-butter' is that 'hard' scientists kept working on the macro models - they didn't start with the Electro-Weak Interaction and work backwards to Electromagnetism and the Weak Interaction; they worked forwards from the macro models to the micro.

    One should not look for cross-validating models; one should look for models that cross-validate (existing) models. Otherwise, as Noah points out, you should junk your hypothesis and move on.

    To your next reviewer who rejects a paper for lack of micro-foundations, point out that Newton, Priestley, Bohr, et cetera weren't micro-founded either.

    1. Preston Urka12:04 PM

      ps - in the 'hard' sciences bestiary, Lucas (for this one comment) would come across as an Astrologer, studying Astrology. Sounds a lot like an Astronomer studying Astronomy, but isn't quite the same. :)

    2. But would it be OK to explain the behavior of solar systems by assuming laws that contradict the behavior of the individual planets within a solar system?

    3. Preston Urka1:09 PM

      CA - I'm not suggesting one start by assuming contradictory laws.

      As Noah points out, if you have an explanation of the solar system (that doesn't contradict the behavior of individual planets) then it is fine.

      He ALSO points out, if you have an explanation of individual planets (that doesn't contradict the behavior of the solar system) then that is fine.

      It would be nice if you can explain the behavior of solar system and planets with one explanation - i.e. gravitational attraction between masses - but it isn't required if the separate explanations are non-conflicting (even Ptolemic epicycles have a fair predictive ability).

      Additionally, if your solar system and planetary theories do start to conflict, it is not clear which theory (if either) is correct. For example, the understanding of the solar system was surmised incorrect and 'fixed' by adding in Neptune and Pluto. However planetary motion was also surmised incorrect and 'fixed' by correcting for relativity (especially with regard to Mercury).

      This is why, as a non-economist, I enjoy Noah's blog; he advocates the scientific method, and is thus understandable to a scientist. He doesn't try to 'make it fit' he looks for the 'fit that works'.

    4. Nathanael1:06 AM

      Preston makes a good description of the actual procedure for resolving conflicts.

      For a long time, geology told us the age of the earth, and physics told us the age of the universe, but physics said the age of the universe was shorter than the age of the earth, which is actually impossible. Which was wrong? (As it turned out, physics.)

  16. Noah, I have a go at Lucas too, but I think I end up closer to Brad on this issue ...http://larspsyll.wordpress.com/2012/11/30/oh-dear-oh-dear-robert-lucas-is-talking-nonsense-again/

  17. Nathanael1:03 AM

    Lucas is WRONG. Beyond wrong, even.

    Perhaps his problem is that he's never studied biology, or the history of biology. The theory of evolution by natural selection, in particular, does not meet *any* of his "microfoundation" requirements. And yet it is the absolute best theory for explaining vast quantities of biology and geology, far better than "microfounded" theories.

    I have to agree with the people who think that economists suffered from physics envy, when they should have been studying biology.

  18. Big fan of Lucas :) His nobel prize lecture is brilliant, both in its exposition of the history of monetary theory and his very modest conclusions about what we know today. Question, you pick on the "Calvo Fairy," why not the "Taylor Fairy" also?

  19. Monetary theory, monetary theory ... follow the money: that was where you could get research funds, CB conferences and talks to Wall Street types. Let's not ignore self-interest as a component of the direction research takes. From that perspective RE and later developments were gold mines.