Monday, July 14, 2014

How are macro methods evolving?

I realized long ago that I'm much more interested in the philosophy-of-science issues of macroeconomics than in the subject matter itself! So when John Cochrane came back from the NBER Summer Institute with a big post about the latest trends in macro methods, I was understandably excited. I don't have a heck of a lot to add, but here are the highlights:

Math as Storytelling

Back in 1991, Larry Summers complained that macro models create the illusion of science-y-ness by pretending that the parameters in their model represented real things instead of stylized allegories. In 2010, Ricardo Caballero argued something similar, saying that the crisis had exposed the faults of the overly-precise "fully-specified DSGE" approach.

The argument is really not about the content of models - it's about the use of math itself. One way to use math is the way physicists and chemists use it - to make quantitative predictions of stuff. The other, less ambitious, way is to use math to be precise about your ideas, to check your logic, and to explain your ideas in a universal language. The latter way isn't bad; what's bad is when you mistake the latter for the former, and take your models "too seriously."

The crisis and recession seemed like it should have told macroeconomists that they were taking their models a bit too seriously. And in fact, that seems like exactly what has happened. Cochrane:
Most of the theory papers had some "motivating" facts...Not one paper wrote down a model, estimated or calibrated its parameters, and compared that model to data...This isn't a complaint, really, it's just where we are. The kinds of things people want to investigate are just too hard to write down models rich enough to take to the data... 
[B]oth of the macro theory papers stopped well short of serious confrontation with data. We didn't see anything like the standard fully specified models...compared to, say, impulse-response functions. The models are so stylized you can't begin to quantify them...This too is not really a criticism. I've been working with simpler and simpler models, as I find it hard to keep the intuition and quantitative parable aspect alive as models get more complex.
So mainstream macro people seem to have converged on the Caballero idea. This also provides yet more evidence that modern mainstream macroeconomics is very much alive and kicking as a research program.

More stylized models doesn't necessarily mean simpler models, though:
Sam [Kortum] gently chided Ufuk et al. for presenting 24 pages of complex model all to "motivate" some regressions.
It will be interesting to see whether the move toward stylization will be followed by a move toward simplicity in model-making. Maybe macroeconomists, groping for big ideas to explain the unprecedented events we've just seen, will go back to telling the kind of simple stories that Milton Friedman used. Or maybe even "24 pages of complex model" is so simple compared to the real thing it's trying to model that to make it even simpler would lose too much of the logic.

Growth vs. Business Cycle Theory

The idea that growth and development econ were two completely different fields always struck me as a little weird. I mean, sure, maaaaaaybe you could use an endogenous-growth model to tease a couple extra bips of growth out of a mature economy for a few years, if you had enough data to really find the best endogenous-growth model, which (let's be honest) you don't. Endogenous growth theory is very kewl and interesting, but it just doesn't seem that important relative to development econ, which deals with the monumental challenge of boosting poor countries to middle-income level. (Robert Lucas seems to agree.)

I don't follow growth theory much, but according to Cochrane, the top growth people are indeed becoming more interested in development issues, and adopting the methods more commonly associated with development econ:
Economic Fluctuations merged with Growth in the mid 1990s. At the time there was a great confluence of method as well as interest. Growth theorists were studying growth with Bellman equations, dynamic general equilibrium models of innovation and transmission of ideas, thinking about where productivity shocks came from... 
That confluence has now diverged. I enjoyed spending an hour or two thinking about how religion has blocked or adapted to ideas over the centuries, and Paul [Romer]'s view on social norms or neuroeconomics. But I don't really have any expertise to contribute to that debate...[W]hen Daron Acemoglu, who seems to know everything about everything, has to preface his comments on macro papers with repeated disclaimers of lack of expertise, it's clear that the two fields really have gone their separate ways. Perhaps it's time [for] growth to merge with institutions and political or social economics.  
Cool. Though this may not sit well with Japanese macro people, a lot more of whom do growth econ rather than business-cycle theory.

Verbal Arguments and the Wisdom of the Ancients

Probably the most striking sentence in Cochrane's post was the following:
In my 30 years as an economist, our field has become much more literary and less quantitative.
That's interesting. I had thought it was the opposite. Was there a U-shaped pattern, where things became more quantitative leading up to the mid-80s, and then trended back toward literary-ness?

In times of uncertainty, we humans have a natural tendency to reach for the wisdom of the ancients. Cochrane isn't such a fan of this, but recognizes that he may be swimming against the tide:
The use of ancient quotations came up several times. I  complained a bit about Eggertsson and Mehrotra's long efforts to tie their work to quotes from verbal speculations of Keynes, Alvin Hansen, Paul Krugman and Larry Summers. Their rhetorical device is, "aha, these equations finally explain what some sage of 80 years ago or Important Person today really meant."  Ivan Werning really complained about this in Paul Beaudry's presentation. What does this complex piece of well worked out "21st century economics" have to do with long ago muddy debates between Keynes and Hayek? It stands on its own, or it doesn't... 
Physics does not write papers about "the Newton-Aristotle debate." Our papers should stand on their own too. They are right or wrong if they are logically coherent and describe the data, not if they fulfill the vague speculations of some sage, dead or alive... 
Sure, history of thought is important; tying ideas to their historical predecessors is important; recognizing the centuries of thinking on money and business cycles is important. But let's stand up for our own generation; we do not exist simply to finally put equations in the mouths of ancient economists. 
But...perhaps I'm just being an old fogey. Adam Smith wrote mostly words. Marx like Keynes wrote big complicated books that people spent a century writing about "this is what they really meant." Maybe models are at best quantitative parables. Maybe economics is destined to return to this kind of literary philosophy, not quantified science.
My instincts are with Cochrane on this issue. There is nothing more annoying than when you argue with some idea, and then some guy comes along and says "Go read Ludwig von Mises, then you'll understand everything." No you won't. You'll just get a warm glow of understand-y-ness, and you'll end up parroting words and phrases from the Old Master without being any better able to think critically and originally about the issues.

Then again, a lot of those old folks were really smart, and there are probably insights embedded in their writings that are too vague or complex to be translated directly into math, but which contain information, the way the priors of a portfolio manager carry valuable information in a Black-Litterman model. But the flip side of that is that you probably have to be a really, really smart person to extract that deep-buried insight. Economic history, in other words, seems like very dangerous sauce to me - in the right hands it can be useful, but it is usually in the wrong hands.

But that's just my thought. I feel like I may annoy Brad DeLong with this thought...

The Upshot: Halfway Back to the Drawing Board

So from what Cochrane saw at the NBER macro meeting, the field is becoming more literary, more stylized in its modeling, and more eclectic in its approach. To me, these all seem like manifestations of one single, underlying process: Macroeconomists are going back to the drawing board in the wake of the crisis and the recession. Not all the way back, but part of the way back. They are searching for new ideas, by making their models more conjectural and conceptual, by bringing in a mix of techniques and "out-there" ideas, and by picking through ideas from the past.

It seems to me that this is exactly what good scientists do. If you are one of the people who thinks that macroeconomics is utterly compromised by dogma, politics, or non-scientific thinking, Cochrane's report should cause you to update your priors somewhat.

One More Thought: The Impact of Blogs

I suspect that blogs have played a largely helpful, though marginal role in the evolution of macro since the crisis - encouraging macro people to realize that something big was broken and needed fixing, tossing around ideas and brainstorming, etc. But I've come to think that blogs have also injected too much contentiousness and aggression into the discussion. For example, Cochrane writes:
[Paul Romer] pointed to my use of "paleo-Keynesian" to describe the static models from the 1960s, guessing nobody would remember anything else from my discussion. When I complained that Paul Krugman invented the term, he pointed out (correctly) that such borrowing just made its use more rhetorically effective. There go the cortisol levels.
When I started blogging a few years ago, I took a very confrontational and sometimes even insulting tone. That was because I thought A) this is the internet, B) everything on the internet is a joke, and C) everyone gets that it's a joke. I guess I had spent too much time in the bowels of the net. I always meant it as a joke, and I never imagined that top academic people would read, much less care about, my blog.

Turns out I was naive. Over time, fellow bloggers like Tyler Cowen and Adam Ozimek convinced me that more civility was needed, so I try to confine my chain-yanking to those who are more used to getting their chains yanked. Academics need to be able to think clearly and objectively, without their cortisol levels being spiked.

Basically, in the wake of the crisis, blogs have fulfilled the same role as the verbal debates between Keynes, Hayek, Sraffa, Robinson, etc. during the Depression. But like those debates, it has generated its fair share of acrimony.


  1. Daniel4:19 AM

    The crisis and recession seemed like it should have told macroeconomists that they were taking their models a bit too seriously.

    What models would that be ?

    The AD/AS model, which tells you that when inflation is low and unemployment is high, it's an AD issue ?

    The Fisher equation, which implies that you can't have low interest rates and easy money at the same time, unless the economy is devouring itself ?

    The sticky wages model, which explains why inflation targeting fails when confronted with a negative supply shock ?

    Because all those models were thrown out the window when the recession struck, only to be replaced by vague bullshit like "financial frictions at the zero lower bound".

    1. The Fisher equation, which implies that you can't have low interest rates and easy money at the same time, unless the economy is devouring itself ?

      so much for that. easy money forever despite strong recovery

    2. Daniel7:21 AM

      Good, now try making some sense.

  2. Anonymous4:48 AM

    Sorry to have to post this, but really until people get it, someone will keep posting it.

    "The master-economist must possess a rare combination of gifts .... He must be mathematician, historian, statesman, philosopher -- in some degree. He must understand symbols and speak in words. He must contemplate the particular, in terms of the general, and touch abstract and concrete in the same flight of thought. He must study the present in the light of the past for the purposes of the future. No part of man's nature or his institutions must be entirely outside his regard. He must be purposeful and disinterested in a simultaneous mood, as aloof and incorruptible as an artist, yet sometimes as near to earth as a politician."


    An over-quoted quote, for sure. But until Cochrane realises that economics is not the preserve of applied mathematicians and needs serious rebalancing, and there is other valuable accumulated knowledge out there done by other people that we need to use to fight unemployment and poverty, it bears repeating and repeating and repeating.

  3. Interesting post and evolution by Cochrane. However, in light of the morass that development economics is in, I'm not sure turning there will help much!

  4. Anonymous6:53 AM

    "and you'll end up parroting words and phrases from the Old Master without being any better able to think critically and originally about the issues."

    I doubt Cochrane has read the "old masters". He does not seem to realise a big reason why we read them and study history is to not repeat old mistakes. People who do not read the classics and are historically illiterate will at best reinvent the wheel, and most likely not as well.

  5. "Economic history" is not the same as the history of economics. Methodology is a subject with a literature, not uninformed speculation.

    Economists have demonstrated that can one be imprecise and vague, while still putting forth mathematical models.

  6. Anonymous7:05 AM

    I think you've erred in going for a softer blogging approach. Look, I don't think anyone other than a few heteros argue that there isn't a lot of good work being done in various sub-fields, but there's a definitive macro rot. The main critiques have always been by crazy people and it's easy to write them off collectively. You've been a good voice in harsh, wonkish criticism - and I think a silent majority of useful economists on a place like EJMR actually agrees with you most of the time!

    It's also infuriating when someone like glorified food-blogger Cowen calls for moderation. Look, there were monumental failures in policy (and also monumental successes, not discounting those) leading up to/in response to the crisis, and these missteps *hurt* a lot of real people that policy-makers will never meet. R&R, for all their butthurt, genuinely damaged things (including the public perception of macro at the very least..)! To now turn around and say, "keep it civil" makes a mockery of things - turns out when a field's collective output has a large effect on society, people have a right to grab pitchforks and be as uncivil as they please.

    We need people standing up and *yelling* about stupidities like I dunno.. labor supply elasticity (get with program macrotards.. < 1 for sure). There's a whole generation of economists who are cloistered in their research programs that just sit there and spin their wheels contributing nothing. We're not going to get anywhere listening to the Mulligans or Kehoes of this world and we need insiders to start saying that in some form or other.

    Anyway, sorry for the long rant! Release the old Noah damn it!

    1. policy-makers will never meet. R&R, for all their butthurt, genuinely damaged things (including the public perception of macro at the very least..)! T

      Hurt people who bought overvalued stocks, people who bought more home than they could chew, bought homes in speculative areas, didn't read the fine print for the mortgage or were unqualified? Rich Santelli was right about loser homeowners. They don't deserve our sympathy

      Mistakes were made, but it's counterproductive to blame the people that are trying to fix the problem.

    2. Well, thanks. I think you'll still see the "old Noah" come out occasionally. ;-)

      But another thing is, since I'm not actually doing any macro, I'm less and less wonkish. I can read the odd paper or attend an occasional conference, but my knowledge is rapidly getting out of date...

    3. Anonymous4:39 PM

      Mistakes were made, but it's counterproductive to blame the people that are trying to fix the problem.

      Frauds were committed. False prospectuses were issued. False information was put in mortgage applications. Misleading financial statements were prepared, certified and published. Without those crimes there would have been no housing bubble, there would have been no financial crisis.

      It might not fix the problem to send a few thousand bankers to prison for life but it would be justified and enormously satisfying. The fact that no one has gone to prison just shows how utterly useless the regulators and Attorney Generals are.

    4. People hurt included those whose life chances were and are damaged because they picked a poor year to graduate from college. People hurt included those who lost jobs because demand fell through no action in any way connected to anything they did. Even many of the people taking out mortgages were defrauded. I could go on ad nauseam.

      And what Anonymous at 4:39 said, although she left out the rating agencies and fraudulant MBS sales. Also, the decision not to prosecute was probably made above the Attorney General's pay grade. And while sending perps to prison won't help this mess it might slow down the next one. Three cheers for moral hazard, a concept remembered at selected times only.

    5. "Hurt people who.." happened to live in the world where enthusiastic fraudsters scammed huge numbers of people in a massive orgy of confidence trickery disguised as investment banking. Those who lost homes and jobs and investments despite not getting swept up in the con game - may we assume that you also feel they don't deserve [y]our sympathy? Most of us got smashed up in this wreckage, GE; that our governments preferred to let us all struggle in order to spare the money and the delicate feelings of people like that Santelli loudmouth tells us where we stand. "Mistakes were made" indeed. At least when Homer Simpson says that, it's just that he's stupid; when the fraudsters and their apologists say it, it's more that they're (at best) willfully blind, or at worst rapacious sociopaths.

    6. Anonymous5:35 PM

      "Well, thanks. I think you'll still see the "old Noah" come out occasionally. ;-)"

      Might be wiser to wait until after tenure.

    7. Anonymous12:16 AM

      "turns out when a field's collective output has a large effect on society, people have a right to grab pitchforks and be as uncivil as they please"

      'taint a matter of RIGHTS but EFFECTIVENESS. In humans tribalism is never far below the surface and nastiness evokes that reflex, at the expense of good thought. Cochrane (a man who has often enough raised cortisol levels himself) is right about the need to keep it focused on the issues rather than the people if we want to do better in the future.

  7. Anonymous7:49 AM

    Rick Santelli is wrong, that's why he's a commentator on TV instead of on the floor making zillions of dollars.

    1. Ah, I've been hoping somebody would say something like that. I thought Santelli used to be a trader, so I've been nurturing the belief (I hope this is not libelous) that he just loves to sell overpriced trash to people who don't know any better because it proves what a great "trader" he is. That is, that he is one of those who loves to rip off the faces of customers who trust him.

  8. I think the tldr version is: economists are learning to value data quality, not just data quantity.

    Maybe. I hope so. The fetish for "big data" is getting tiresome. I've seen this trend for almost 15 years, and it's gotten to the point where it bleeds into fields where it scarcely belongs: literature, music, art, education. Economists complain about their physics envy--they should see literary theory's economics envy!

    Of course big data as one tool of a great many is useful, but it's been treated like a philosopher's stone that will solve all ills. If the economists realize it has its place but evaluation is also a part of analysis, hopefully the rest of the world will follow.

    1. applying physics concepts can help make economics more rigorous

    2. Saturday's New York Times had an article explaining why biology can't be like physics.
      As soon as I saw that, I thought of Noahpinion.
      And already there's a discussion about how econ should be like physics.

      Economics ought to look more like the biological model, although I confess that I don't yet understand what that would be.

    3. "applying physics concepts can help make economics more rigorous"

      Other great minds have had this thought. If it could be done it would have happened a while ago.

  9. Anonymous11:04 AM

    "But let's stand up for our own generation; we do not exist simply to finally put equations in the mouths of ancient economists."

    I agree. But that pretty much sums up New-Classical economics. Hence the name.

    Where did he think Ricardian Equivalence came from?

    Ironic John Cochrane said that.

  10. "Economic history, in other words, seems like very dangerous sauce to me - in the right hands it can be useful, but it is usually in the wrong hands"

    Fair enough. But I think this applies equally well if you just replace "history" with "theory".

  11. The comparison for me is climate models versus macroeconomics. Climate models appear to be based on available data. Macroeconomic models are based on ?

    P.S. A software model is not math.

    1. Anonymous1:40 PM

      P.S. A software model is not math.

      Proving that you don't really understand software or math.

  12. Anonymous3:54 PM

    Economic history ... in the right hands it can be useful.

    What a profound observation. Is this a serious remark?

  13. Anonymous3:56 PM

    Only last week, PK talked about the clique that rules academic macro. Well, you don't really need a news flash to tell you that this clique continues unabated—pre-crisis and post-crisis. What makes you think that there will be modifications to macro when what is at stake are their entire career and livelihood? The bottomline is that as long as the clique rules, there will be no change in macro... some tinkering to "fit the facts" where model moments and data moments are in "perfect harmony." And this will continue to be the best and the only way of empirical validation—never mind the facts!

  14. Noah,

    With regard to civility, here are my thoughts:

    I'll say, I hope you don't try to be "civil" by being a lot less clear and a lot more misleading, or moving in the direction of false equivalence, or by leaving out important information or points because it might offend someone, or make you look less "Balanced" or "Centrist". I know the temptation for journalists and pundits and just people involved in issues and organizations to do this is great, but the cost can be great to society of people giving in to this, as we see stunningly in our politics. At the same time, I am pragmatic, but please carefully weigh the costs and benefits.

    1. Anonymous1:14 AM

      Or the un-tenured?

  15. Cochrane complains that some people refer to old debates. I complain that he himself keeps (in the same paragraph) referring to Physics, as if that were an argument in itself.

  16. Amazing Turtles4:12 PM

    What does all this mean for young people interested in doing economic research?

    Does it mean there will be more room for people with backgrounds in psychology, history, philosophy?

    Will the first two years of the Econ PhD curriculum change? Has it changed at all yet?

  17. Is macro a subdiscipline of literary mathematics?

    1. Funny, my undergraduate degree was in math, my lifelong love is literature, and now I'm getting a macroeconomics PhD.

    2. Carola, you ARE the future!!

    3. Once upon a time in an alternate universe, bounded by the constraint AD = AS...

  18. David Glasner relates some thoughts on precision, exactness and "axiomatization" in macro:

  19. Your comment irritates me twice both because you question the value of re-re-reading Keynes and because you mention the fact that it will irritate Brad, but don't mention me.

    Surely Cochrane and you neither argue that economists should read nothing nor that we should read everything. We have limited time and must decide what reading is most likely to be useful. If Keynes has more useful insights into what happened since 2008 than [name deleted re the civility part of the post] then it is better to read Keynes than to read [name deleted]. I do not have a particular name in mind and not because I can't think of even one.

    Physicists do not discuss the Newton Aristotle debate, because they understand much more than Newton did and can prove it Economists can dismiss Keynes after demonstrating that they can reply to his criticisms of the arguments they are making.

    I think an open minded examination of theory and data places Keynes as more up to date and with it than all but a few contemporary macroecnomists. In debate ad hominem arguments are out of order. But he wrote long ago and is long dead is an ad hominem argument.

    If an economist can make a case that he has surpassed Keynes then fine leave Keynes in the library. However, my challenge to well the blogsphere to make that case has not been met yet.

    This is a extremely extreme claim to make. It should be easy to refute. I now make it again to you Noah Smith. the challenge is come up with theoretical work since Keynes 1937 ( not 1936) which is empirically more useful that Keynes's theory (all stories). I admit that there has been useful empirical work given the availability of more data and of computers. I know there has been a huge amount of theory which would be novel to Keynes. However, I think it is strictly inferior to the old stories (as written and not as rewritten with math).

    1. Anonymous5:38 PM

      Your opinion is even less relevant than Keynes's.