Econ theory as signaling?

I don't expend much effort dissing macroeconomics these days, but every once in a while it's good to give people a reminder. I wrote a Bloomberg post about how academic macro (or more accurately, mainstream macro theory) has not really helped out the finance industry, the Fed, or coffee house discussions. The reason, as Justin Wolfers recently pointed out, is basically that DSGE models don't work. Brad DeLong then wrote a post riffing on mine, which is excellent and which you should read. A super-fun Twitter discussion then followed, part of which Brad storified for posterity.

But that leaves the question: Assuming Wolfers and DeLong and I aren't just blowing smoke out of our rear ends, and DSGE models really don't work, why do so many macroeconomists spend so much time on them? One obvious hypothesis is that a huge percent of their human capital is already invested in knowing how to do this technique, so they just keep doing what they know how to do, and teaching it to their grad students.

Another hypothesis could be that it's just an equilibrium of a repeated coordination game. Universities pay macroeconomists to do research, but they have absolutely no idea what good macroeconomic research is, so in practice they pay macroeconomists to do whatever other macroeconomists decide is good. Maybe since macro data is very uninformative, no one actually knows what good research looks like, so they all settle on some random thing - DSGE models. This is a kind of Kuhnian explanation.

Another hypothesis is politics - a small conservative old guard thinks that since DSGE is at some level based on RBC, forcing everyone to do DSGE will nudge macro toward anti-interventionist stances on fiscal and monetary policy. And they use their positions of influence at departments, journals, and professional organizations to enforce conformity among the younger, less politicized economists. I don't really buy this hypothesis, but someone usually brings it up.

Yet another hypothesis is that it's just fun for some people to do, or at least to watch other people do, this kind of theory. Paul Romer recently complained that "in the new equilibrium...empirical work is science; theory is entertainment." I'm sure there are people out there for whom this really is the case - I once saw V.V. Chari get very excited that he couldn't use a fixed-point theorem to prove the existence of a solution in one of his models, and had to resort to more exotic methods. Heh. 

But here's another hypothesis: What if it's signaling?

I've been very skeptical of the fad in which everyone invokes signaling to explain social phenomena. I'm also pretty critical of the signaling model of college - yeah, it's probably part of what's going on, but the signal is just too expensive (4+ years of the prime working years of millions of our most talented young people, wasted on signaling?). So I bet it's a smallish piece of the college puzzle.

BUT, when it comes to DSGE, I kind of suspect that signaling could be a bigger piece of what's going on.

That suspicion was probably planted in 2005, before I even went to grad school, by a Japanese economist I knew who had done his PhD at Stanford. He gave me his advice on how to have an econ career: "First, do some hard math thing, like functional analysis. Then everyone will know you're smart, and you can do easy stuff." That's paraphrased only a little (I can't recall his exact wording).

I then watched a number of my grad school classmates go into macroeconomics. Their job market papers all were mainly theory papers, though - in keeping with typical macro practice - they had an empirical section that was usually closely related to the theory. The models all struck me as hopelessly unrealistic and silly, of course, and in private my classmates - the ones I talked to -  agreed that this was the case, and said lots of mean things about DSGE modeling in general, basically saying "This is the game we have to play." Then all of those classmates went on to do much less silly-seeming stuff, usually more focused on empirics, usually for government agencies. Essentially, they followed the advice of that Japanese economist.

Finally, I noticed an interesting data fact. Theory papers are getting much less common in top econ journals, but are still prominent among job market papers. The pattern again looks the same - prove yourself with theory, then do more empirical stuff later on. Of course, this data is for all econ, not just macro, and some percentage is going to just be people in the micro theory field itself. Plus, the thing for job market papers is just one year. So it's far from a slam-dunk case, but it's another piece of evidence that seems to fit the pattern.

But OK, suppose signaling is going on. What's being signaled, why is it valuable, and why is it hard to observe directly? The obvious possibility is that it's signaling intelligence - that the ability to make DSGE models is just an upper-tail IQ test. That's valuable because A) in the long run, people with very high intelligence are going to do good research, and B) intelligence gets much harder to observe in the upper tail. If DSGE is an IQ test, though, the invention of tools like Dynare that make it easier to make DSGE models might push the profession toward a pooling equilibrium, lowering the prestige and/or the salary of macroeconomists.

But it might also be what Bryan Caplan calls "conformity signaling". If macroeconomics research is a coordination game (see above), and if the prevailing research paradigm is not really better than alternatives, then you probably want macroeconomists who are willing to "play the game", as it were. So DSGE might be an expensive way of proving that you're willing to spend a lot of time and effort doing silly stuff that the profession tells you to do.

So there it is: The Signaling Model of Macro Theory Research.


Updates

Of course, all this is predicated on the notion that DSGE models haven't really increased our understanding of the economy. Chris Sims, one of the smartest folks in the business, and a very empirically minded macroeconomist, is a defender of DSGE. And here's another DSGE defense. So again, my premise here could always just be wrong.

Also, there are a lot of DSGE papers I personally like, but they tend to be ones that ingeniously poke holes in other DSGE models. See this discussion in the comments for some of those. Also, a few other examples are here, here, and here.

If you want to know what I think is the actual problem with DSGE models, see my next post!