Saturday, June 11, 2016

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

54 comments:

  1. Why is everyone ignoring VAR models - they're used all the time.

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    Replies
    1. Because HULK SMASH DSGE

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    2. I was always very interested in agent-based simulations, which it seems could be extremely valuable (valuable if you care about maximizing total societal utils, that is).

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    3. And Noah's obviously been experimenting with gamma rays. Do NOT get him mad!

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  2. Excellent post Noah.

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  3. Do you want an outside view from someone that has proven himself at the upper tail of the IQ scale in other ways in other fields? I don't claim to be as smart as Noah or anyone else in particular, rather I'm mostly just concerned.

    The main signaling I can see is conformity signaling. There's no question about it from my vantage point. Now I ask, why is conformity good? It is good because it protects social systems regardless of their merit. Good for whom? Them, of course, the economists and the professors they employ. Good for the public they intend to serve? No, it harms the general public, but it is easy to rationalize because there is no hippocratic oath for macroeconomists. Would it make a difference if there was? I think it might.

    Certainly a person should be capable of understanding and/or creating (perhaps upon coercion) a DSGE model as proof that they're capable of understanding reasonably complex mathematical systems. A good economist should be capable of finding mathematical relationships where they exist. But they shouldn't be encouraged to find them where they don't exist, and that is what DSGE does to their minds if they are not mindful -- it encourages the finding of what a person sets out to find in the numbers.

    The world needs conformists and non-conformists in every field. It is too bad this one encourages only conformity. The nonconformity generally comes from philosophers because they are among the few allowed by their own social group to comment on anything at all, and the roots of economic theory (as most of science) is philosophy. A lot of valuable science is philosophy proven wrong.

    It just might be that the best minds in any field find themselves working as patent clerks or bar bouncers because they refuse to conform. We still haven't learned this lesson. Humanity suffers for it.

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  4. Anonymous9:43 PM

    An alternative view:

    https://www.youtube.com/watch?v=TH6QexRT0Fg

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  5. Pretty good, but I would say it's a bit of all of the above (with the weakest explanation being Romer's). Also, don't underestimate the role that the prestige and big 'egos' of macro play, Sargent and Lucas in particular, but others too like Prescott. Imagine if within a year, the economics profession all collectively decides that any model with Rational Expectations were complete junk and not worth taking seriously or taking up anyone's time beyond "people used to actually believe this stuff", well what about all the people out there who have staked their career on this stuff? Do you think Lucas wouldn't have something to say about that? Do you think JET or AER and the people who staff it would just say "well yeah of course! Why were we even publishing this stuff for 35 years anyways? Crazy us." And not just them, but lesser known people like Woodford or even Eggertson who have made their careers on tweeking the DSGE.

    The inertia to continue doing the same thing is pretty strong, and it's coming from more than just one direction, but I think if there's a missing element it's the role of Big Egos. Afterall, Science advances one funeral at a time.

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  6. There is one very simple reason why DSGE is still regarded highly, although it is of course patent nonsense.

    Standard classical theory (the good old demand and supply curves) has proved to have high explanatory value in the majority of real-life situations which, considering that recessions are rare, means most situations.

    A new theory (like Einstein's relativity theory), should be able to show that the old theory (Newtonian mechanics) is a special case of itself. Keynesian economics, whatever its proponents claim, hasn't been able to do that. If it had, it and not DSGE would be the reigning paradigm among economics. And the reason that Keynesian economics has failed is that although it is basically correct it got the details all wrong.

    A new theory should be able to show why the market for fish always clears but the labor and aggregate markets do not.

    See "Macroeconomics Redefined" http://www.amazon.com/dp/B00ZX9O5XQ for details.

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    Replies
    1. Anonymous11:31 PM

      "And the reason that Keynesian economics has failed is that although it is basically correct it got the details all wrong."

      By "Keynesian economics" do you mean the interpreters of the economics of Keynes or do you mean the economics of Keynes himself?

      Henry.

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  7. Anonymous12:11 AM

    >Assuming Wolfers and DeLong and I aren't just blowing smoke out of our rear ends

    well...wouldn't be the first time

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  8. "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."

    I always hated how this was often exaggerated. "It's all signaling." Yes, there's no benefit to what engineering majors learn in their courses, or pre-med students, or accounting students. We could have just as productive and high-tech a society if none of that was ever learned, and we just issued the signals and credentials without all of that time consuming learning. And yes, there is a lot of fooling around in college, and a lot of people who learn little, but if you're going to pass your exams in majors like engineering, pre-med, accounting, computer programming,..., you're going to be forced to learn a great deal of valuable things and gain a great deal of expertise, that you can't run a non-30-year-life-expectancy-economy without.

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  9. Why do we always go for the most complicated explanation?

    A body in motion tends to stay in motion: The law of inertia applies to research just as much as anything else. For a tenured professor, who got tenure by publishing a bunch of cited work, what incentive is there to change direction?

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  10. Anonymous10:03 AM

    Heterodox economists might have something to add, although they tend to be outside the club and are thus ignored, at least in public.

    Does economics advance one dead economy at a time? That seems likely with the catastrophic impacts of the economic conventional wisdom debt buildup on the citizens of Japan, the US and EU countries.

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  11. "I don't expend much effort dissing macroeconomics these days, but every once in a while it's good to give people a reminder."

    Yes, a reminder that you know little about macroeconomics. Write about what you know.

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    1. This comment has been removed by the author.

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    2. This comment has been removed by the author.

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    3. K, Steve, whatevvvvver you say. :D

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    4. "DSGE models don't work"

      When I read that, here's what I think you're thinking. "Don't work" means useless. Now, most of what I do would fall under "DSGE," if I take the term literally. I'm somewhat outside the mainstream, but I've bought into the idea that formal modeling is useful, optimization is useful, RE is useful. So, I think you're telling me that what I know is useless, and what I do is useless. And I get paid to do what I do, which is full time research in macro, giving policy advice, etc. By implication, it seems you're saying that you could do my job as well or better than I can. Is that correct?

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    5. What I mean is, it doesn't seem like any clear new lessons about the actual economy have been learned from the DSGE program. I don't think it's been useless - I think it's helped people think through a lot of stuff, and that's definitely not useless. But it also doesn't look like a big success.

      Even if it had turned out to be *totally* valueless, I don't think it would have been useless, or a waste of time, to study it. It wasn't obvious, at the beginning, how things would turn out. I think scientists' job is to explore possible avenues of understanding, and obviously no one knows ahead of time which avenues will yield big leaps of understanding.

      As for your own work, I know I know nothing, etc. etc., but I've read your Neo-Fisherian stuff, and I know you've done other stuff on money search, though the only papers I've read in that field are Randy Wright's.

      I don't have a comprehensive picture of what money search has done, but I do know that it has been used to show that sticky prices might not imply monetary non-neutrality: https://www.minneapolisfed.org/research/wp/wp690.pdf
      That seems like a very important thing to know, given how many policymakers rely on the idea of monetary non-neutrality, and use observed sticky prices to justify that. Monetary non-neutrality is also probably hidden in the background of New Keynesian models, which are somewhat influential at central banks.

      As for the Neo-Fisherian stuff, I think that's been very important because it's raised the real possibility that we're doing monetary policy all wrong.

      Notice, though, that both of these accomplishments - which I think are real and important and useful - are showing ways in which mainstream models might be failing us. They're showing we don't know as much as we thought we knew. I think that's very useful research, but - like most of the macro research I like - it introduces more uncertainty instead of more certainty about how the world works.

      That's all I know of your own work. But it's been influential in convincing me of how little we yet understand about the actual workings of the business cycle, money, etc. Which is what I mean when I say DSGE models "don't work".

      So maybe I know nothing, but that's how I see things...

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    6. So, what I see is a disconnect between some of what you write, and what you actually know. On the positive side, I think you're trying hard to understand what is going on in the economics profession. Brad DeLong, whose writing you apparently approve of, does not seem to be trying very hard - and he's openly dismissive of much of what we do. If I take statements of yours like "DSGE models don't work," or "it doesn't seem like any clear new lessons about the actual economy have been learned from the DSGE program," those statements don't make any sense to me, and if they came from someone else, I would just say they reflected ignorance (I did say you may not know as much as you could, but I was trying to provoke you :-)). There are more research programs in macro than you can shake a stick at, and I really don't know what you mean by "DSGE program." Do you mean something more specific, like the NK program? I'm critical of that stuff, but I'm not ready to dismiss it as total bunk. I'm not sure what kind of "success" you're looking for. The world is a very muddled place, we have human limitations, and economics is damn hard. Given that, the macro subfield looks tolerably successful to me. We're not falling down on the job.

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    7. Anonymous12:27 PM

      DSGE models assume continual labour market clearing, i.e. no involuntary unemployment. So how can they in any way be useful in characterizing a real economy? I guess the tens of millions of unemployed in developed economies are all on an intended extended vacation, well apparently, that's at least what some mainstream economists tell us is the case.

      Henry

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    8. "DSGE models assume continual labour market clearing"

      Wrong.

      http://www.nobelprize.org/nobel_prizes/economic-sciences/laureates/2010/

      http://www.frbsf.org/economic-research/files/christiano_trabandt_walentin.pdf

      http://www.nber.org/papers/w13897

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    9. Steve: Well, I think Brad is meaner than he ought to be, and of course he also has a political axe to grind. I think he says a lot of very insightful things, but I don't always like his tone...

      What I mean is, I don't see any big jumps in our understanding of why real-world stuff happens. Do we know what causes recessions? Not really (see Lucas here: http://www.economist.com/blogs/freeexchange/2012/12/business-cycles-0). Do we know how monetary policy affects output, inflation, or unemployment? Not really - Neo-Fisherism is part of the proof of our lack of understanding there, but there's lots more proof besides. Fiscal policy, same thing (not to mention the interaction between fiscal and monetary). Do we know how monetary policy or fiscal policy gets set in practice, or how people form beliefs about policy regimes? I'd argue we don't, really. Do we even know what unemployment is, much less how it responds to business cycles and/or policy? Here I'm less informed, but unless there have been big breakthroughs in labor search models recently I'm not hugely optimistic. How about inequality and how it interacts with aggregate and idiosyncratic risk? I don't think we've learned much from Krusell-Smith type models. How about international business cycles? All of the above ignorance seems to go double.

      So I'm basically saying it doesn't look like we've made much progress on the big questions. When I say DSGE "doesn't work", I don't mean there's some better modeling approach out there, or that people should switch, I'm saying that despite decades of many super-smart people working on it, there don't seem to have been any big leaps of understanding about business cycles and related phenomena. RBC and its variants, and NK and its variants, were two big hopes for breakthroughs, but I think they both have underperformed expectations.

      So from my uneducated ignorant position, it looks like macroeconomists might want to focus on 1) setting their sights on smaller pieces, like consumption behavior and business investment behavior, and 2) nailing down more empirical facts, to help guide future theoretical development.

      But maybe I am being silly. It wouldn't be the first time...

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    10. Anonymous7:51 PM

      Stephen said:

      "Wrong."


      Then why are they named "general equilibrium" models?

      I'll check your links - thanks.

      Henry

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    11. Anonymous8:04 PM

      Stephen,

      Checked your links. These papers and the Noble Prizes deal with frictional unemployment which you well know is totally different from involuntary unemployment. It is involuntary unemployment that DSGE models assume away.

      Henry.

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    12. Anonymous10:36 PM

      "'m saying that despite decades of many super-smart people working on it,"

      I think this sort of worship of the Sargent and Lucas gods is part of the problem. Perhaps it is a consequence of the existence of a Nobel Prize in a discipline where there shouldn't be one which tends to feed on and reinforce things done in a certain way.

      There needs to be a lot more humility. DSGE is basically using a methodology that is inappropriate in a social science. Obvious to many but very hard for the profession to swallow.

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    13. Henry, you're wrong, just add sticky wages and the workers in a DSGE model will be involuntarily unemployed. Duh.

      https://bfi.uchicago.edu/sites/default/files/research/Chicago_Handbook_Basu_House.pdf

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    14. Anonymous7:26 AM

      "Henry, you're wrong, just add sticky wages and the workers in a DSGE model will be involuntarily unemployed. Duh. "

      Yes there might be a change in employment, but it is not considered involuntary. The workers have voluntarily decided to take a "leisure break", according to orthodox theory.

      Henry.

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    15. That's not true Henry. In these models all agents wish to have a job, but they can't get them. They are not enjoying a "leisure break" at all.

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    16. Anonymous4:48 PM

      " In these models all agents wish to have a job, but they can't get them. "

      Why can't they get them?

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    17. Anonymous5:10 PM

      " In these models all agents wish to have a job, but they can't get them. "

      Pontus,

      Why can't they get them?

      Henry

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    18. Anonymous7:07 PM

      Pontus,

      I see you haven't responded to my question.

      My point is how is it that these NK models can be continued to be called general equilibrium models if the framework within which they are pitched does not rely on general equilibrium. If the models are truly of the general equilibrium type the labour markets within them are modelled under general equilibrium which implies market clearing and hence no involuntary unemployment.

      Henry

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    19. You seem a bit impatient Henry.

      In any case, these are models in which one market does not clear because of the institutional features of that market. Instead, the price in that particular market is determined through other mechanisms (in this case through bargaining).

      Perhaps a purist would not agree that these models are of general equilibrium. But that's a bit of a strange discussion. As David points out, the "equilibrium" part is nowadays used as a short version of "solution concept".

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    20. Oh, and they can't get them because it is not easy to find an employer demanding your particular skill in this particular moment. It takes time.

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    21. Anonymous4:33 PM

      "You seem a bit impatient Henry."

      Yes, I am.

      "... one market does not clear because of the institutional features of that market."

      " As David points out, the "equilibrium" part is nowadays used as a short version of "solution concept". "

      So are you saying they clear or not? Are you saying there is no equilibrium or not?

      "Oh, and they can't get them because it is not easy to find an employer demanding your particular skill in this particular moment. It takes time."

      And that's called frictional unemployment.

      It seems to me (please correct me if I misunderstand you) that you are saying there is market clearing and that there is equilibrium and any unemployment that results is frictional.

      Henry

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    22. Hi,

      I'm saying that the labor market does not clear., but that doesn't imply that there no equilibrium. The "labor market clears" line in the equilibrium definition is replaced by "a free entry condition".

      The terms frictional, cyclical, structural unemployment are not, at least according to me, particularly useful. If the amount of unemployment follows the cycle, does that mean it's cyclical? If frictional unemployment gets exacerbated through labor market institutions, does that make it structural?

      Delete
    23. Anonymous11:25 PM

      Pontus,

      Doesn't free entry imply markets will clear? At equilibrium, net entries will equal what's demanded. Yes?

      Anyway, this is all about frictional unemployment. I'm saying the GE model doesn't account for involuntary employment.

      In your employment type run through you forgot to mention involuntary employment. I'm not making any assertions about the others other than they are not the same as involuntary unemployment.

      Henry

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    24. Free entry is referring to firms. They enter to the point that the benefit of doing so is equal to the cost. If the cost is non-zero, unemployment will emerge as an equilibrium outcome. And, to a certain extent you are correct: Entry creates profit generating enterprises which is owned by someone. In equilibrium the demand for equity shares in such companies are equal to the supply (entry) of such companies. But the labor market does not clear. I don't want to repeat that sentence any more, so once and for all: THE LABOR MARKET DOES NOT CLEAR. THERE IS INVOLUNTARY UNEMPLOYMENT IN EQUILIBRIUM. Read more here if you wish: https://en.wikipedia.org/wiki/Matching_theory_(economics)

      And unemployment is certainly involuntary. Each unemployed individual would love to get a job but has not been able to find one. In what way is this voluntary? They get no "utility" from leisure, and they get no pay (apart from, perhaps, UI). A job would be the best thing that can happen to them. Again THIS IS INVOLUNTARY UNEMPLOYMENT.

      [Sure, underlying this is the idea that there exist a job for everyone, but they have not been able to find each other yet. So if all informational frictions -- which the model capture in a crude way -- vanished, so would unemployment.

      Although maybe that's where we are heading. I've met people who have become unemployed and the next day they turn on Uber on their phone and start driving ...]

      Delete
    25. Anonymous11:00 PM

      Pontus,

      Matching theory deals with frictional unemployment, not involuntary unemployment.


      Henry

      Delete
    26. Henry,

      The unemployed in the most plain vanilla Mortensen-Pissarides framework are

      1, Not able to find a job
      2, Actively looking for a job (at prevailing wages)

      That satisfies at least my definition of involuntary unemployment. Yours must be different from mine. What is it?

      [Another side not: "Involuntary unemployment" is not necessarily a useful concept. I may have my eyes on landing a job as an astronaut at NASA, but my applications keep on being declined. Does that make me "involuntarily unemployed". But I should also emphasize that this problem does not arise in the aforementioned framework, as jobs are homogenous]

      Delete
  12. Anonymous12:00 PM

    Maybe the four different venues require different approaches due to their different objectives? The private sector is not in a position to set policy, so their interest in causal inference is limited--predictive utility is the primary objective. Coffeehouse types intend to persuade people without any rigorous consideration of history, data, or theoretical restrictions (e.g., budget constraints). The goal is to persuade, not to exhibit scientific rigor--hence, any number of ideologically soothing, but scientifically suspect ideas proliferate. At the Fed, there is interest in both policymaking and forecasting, explaining why they simultaneously make use of DSGE-type models and the kind of models the private sector uses (e.g., FRB/Penn). Academics, whose goal is mostly understanding and explanation, is more or less exclusively interested in causal inference, and so is in need of structural causal models, of which DSGE have been judged to be the best of a bad bunch. That DSGE has not worked empirical wonders is not to say that it has not generated any number of insights that have proven useful, and it is not to say that there exist better alternatives. Try to understand what the DSGE modelers are after intellectually , rather than questioning their motives, and then enlighten us about what the superior alternative is. And try to do so through conventional academic channels, rather than taking your case to the public and creating confusion about the state of opinion in academic macro.

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  13. Academic economists rewarding conformity?! Who would dare say that? It must be wrong

    ReplyDelete
  14. Economics is locked in idiocy: How could this happen?
    Comment on Noah Smith on ‘Econ theory as signaling?’

    Economists can explain everything. Accordingly, Noah Smith’s rhetorical question “DSGE models really don’t work, why do so many macroeconomists spend so much time on them?” has been answered long ago with the one-size-fits-all explanation: utility maximization. “Gary Becker has suggested that a substantial resistance to the acceptance of new ideas by scientists can be explained by two familiar economic concepts. One is the concept of specific human capital: the established scholar possesses a valuable capital asset in his command over a particular body of knowledge. That capital would be reduced if his knowledge were made obsolete by the general acceptance of a new theory. Hence, established scholars should, in their own self-interest, attack new theories, possibly even more than they do in the absence of joint action. The second concept is risk aversion, which leads young scholars to prefer mastery of established theories to seeking radically different theories. Scientific innovators, like adventurers in general, are probably not averse to risk, but for the mass of scholars in a discipline, risk aversion is a strong basis for scientific conservatism.” (Stigler, 1983, p. 538)

    Economists are well aware that they are scientifically lost in the wood. The problem, though, is not at all that they resist new ideas but that they have none. “Yet most economists neither seek alternative theories nor believe that they can be found.” (Hausman, 1992, p. 248)

    To explain the conspicuous stagnation of economics with conservatism is a bit euphemistic. The fact of the matter is that the representative economist lacks the defining characteristic of a scientist: “A genuine inquirer aims to find out the truth of some question, whatever the color of that truth. ... A pseudo-inquirer seeks to make a case for the truth of some proposition(s) determined in advance. There are two kinds of pseudo-inquirer, the sham and the fake. A sham reasoner is concerned, not to find out how things really are, but to make a case for some immovably-held preconceived conviction. A fake reasoner is concerned, not to find out how things really are, but to advance himself by making a case for some proposition to the truth-value of which he is indifferent.” (Haack, 1997, p. 1)

    What Haack calls pseudo-inquiry and Smith calls signaling has been called cargo cult science by Feynman: “They’re doing everything right. The form is perfect. ... But it doesn’t work.”

    The representative economist does exactly what he is supposed to do: “It is a touchstone of accepted economics that all explanations must run in terms of the actions and reactions of individuals. Our behavior in judging economic research, in peer review of papers and research, and in promotions, includes the criterion that in principle the behavior we explain and the policies we propose are explicable in terms of individuals, not of other social categories.” (Arrow, 1994, p. 1)

    What does methodological individualism mean in detail? All variants of orthodox economics are built upon this set of foundational propositions, a.k.a. axioms: “HC1 economic agents have preferences over outcomes; HC2 agents individually optimize subject to constraints; HC3 agent choice is manifest in interrelated markets; HC4 agents have full relevant knowledge; HC5 observable outcomes are coordinated, and must be discussed with reference to equilibrium states.” (Weintraub, 1985, p. 147)

    It is pretty obvious to anyone with a modicum of scientific instinct that the axiomatic starting point of standard economics is methodologically forever unacceptable. HC2, HC4, HC5 are blatant nonentities, but the representative economist swallows them hook, line and sinker since more than 140 years. To state in 2016 that “DSGE models really don’t work” is an insufficient concession because textbook supply-demand-equilibrium is built upon the same axiom set and does not work since Jevons/Walras/Menger.

    Part 2

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  15. Part 2

    By sticking to the microfoundations HC1 to HC5 economists violate scientific standards on a daily basis. And by proudly telling the world “most of what I and many others do is sorta-kinda neoclassical because it takes the maximization-and-equilibrium world as a starting point” Krugman is only signaling his and others utter scientific incompetence.

    Egmont Kakarot-Handtke

    References
    Arrow, K. J. (1994). Methodological Individualism and Social Knowledge. American Economic Review, Papers and Proceedings, 84(2): 1–9. URL http://www.jstor.org/stable/2117792.
    Haack, S. (1997). Science, Scientism, and Anti-Science in the Age of Preposterism. Skeptical Inquirer, 21(6): 1–7. URL http://www.csicop.org/si/show/science_
    scientism_and_anti-science_in_the_age_of_preposterism.
    Hausman, D. M. (1992). The Inexact and Separate Science of Economics. Cambridge: Cambridge University Press.
    Stigler, G. J. (1983). Nobel Lecture: The Process and Progress of Economics. Journal of Political Economy, 91(4): 529–545. URL http://www.jstor.org/stable/1831067.
    Weintraub, E. R. (1985). Joan Robinson’s Critique of Equilibrium: An Appraisal. merican Economic Review, Papers and Proceedings, 75(2): 146–149. URL http://www.jstor.org/stable/1805586.

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  17. Anonymous5:14 PM

    I sort of wonder what Thomas Sargent would say if he ever came across a piece like this.

    https://www.minneapolisfed.org/publications/the-region/interview-with-thomas-sargent

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  18. Easy answer: Because economists insist on ignoring the capital critique.

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  19. It is fascinating how this echoes discussions about modern theoretical physics, especially those about string theory. String theory has had lots of extremely bright people working on it for decades now, but it has yet to even duplicate what is known as the Standard Model. Why are so many in physics apparently wasting their time? Is it signalling that they are good, hard working physicists?

    Of course, physics is caught in a different rut from economics. Physics has lots of data and a pretty good theory that annoyingly keeps providing accurate predictions. Economics has lots of data and a rather weak theory that annoyingly neither predicts nor provides a particularly good path out of economic failures.

    Many in physics consider string theory to be mere fashion. That is, it is a theoretical approach with a certain aesthetic appeal, but more importantly, it is accepted by the research establishment, so it is easier to get funded if one uses the magic words. This is a common problem in many fields. Deciphering Mayan script was held back since it was accepted that it was ideographic, not linguistic. The big breakthroughs came from the USSR which had its own orthodoxies during the Cold War.

    I get the impression that economics has its fashions as well.

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    Replies
    1. That's my impression too.

      The thing is, in physics, people's expectations for theories are pretty high; in econ, pretty low.

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  20. Anonymous11:11 AM

    It's a feature, not a bug. B-school profs need strict barriers to entry to maintain their inflated salaries.

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  21. "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."

    Exactly. "DSGE" is not some static thing. Theory and empirical practice are evolving as we learn more, just as happens in any healthy scientific activity.

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  22. Something very similar was already denounced by Tom Mayer more than two decades ago
    http://www.usc.es/economet/reviews/aeid125.pdf

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  23. Wrong question, wrong answer
    Comment on Stephen Williamson on ‘Econ theory as signaling?’

    Noah Smith starts his post with the circumspect question: “Assuming ... DSGE models really don’t work, why do so many macroeconomists spend so much time on them?”

    Note, that he does not straightforwardly assert: “DSGE does not satisfy the scientific criteria of material and formal consistency.”

    Stephen Williamson takes this clear signal of spinelessness as an invitation and shifts the issue rhetorically away from the crucial point by starting the second-guessing meta-communication game: “When I read that, here’s what I think you’re thinking. ‘Don’t work’ means useless.”

    Noah Smith is now trapped in a very inconvenient corner and he gets the knockout: “Now, most of what I do would fall under ‘DSGE,’ if I take the term literally. I’m somewhat outside the mainstream, but I’ve bought into the idea that formal modeling is useful, optimization is useful, RE is useful. So, I think you’re telling me that what I know is useless, and what I do is useless. And I get paid to do what I do, which is full time research in macro, giving policy advice, etc. By implication, it seems you’re saying that you could do my job as well or better than I can. Is that correct?”

    No! For heavens sake, no! Everybody knows that Noah Smith never wanted to say that he could do Stephen Williamson’s job better.

    So, let us now get out of this ridiculous little game and put things straight.

    (i) DSGE is provably false according to the scientific criteria of material and formal consistency.

    (ii) What the proponents of DSGE including Stephen Williamson offer as knowledge is NOT knowledge=episteme but opinion=doxa. “In order to tell the politicians and practitioners something about causes and best means, the economist needs the true theory or else he has not much more to offer than educated common sense or his personal opinion.” (Stigum, 1991, p. 30). DSGE is NOT the true economic theory. Just the contrary: DSGE is axiomatically false.

    (iii) Because they do not have the true theory economic policy advice of the proponents of DSGE has NO scientific foundation but is at the same level as poultry entrails reading.

    (iv) Right policy depends on true theory. Therefore, to say what the proponents of DSGE do is useless is an euphemism. As a matter of fact, they got price theory, profit theory, and employment theory wrong and therefore ultimately bear the intellectual responsibility for the social devastations of unemployment. DSGE is NOT a “healthy scientific activity” but a scientific failure.

    What Noah Smith and Stephen Williamson are unmistakably signaling is: economists are not useless but a menace to their fellow citizens.

    Egmont Kakarot-Handtke

    References
    Stigum, B. P. (1991). Toward a Formal Science of Economics: The Axiomatic Method in Economics and Econometrics. Cambridge, MA: MIT Press.

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