Saturday, August 20, 2016

Heterodox macro - a reply to some replies

The other day I wrote a Bloomberg View post arguing that heterodox macroeconomics is not in any better shape than mainstream macroeconomics. As you might expect, this drew some lively responses.

One or two of the responses seemed to be arguing against the title of my post, rather than the contents. That's understandable, since titles are important. In this case, though, it probably detracted from the debate a great deal. The Bloomberg title people are good, and they usually get things right, but once in a while the title they choose doesn't quite capture the point I'm trying to make. This was one of those cases. The title they gave my post was "Economics Without Math Is Trendy, But It Doesn't Add Up." But actually, this wasn't what I was arguing. My point about non-mathy models wasn't that these are bad, useless, or inferior. It was that they're different from mathy models, and so comparing non-mathy models with mathy ones is an apples-to-oranges comparison. Both types of models have their uses, but you can't really compare one to the other. I make that pretty clear in the text of my post, but most of the people who responded tended to focus more on the title. Oh well. These things happen.

Anyway, on to some of the responses. The numbering here is arbitrary, corresponding to the order in which the tabs were open on my browser. (Note: The ordering has changed; see #4.)

Response 1: Steve Keen

First, we have a response by Steve Keen. Steve, unlike others, did get the point I was making about mathy vs. non-mathy models (Thanks, Steve!), and had some good commentary on the subject:
There is indeed a wing of heterodox economics that is anti-mathematical. Known as "Critical Realism" and centred on the work of Tony Lawson at Cambridge UK, it attributes the failings of economics to the use of mathematics itself... 
What Noah might not know is that many heterodox economists are critical of this approach as well. In response to a paper by Lawson that effectively defined "Neoclassical" economics as any economics that made use of mathematics (which would define me as a Neoclassical!), Jamie Morgan edited a book of replies to Lawson entitled What is Neoclassical Economics? (including a chapter by me). While the authors agreed with Lawson's primary point that economics has suffered from favouring apparent mathematical elegance above realism, several of us asserted that mathematical analysis is needed in economics, if only for the reason that Noah gave in his article[.]
Steve also offers some useful criticism of Milton Friedman's ideas about how to evaluate a model's empirical success (I agree).

Steve also makes the useful point that linearization critically hampers many mainstream models (I agree).

Steve points out that non-mathy models can make qualitative forecasts. That's true. However, my point was that these are often a lot less actionable than quantitative forecasts. A non-mathy model might tell you that private-sector debt is dangerous, but it might not tell you how much of it is dangerous, or how dangerous. For that, you'd need some kind of mathy model. Steve definitely seems to get this point too, though, so I'm not disagreeing.

Steve then discusses overfitting of data, and points out that many mainstream models do this too. That's certainly true, although I think DSGE models tend to be a lot more parsimonious than SFC models or stuff like FRB/US. Actually, overfitting is one of the big criticisms of the most popular DSGE models in use at central banks.

Steve then addresses the idea that heterodox models are similar to mainstream ones. I never said they were, although I said there are some similarities between the FRB/US model and Wynne Godley-type SFC models. In fact, there are some similarities, though there are also differences. But in general, most heterodox models are very different from most mainstream models.

Steve also discusses my (admittedly too brief) mention of agent-based models, and has some good comments:
Largely speaking, this is true - if you want to use these models for macroeconomic forecasting. But they are useful for illustrating an issue that the mainstream avoids: "emergent properties". A population, even of very similar entities, can generate results that can't be extrapolated from the properties of any one entity taken in isolation...Neoclassical economists unintentionally proved this about isolated consumers as well, in what is known as the Sonnenschein-Mantel-Debreu theorem. But they have sidestepped its results ever since...Multi-agent modelling may not lead to a new policy-oriented theory of macroeconomics. But it acquaints those who do it with the phenomenon of emergent properties - that an aggregate does not function as a scaled-up version of the entities that comprise it. That's a lesson that Neoclassical economists still haven't absorbed.
I think this is right. Agent-based models have so far served as a demonstration of the fragility of representative agent models. In the future, they might be much more than that.

So anyway, I'd say I pretty much agree with Steve's response. Good stuff. (Though this person on Reddit had some problems with it.)

Response 2: Ari Andricopolous

Ari has a response as well. His response comes in the form of a list of things that he thinks macro models should not include. The list is:

  1. Microfoundations
  2. Rationality
  3. Loanable funds
  4. Interest rate effects
  5. The financial sector

It's pretty clear that the last item on this list is misplaced, since Ari thinks one should include the financial sector in models.

Whether macro models should be microfounded is a big open question, but I'd like to note that by saying they shouldn't be, Ari is saying that agent-based models are bad. Agent-based models are as microfounded as they come.

As for rationality, I kind of disagree...humans observe and learn and adapt (OK, some more than others, I'll grant). Even though perfect rationality is probably pretty unrealistic, to insist that models totally ignore human observation, learning, and adaptation seems very dangerous for the realism of any model.

As for the loanable funds thing...yeah, OK, sure.

Response 3: Jo Michell

Jo Michell's response might have been the first to go up, but it's later on this list because...the numbering is arbitrary!

Jo, which I believe is short for "Jörmungandr", has a helpful diagram of the "schools" of macroeconomic thought. He also pushes back on the notion that "heterodox" is a useful classification at all:
The problem with ‘heterodox economics’ is that it is self-definition in terms of the other. It says ‘we are not them’ — but says nothing about what we are. This is because it includes everything outside of the mainstream, from reasonably well-defined and coherent schools of thought such as Post Keynesians, Marxists and Austrians, to much more nebulous and ill-defined discontents of all hues. To put it bluntly, a broad definition of ‘people who disagree with mainstream economics’ is going to include a lot of cranks. People will place the boundary between serious non-mainstream economists and cranks differently, depending on their perspective. 
Another problem is that these schools of thought have fundamental differences. Aside from rejecting standard neoclassical economics, the Marxists and the Austrians don’t have a great deal in common.
This is a good and useful point. My Bloomberg post really did bite off more than it could chew. My point was that there wasn't something better and more successful out there that by rights ought to already have displaced the (unsuccessful) mainstream approach. But in making that point, I touched on a number of different types of alternatives that aren't really closely connected. And I left out others (for example, Steve Keen's own work, and the Austrians).

Jo, unfortunately, appears to have gotten tripped up by the title:
Noah seems to define heterodox economics as ‘non-mathematical’ economics. This is inaccurate. There is much formal modelling outside of the mainstream. 
Well, no, I don't define it that way, otherwise I wouldn't have discussed SFC models and agent-based models in my post.

Jo goes on to make some good points about mainstream models, and some of the problems they encounter.

Response 4: Frances Coppola

Frances Coppola, whom I cited in my Bloomberg post, also has a response. I responded to this post earlier, but Frances changed it, so I moved my response down to #4.

Frances still seems to misunderstand my post somewhat, and to have been tripped up by the title:
Noah's core proposition is that economics has no validity unless it is expressed in mathematical terms. He says that economics without mathematics doesn’t add up.
Actually, I didn't make such a claim. Nor do I believe it. What I wrote was:
Broad idea-sketching is certainly a valuable activity. If theorists get lost in the specifics of their models, they can blind themselves to truly new hypotheses and mechanisms that would let them make big, radical changes. I do think this has happened to some degree in mainstream macro...But that doesn’t mean that broad idea-sketching is a replacement for formal models. It’s not an apples-to-apples comparison.
My point is that although non-mathematical econ is often valuable, it's not comparable to mathematical econ. Both have their place. But to say that a non-quantitative theory was successful at predicting the Great Recession, while a quantitative theory failed, is to hold the two theories to very different standards, since "predict" means different things for quantitative theories than it does for non-quantitative theories.

Frances goes on to discuss some of the limitations of purely quantitative models. She's broadly right. She then criticizes some heterodox theorists who, in her opinion, focus too much on math:
Noah's post unfortunately seems to have elicited some rather defensive responses from the heterodox community, along the lines of “But we DO like mathematics!” or even, “Actually our mathematics is better than yours”. But this is to buy into Noah's core proposition. The heterodox economics community should - and, to be fair, in most cases does - reject it outright.  Economics is not, and cannot be, exclusively mathematical...There is no need for the heterodox economic community to be defensive about vagueness.
Again, Frances demonstrates a deep misunderstanding of my thesis. I never said that econ theory should be exclusively mathematical, nor do I believe it. This confusion is partly the result of the title, and partly the result of me just not explaining my thesis well enough.

Anyway, those are the responses I've seen. Thanks to everyone who took the time to respond!


  1. Screw it, let's just use tea leaves.

    1. Tea leaves? You quack! Burnt sheep entrails or nothing.

      Sure you could also string together the Greek alphabet, but that's a lot more work that using real numbers represented by historical data, and might disprove one's ideology.

    2. There's no need, agents have Rational Expectations to already predict the future!

  2. "But to say that a non-quantitative theory was successful at predicting the Great Recession, while a quantitative theory failed, is to hold the two theories to very different standards, since "predict" means different things for quantitative theories than it does for non-quantitative theories."

    That would indeed be a double standard, if it were what I said. But it is not.

    This is what I said:

    "People rightly ask why academic economists failed either to predict or adequately explain the financial crisis, whereas heterodox economists working in the real economy – many of them untrained in formal economics – not only predicted it but correctly identified the causes."

    I said nothing about the nature of the theories or the methods that they used.

    In your response to my comment, you complained that much heterodox economic theory is non-quantitative, then you went on to say quantitative and non-quantitative predictions are not comparable. Fine. I never said they were.

    You've knocked down your own straw man.

    1. Frances,

      Some of the het people forecasting the crash and Great Recession did use mathematical models, if not necessarily highly esoteric ones. But I think it is not wise to go back and dredge through the long and contentious literature on just who forecast what and when and how.

    2. Frances Coppola

      Your argument is entirely beside the point because ‘Science does NOT predict the future’

      Egmont Kakarot-Handtke

    3. "People rightly ask why academic economists failed either to predict or adequately explain the financial crisis, whereas heterodox economists working in the real economy – many of them untrained in formal economics – not only predicted it but correctly identified the causes."

      The whole "Who predicted the crisis?" pissing match is idiotic. Tons of people, "orthodox" and "heterodox," predicted that the housing market would crash and we'd have a financial crisis.

  3. Nah, won't work. People are harder to manipulate with tea leaves.

  4. Ridiculous. Tea leaves don't tell you anything. You need to toss dried bones to get any real answers!

  5. Nothing to chose between Orthodoxy and traditional Heterodoxy
    Comment on Noah Smith on ‘Heterodox macro ― a reply to some replies’

    All that has to be said about formalization/mathiness has already been said by the great heterodox economist Georgescu-Roegen: “Lest this position is misinterpreted again by some casual reader, let me repeat that my point is not that arithmetization of science is undesirable. Whenever arithmetization can be worked out, its merits are above all words of praise. My point is that wholesale arithmetization is impossible, that there is valid knowledge even without arithmetization, and that mock arithmetization is dangerous if peddled as genuine.” (1971, p. 15)

    There are heterodox AND orthodox economists who cannot get their heads around this still valid summary. These are the retarded folks who do not understand that there is an essential difference between science and non-science. The former is the realm where the criterion true/false applies and NOTHING else (= theoretical economics), the latter is the vast realm of storytelling where anything goes (= political economics). So there are TWO kinds of Orthodoxy and TWO kinds Heterodoxy which have to be kept apart. For an overview of current economics see (2016b) plus description (2016a).

    True/false in turn has TWO inseparable aspects: “Research is in fact a continuous discussion of the consistency of theories: formal consistency insofar as the discussion relates to the logical cohesion of what is asserted in joint theories; material consistency insofar as the agreement of observations with theories is concerned.” (Klant, 1994, p. 31)

    Logical consistency is methodologically secured by the axiomatic-deductive method. This method presupposes firm ground to start with or, as Aristotle put it: “When the premises are certain, true, and primary, and the conclusion formally follows from them, this is demonstration, and produces scientific knowledge of a thing.”

    The fact of the matter is that BOTH orthodox microfoundations and heterodox macrofoundations are false. Because of this, traditional Heterodoxy is not an acceptable replacement of Orthodoxy. The current state of economics is: Walrasianism, Keynesianism, Marxianism, Austrianism is materially/formally inconsistent. Economics is a failed science. This calls for a paradigm shift.

    Heterodox macro has been formalized. This is praiseworthy. The problem is that there are different versions of heterodox macro, e.g. Keynes, Kalecki, Minsky, Keen, which are INCONSISTENT. So traditional macrofounded Heterodoxy is formal garbage (2015) (2016c) just as microfounded Orthodoxy. Because there cannot be a pluralism of false theories BOTH approaches have to be replaced by the correct macrofoundations. Nothing less will do. Inconsistency is lethal in science. Game over for Orthodoxy and traditional Heterodoxy.

    Egmont Kakarot-Handtke

    E.K-H (2015). Heterodoxy, too, is scientific junk. Blog post. URL
    E.K-H (2016a). From Orthodoxy to Heterodoxy to Sysdoxy. Blog post. URL http://axecorg.
    E.K-H (2016b). From proto-science to science. Wikimedia. URL
    E.K-H (2016c). Where advanced Heterodoxy – represented by Steve Keen – took the wrong turn. Blog post. URL
    Georgescu-Roegen, N. (1971). The Entropy Law and the Economic Process. Cambridge, MA: Cambridge University Press.
    Klant, J. J. (1994). The Nature of Economic Thought. Aldershot, Brookfield, VT: Edward Elgar.

    1. EKH,

      I hope you realize that your quote from Georgescu-Roegen praises efforts to "arithmetize." He only argues that one needs some more knowledge beyond that arithmetic knowledge, and he was indeed involved in developing certain parts of the mathematical apparatus of standard economic theory, such as that underlying indifference curves, among other topics.

    2. Barkley Rosser

      Georgescu-Roegen said: “What particular reality is described by a given theory can be ascertained only from that theory’s axiomatic foundation.” (1966, p. 361)

      And: “In fact, the history of every science, including that of economics, teaches us that the elementary is the hotbed of the errors that count most.” (1970, p. 9)

      Georgescu-Roegen was well aware that the axiomatic foundations of economics are defective. Neither Orthodoxy nor Heterodoxy got this pivotal methodological point until this day.

      Georgescu-Roegen was also well aware of his fellow economists’ utter scientific incompetence: “Knight lamented that there are many members of the economic profession who are ‘mathematicians first and economists afterwards.’ The situation since Knights time has become much worse. There are endeavors that now pass for the most desirable kind of economic contributions although they are just plain mathematical exercises, not only without any economic substance but also without mathematical value. Their authors are not something first and something else afterwards; they are neither mathematicians nor economists.” (1979, p. 317)

      This is the very definition of economics as cargo cult science.* The situation since Georgescu-Roegen’s time has become even worse.

      Egmont Kakarot-Handtke

      Georgescu-Roegen, N. (1966). Analytical Economics, chapter Economic Theory and Agrarian Economics, pages 359–397. Cambridge, MA: Harvard University Press.
      Georgescu-Roegen, N. (1970). The Economics of Production. American Economic Review, Papers and Proceedings, 60(2): 1–9. URL
      Georgescu-Roegen, N. (1979). Methods in Economic Science. Journal of Economic Issues, 13(2): 317–328. URL

      * Wikipedia

    3. EKH,

      Just to note that NGR early in his career did what he criticized later in his career, see "The Pure Theory of Consumer Behavior," QJE, 1936.

      And I find it pretty funny that you think that you think that the point that "the axiomatic foundations of economics are defective. Neither Orthodoxy nor Heterodoxy got this pivotal methodological point until this day" First of all, lots of economists, even including some fairly mainstream ones, are aware that a lot of the axioms of economics are flawed. And the second point is that you make it look like it is your revelation of this point "this day" has suddenly made Orthodoxy and Heterodoxy aware of this. You really have an exaggerated view of your importance, EKH, to the point of demented delusion.

  6. I did not put up a post anywhere specifically on your original post (unable to comment at Bloomberg) but did put a comment up on Economists View when Mark Thoma linked to your piece. Basically I said a short version of what Steve Keen said, which was that there are indeed more mathematical het macro models around than just Godley-Lavoie, including Steve's Minsky model, a lot of ABMs, as well as some other things.

    There is also the matter that the het macro people are more likely to be open to some of the mathematical approaches that fall under the general rubric of "complexity," although some of that has been used by more conventional economists. What has not been used by the more conventional folks has tended in het models to show up in either the ABMs or in some of the econophysics models. I note that Steve has been a critic of some of the latter, even as he has also been a participant to some degree in that stuff.

    Barkley Rosser

  7. A.J. Sutter11:38 PM

    Apropos of non-mathy models being"often a lot less actionable than quantitative forecasts": In 2005, my wife was working in a retail bank branch in the San Francisco Bay Area. The branch manager, who had graduated from an undistinguished private college in Japan, repeatedly told her, as well as the bank's management, that subprime loans were a ticking time bomb. Acting on this advice, we decided to move to Japan, completing that process by early 2007. (The California bank also listened to her, and didn't issue any such loans.) Great idea!! Life in Tokyo was very comfortable during the worst years of the global financial crisis. Neither mathematical models, nor even Minskys, Roubinis, et al., are a substitute for some basic observation and insight; and the latter can certainly be actionable.

  8. Barkley Rosser

    You write: “First of all, lots of economists, even including some fairly mainstream ones, are aware that a lot of the axioms of economics are flawed.”

    Famously, Keynes was very aware of this 85 years ago. “The classical theorists resemble Euclidean geometers in a non-Euclidean world ...” (1973, p. 16). And he knew that the fault was in what today is called microfoundations: “For if orthodox economics is at fault, the error is to be found not in the superstructure, ... but ... in the premises. (1973, p. xxi)

    Consequently, Keynes started the macrofoundations research program in the General Theory formally as follows: “Income = value of output = consumption + investment. Saving = income - consumption. Therefore saving = investment.” (1973, p. 63)

    These formal foundations are conceptually and logically defective because Keynes never came to grips with profit and therefore “discarded the draft chapter dealing with it.” (Tómasson et al., 2010, p. 12).

    This was how Heterodoxy started in earnest. The original task of Heterodoxy is NOT to criticize Orthodoxy and to improve it here and there but to REPLACE indefensible scientific garbage and to become the legitimate Orthodoxy. As we know today, Heterodoxy messed up the necessary paradigm shift.

    Keynes’s original blunder kicked off a chain reaction of errors/mistakes: (i) all I=S/IS-LM models are are false since Keynes and Hicks, (ii) Keynes’s profit conundrum has not been solved by After-Keynesians, (iii) employment and monetary theory is still false.

    On the other hand, Orthodoxy went on with their flawed ‘euclidean’ axioms. As Krugman nicely put it “most of what I and many others do is sorta-kinda neoclassical because it takes the maximization-and-equilibrium world as a starting point.”

    This is the current state of economics: the orthodox microfoundations are flawed since 140 years and the heterodox macrofoundations are flawed since 85 years. As a consequence, all models that contain maximization-and-equilibrium or I=S/IS-LM are a priori false and together this is roughly 90 percent of the content of peer-reviewed economic quality journals and 100 percent of textbooks. Economic policy guidance has NO sound scientific foundation but is plucked from thin air.

    From this follows, firstly, that the word ‘sciences’ has to be eliminated from the “Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel”. The general public has to be informed that the 200 year old claim and the actual state of economics do not match. It follows, secondly, that incompetent scientists have to be expelled from economics regardless of their affiliation to either Walrasianism, Keynesianism, Marxianism, Austrianism or any other failed approach. It follows, thirdly, that the pathetic cargo cult ping-pong between brain-dead Orthodoxy and silly Heterodoxy ends: “So we really ought to look into theories that don’t work, and science that isn’t science.” (Feynman)

    And this is what one REALLY sees: The orthodox microfoundations are flawed. The heterodox macrofoundations are flawed. Economics is a failed science. Economists are incompetent scientists.

    Egmont Kakarot-Handtke

    Keynes, J. M. (1973). The General Theory of Employment Interest and Money.London, Basingstoke: Macmillan.
    Tómasson, G., and Bezemer, D. J. (2010). What is the Source of Profit and Interest? A Classical Conundrum Reconsidered. MPRA Paper, 20557: 1–34.URL

    1. Does "Economists are incompetent scientists" include you, EKH, or are you not an economist?

    2. He's just a fruitcake, B-dog, you can just ignore him.

  9. "Neoclassical economists unintentionally proved this about isolated consumers as well, in what is known as the Sonnenschein-Mantel-Debreu theorem"

    If he had just controlled himself and not put that word "unintentionally" in there, I'd dislike him a lot less.