tag:blogger.com,1999:blog-17232051.post2260356976334134780..comments2024-03-18T07:04:18.975-04:00Comments on Noahpinion: Why bother with microfoundations?Noah Smithhttp://www.blogger.com/profile/09093917601641588575noreply@blogger.comBlogger46125tag:blogger.com,1999:blog-17232051.post-51637088463805042072019-03-16T20:18:02.169-04:002019-03-16T20:18:02.169-04:00I've read Richard Thaler's book, Misbehavi...I've read Richard Thaler's book, Misbehaving, and would guess that microfoundations that assume all actors within a market act in a completely rational manner fall short of describing reality. Furthermore, I wouldn't be surprised to hear that the individual behaviors, once understood, still contribute to the formation of a system, which itself exhibits patterns and features that are not directly attributable to individual behavior but represent a kind of emergent property of the system. In that case, we may find that any attempt to construct a complete model will depend on developing technology suitable to the task, such as quantum computers. Of course, that is not to say that the development of useful models are out of reach. But complete understanding of the forces at work may remain elusive.Johnhttps://www.blogger.com/profile/10414552954427852673noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-17930958090088446232013-04-24T22:56:43.386-04:002013-04-24T22:56:43.386-04:00"Because if by garbage you mean constrained o..."Because if by garbage you mean constrained optimization, full information, and so on then that same "garbage" is used to derive supply and demand and a whole bunch of other results in Micro theory. So if we accept your reasoning we should discard about 2/3 of what is taught in upper level microeconomics and simply posit aggregate (at the market level) relationships. "<br /><br />I say yes, get rid of it. And I'm going to use the example of supply and demand.<br /><br />Example one. Empirically, supply and demand do not reliably determine price! Merchants WILL price their goods at other-than-profit-optimizing levels, except in certain auction-driven commodity markets. Actually, "cost of inputs plus markup" is a standard pricing mechanism.<br /><br />Example two. Empirically, demand is not independent of supplier behavior! It's driven largely by advertising, publicity, and product differentiation. This means the construction of supply and demand curves doesn't even make sense.<br /><br />Microeconomics as we know it is the theory of coal sales.<br /><br />It applies to a few other commodities. But its foundations are completely wrong for markets driven by price-setting sellers and advertising. They're also completely wrong for markets driven by price-setting buyers and contractors submitting sealed bid packets. Neither of these really behaves in a "supply and demand" fashion. <br /><br />Now, I'm sure someone will come back and say "But the work of so-and-so analyzes this situation". Yeah. And is that taught in freshman micro? Does any macroeconomist know about it?Nathanaelnoreply@blogger.comtag:blogger.com,1999:blog-17232051.post-11540670621178607232013-04-24T22:43:34.284-04:002013-04-24T22:43:34.284-04:00"Its like treating a human body as one single..."Its like treating a human body as one single entity instead of dividing it in to organs and structural components. Pretty dumb. And you miss out on everything that is interesting about it."<br /><br />On the contrary. The "reductionist" method, looking at the individual pieces of the body, has had great success... but the "holistic" method has had some massive successes too. <br /><br />If you're doing ecology, you can just look at the human body as one single entity and the details are pretty unimportant most of the time.<br /><br />"Holistic" and "reductionist" methods are complementary. It is harder to get good holistic theories, and hard to extend them, but when you do get them (example: theory of evolution) they can be far, far more powerful predictively than the theories you get from reductionist research. Keynes discovered some sound holistic theories in economics. Nathanaelnoreply@blogger.comtag:blogger.com,1999:blog-17232051.post-19722429210488130592013-04-24T22:40:10.404-04:002013-04-24T22:40:10.404-04:00It is worth noting that while "microfounded&q...It is worth noting that while "microfounded" models are nice, there's simply no particular reason to prefer them. If a macro model works empirically, it doesn't matter whether you understand the micro behavior which creates it -- what matters is the empirical evidence full stop.<br /><br />Classic example from biology:<br /><br />The theory of evolution by natural selection was known to be correct, and was extremely useful, for *decades* before its "microfoundation" (DNA) was discovered.Nathanaelnoreply@blogger.comtag:blogger.com,1999:blog-17232051.post-78777127366427639912013-04-24T22:38:12.565-04:002013-04-24T22:38:12.565-04:00"In other words, our current microfoundations..."In other words, our current microfoundations are mostly just garbage.<br /><br />If this is true - and I think that the evidence overwhelmingly says that it is!"<br /><br />Thank you, Noah. I've been pushing this point for several years. I convinced you -- that's a success. :-)Nathanaelnoreply@blogger.comtag:blogger.com,1999:blog-17232051.post-60163306494662498652012-07-28T03:15:42.962-04:002012-07-28T03:15:42.962-04:00Huh? Paragraph does not follow from first sentence...Huh? Paragraph does not follow from first sentence.<br /><br />Indeed engineers do not always build their very useful and robust models and tools from "micro-foundations" such as particle mechanics, such as statistic foundations for thermodynamics. Instead they use "macro" models that work very, very well and have real world applicability. So then why does your paragraph seem to support the notion that better results are achieved from much more complex models?droctohttps://www.blogger.com/profile/10824341950818601786noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-75453982213347462402012-07-28T03:12:13.663-04:002012-07-28T03:12:13.663-04:00In physics there is a search for a grand unified t...In physics there is a search for a grand unified theory. Basically you've got quantum mechanics which work very well in one domain (very small) and then general relativity that describes another (very large). (In the 'middle' you've got 'simplified' Newtonian and old electromagnetics that work very, very well for most purposes.)<br /><br />None of this prevents physics from making discoveries and progressing. Though physicists search for a more complete truth they do not stop advancing within their fields simply because they cannot build their foundations on other principles.droctohttps://www.blogger.com/profile/10824341950818601786noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-47397367148160026562012-07-28T02:13:38.233-04:002012-07-28T02:13:38.233-04:00In this debate analogies with physics theories (gr...In this debate analogies with physics theories (gravity, thermodynamics) keep being thrown about but I think there's one important insight that's missing, possibly because physicists only know about it since about 1970, and economics appears to be stuck trying to mimic 19th century physics (and no, the new idea I'm talking about is not from quantum mechanics or general relativity, I'm talking about classical complex systems and statistical physics which someone like Poincare back in the 1890s might have been entirely comfortable with).<br /><br />In particular, your <br /><br />"Pretty much any model, in economics or physics or whatever, has a bunch of possible microfoundations that could give rise to it. That fact alone does not make microfoundations less important, since presumably some microfoundations are actually happening, and others aren't!"<br /><br />is off - empirically - in the theory of collective phenomena. Microscopic behaviour is an object of study in its own sake, not because it is essential for understanding collective behaviour (which it isn't).<br /><br />In the physics theory of collective phenomena there's a concept of 'universality classes'. As it turns out, it doesn't matter what your complex system is composed of. All that matters is two things: the effective dimensionality of the space the system lives in (basically, the number of 'nearest neighbours' an elementary entity of the model interacts with - which is why the physics of thin films or layered materials is different from physics in the bulk) and the dimensionality of the 'relevant state variable' of the elementary entities. And then you can get predictions of so-called 'critical exponents' which describe the appearance of long-range correlations in collective phenomena (what we call 'phases of matter' or, more generally and by analogy, just 'phases' of the system under study). What this means is that systems with widely different 'microfoundations' can belong to the same universality class, so characterising the universality class by empirical measurement tells you precious little about the microfoundations.<br /><br />For example, it turns out that the phases of a fluid (liquid/gas) and the phases of a ferromagnet (magnetised/demagnetised) are in the same universality class. But the microfoundations coudn't be more different.<br /><br />What this means also is that by studying the collective phenomena you can't deduce much about the microfoundations of the system. The atomic theory of fluids wasn't established by studying the liquid/gas phase transition, indeed we now know it probably couldn't have been.<br /><br />I'm not saying that this is true of economics, just that maybe economists should stop trying to philosophize about the Lucas critique by appeal to a physics worldview of 100 years ago.Migeruhttp://eurotrib.com/User/Migeru/Diarynoreply@blogger.comtag:blogger.com,1999:blog-17232051.post-53666139291619651872012-06-08T00:05:52.707-04:002012-06-08T00:05:52.707-04:00most microfounded models rely on utility functions...<i>most microfounded models rely on utility functions with constant parameters - these are the "tastes" that Bob Lucas and other founders of moden macro believed to be fundamental and unchanging. But I'd be willing to bet that different macro policies can change people's risk aversion</i> Why invoke something so technical? Tastes themselves can change. Economists never study where tastes/preferences come from but people in certain businesses definitely do.<br /><br /><i>The usual answer is that "microfoundations make models immune to the Lucas Critique."</i> Surely they're not the only kind that are immune to the Lucas Critique. If you take Y = C(Y−T) + I + G then the C people respond to government behaviour.<br /><br /><br /><i>A better reason to use microfoundations, in my opinion, is that they probably lead to better models. "Better," of course, means "more useful for predicting the future."</i> Evidence that this is true? <br /><br />A related comment -- and maybe this is what you meant by "more information" -- with little agents running around you can get distributional information, whereas with nameless macro forces that might be less believable.@isomorphismshttp://isomorphismes.tumblr.comnoreply@blogger.comtag:blogger.com,1999:blog-17232051.post-58514385676109387582012-04-12T04:01:48.661-04:002012-04-12T04:01:48.661-04:00Update 2
Yes. That is the way to go. I've alwa...Update 2<br />Yes. That is the way to go. I've always thought that ignoring the aggregation problem IS the big problem. Disaggregate and understand. Its like treating a human body as one single entity instead of dividing it in to organs and structural components. Pretty dumb. And you miss out on everything that is interesting about it.reasonhttps://www.blogger.com/profile/10958786975015285323noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-18690690534168566102012-03-22T15:35:39.826-04:002012-03-22T15:35:39.826-04:00""1. Even in microeconomics, we don’t in...""1. Even in microeconomics, we don’t insist on using models built up from maximizing behavior all the time. Exhibit A: supply and demand!..."" <br /><br />What? Did you ever get past an introductory economics class? <br /><br />The standard intermediate micro textbook, Hal Varian's, spends the first 6 chapters showing how the downward-sloping demand function is an outcome of the maximizing behavior of 'rational' agents. Chapters 19-23 do the same for supply functions and profit-maximizing firms. <br /><br />Unless, of course, you want to accuse Hal Varian of not being a 'serious' microeconomist...Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-17232051.post-64797095710307663802012-03-15T10:13:55.947-04:002012-03-15T10:13:55.947-04:00Noah
the comments you have gotten have been super...Noah<br /><br />the comments you have gotten have been super informativeJLDhttps://www.blogger.com/profile/02186957841091998126noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-39008232650709976212012-03-12T21:41:54.603-04:002012-03-12T21:41:54.603-04:00While the thermo-economic anaolgy may not be perfe...While the thermo-economic anaolgy may not be perfect, from the point of view of the evolution of an academic discipline they are quite analagous.<br /><br />Microfoundations appear (to a PhD Chemical Engineer) as the economic analog of statistical mechanics and macroeconomics as the economic analog of classical thermodynamics.<br /><br />When designing a distillation column, a chemical engineer would <b>never</b> explicitly use statistical mechanics. Typically, classical thermodynamics would be used with ideal behavior modified by empirically derived activity coefficients. Likewise, diffusion in the pores of catalyst particles would not be modeled as a random walk. An empirically derived diffusion coefficient would be used instead.<br /><br />While the connection between stat mech and classical thermo is usually discussed in terms of partition functions, the miore useful connection is in using stat mech to estimate the macroscopic (aggregative) activity coefficients or transport parameters (viscosity, thermal conductivity, diffusion coefficient, etc.).<br /><br />There are some tractable problems where stat mech can yield useful results. For instance, the transport of gases can be estimated fairly well from kinetic theory (low density) or Chapman-Enskog theory (high density) and activity coefficients can be estimated using group-contribution methods such as UNIFAQ. However, the temptation to apply these micro-based models to more complex systems (generally with non-independent particles) has led many astray.<br /><br />I see this as folks requiring microfoundations to be built up all the way to macro models. It should be possible in certain cases that may have wide applicability, but the complexity is usually not worth the effort.<br /><br />And, in contrast to what many others have said here, aggregation does not necessarily result in instability. It is true for certain cases, but those tend to be the excpetion rather than the rule.<br /><br />Onsager may have quibbled with the notion that economic actors using their expectations to motivate behavior has no analog in thermodynamics.<br /><br />It should also be noted that from my experience, physicists tend to use statistical mechanics and thermodynamics as synonyms, whereas stat mech is a small subset of thermo.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-17232051.post-17957686118576680862012-03-06T22:22:34.403-05:002012-03-06T22:22:34.403-05:00Ok maybe "largely" is too strong wrt Dor...Ok maybe "largely" is too strong wrt Dorman, let's say, something similar to some of what he said.Richard H. Serlinhttps://www.blogger.com/profile/09824966626830758801noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-52666801660271642532012-03-06T22:16:46.954-05:002012-03-06T22:16:46.954-05:00I was thinking largely the same thing as Dornan, s...I was thinking largely the same thing as Dornan, see:<br /><br />http://richardhserlin.blogspot.com/2012/03/microfoundations-models-square-peg.html <br /><br />With regards to game theory, you need to keep the same kind of things in mind, a model is only as good as its interpretation. I remember in my first PhD game theory class, the professor was a visiting game theory expert, and I asked him, in these models we assume that the first person does what's best given what the second person is doing (and vice-versa), but an optimizing person who doesn't know what the second person is doing may select something very different, and with both optimizing blindly we may end up with something very different than the Nash equilibrium. And even in long run equilibrium we may not end up with the Nash equilibrium. He replied that game theorists understand this and consider it. How many really do (in public), I'm not sure.Richard H. Serlinhttps://www.blogger.com/profile/09824966626830758801noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-50772307296953041852012-03-06T11:04:13.213-05:002012-03-06T11:04:13.213-05:00I also don't like many of the features of RBC ...I also don't like many of the features of RBC models. But it seems to me that the micro behavior assumed is pretty standard in traditional micro. Constrained optimization (of which rational expectations is a form), market clearing, etc. Fortunately a new research effort has begun to incorporate labor and capital market frictions in models with endogenous technological change and study the implications for business cycles. But this would not have been feasible without the development first of search theory in the late 1970s and early 1980s. The assumptions of the first RBC models simply where based on the micro toolbox of the time. So you micro guys should also do some soul-searching(and I say this jokingly)!CAnoreply@blogger.comtag:blogger.com,1999:blog-17232051.post-63053478768513235842012-03-06T02:04:00.893-05:002012-03-06T02:04:00.893-05:00Because if by garbage you mean constrained optimiz...<i>Because if by garbage you mean constrained optimization, full information, and so on then that same "garbage" is used to derive supply and demand and a whole bunch of other results in Micro theory. So if we accept your reasoning we should discard about 2/3 of what is taught in upper level microeconomics and simply posit aggregate (at the market level) relationships.</i><br /><br />I am not willing to toss constrained optimization. Peter Dorman seems to be.<br /><br />My point is that the micro behavior assumed by models like RBC models, etc. is very unrealistic and probably wouldn't be used by any serious microeconomists to describe real consumer behavior.Noah Smithhttps://www.blogger.com/profile/09093917601641588575noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-47962820077870016922012-03-05T19:37:45.103-05:002012-03-05T19:37:45.103-05:00Noah, can you please specify whether the problem i...Noah, can you please specify whether the problem is with macroeconomics or microeconomics? Because if by garbage you mean constrained optimization, full information, and so on then that same "garbage" is used to derive supply and demand and a whole bunch of other results in Micro theory. So if we accept your reasoning we should discard about 2/3 of what is taught in upper level microeconomics and simply posit aggregate (at the market level) relationships. <br /><br />Macroeconomists can only use the microfoundation tools that microeconomists provide!CAnoreply@blogger.comtag:blogger.com,1999:blog-17232051.post-57338590433354371942012-03-05T06:44:44.565-05:002012-03-05T06:44:44.565-05:00"The example with qualitative predictions is ..."The example with qualitative predictions is also wrong. Nobody can answer the question where is the boundary between enough and not enough QE for hyperinflation? Currently, is not enough. Same logic works for any level which does not fit the qualitative prediction. The problem is also how much of QE will destroy the economy before it gets hyperinflation? Let's give $10,000,000 to everyone. Will the economy survive? "<br /><br />Please note that Krugman has been addressing fears of inflation (let alone hyperinflation) for a while; you might want to read his blog posts.Barry DeCiccohttps://www.blogger.com/profile/04735814736387033844noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-63947765424187853652012-03-05T06:42:22.312-05:002012-03-05T06:42:22.312-05:00Robert: "
Importantly, this is not just true...Robert: "<br />Importantly, this is not just true of estimates using micro data. For mant macro models, the intertemporal elasticity of consumption crudely estimated with macro data should be one. Those medels survived crude macro estimates that the parameter is o.1. The lesson was to not calculate the implied regression coefficient of consumption on r when claculating moments to confront with "stylised facts". This was vastly more dishonest than ignoring what microeconmetricians were doing."<br /><br />Could you please clarify this paragraph? There were enough typos that I couldn't follow it.Barry DeCiccohttps://www.blogger.com/profile/04735814736387033844noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-87146490354237374872012-03-05T06:25:59.393-05:002012-03-05T06:25:59.393-05:00Have macroeconomists completely missed complexity ...Have macroeconomists completely missed complexity theory? The whole field seems to assume that you can model the behaviour of the system by modelling its parts. Why should this be true?John Buttershttp://johnbutters.orgnoreply@blogger.comtag:blogger.com,1999:blog-17232051.post-18183979980363200102012-03-05T01:43:57.585-05:002012-03-05T01:43:57.585-05:00Thanks for the mention Noah. I think looking at th...Thanks for the mention Noah. I think looking at the behavior of the aggregates and looking at the behavior of the underlying micro units are both potentially very valuable, and can be combined synergistically. I get the impression, though, that some economists won't even consider studying and modeling the aggregates as a whole.<br /><br />I was also thinking that meteorology (and climatology) was a good example.Richard H. Serlinhttps://www.blogger.com/profile/09824966626830758801noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-24089910723226381952012-03-05T01:08:08.044-05:002012-03-05T01:08:08.044-05:00I think those who are looking for the appropriate ...I think those who are looking for the appropriate use of/analogy from thermodynamics should read Ian Wright's paper <a href="http://ideas.repec.org/a/zbw/ifweej/7604.html" rel="nofollow">Implicit Microfoundations for Macroeconomics</a> as a matter of urgency. "Implicit Microfoundations" are those generated by examining the constraints on agents rather than their context-free individual behaviour. And sorry Noah, the economy really <b>does</b> work like a gas :)Unknownhttps://www.blogger.com/profile/15062041737962225639noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-68150151688818668722012-03-04T21:34:37.260-05:002012-03-04T21:34:37.260-05:00there may be a need for some deep thinking about t...there may be a need for some deep thinking about these issues, but the margin is too narrow anyways...<br /><br />1. economics is very different from physics (as you note) in that standard concepts of causality are trickier in economics : if agents anticipate a certain event, their actions will occur before the event even though their actions may be caused by it. I think this is the basic cause of misunderstanding between economists and physicists (and others). Physicists don't understand our concern with microfoundations if they don't understand this simple thing: (some) economic agents look into the future and this makes mechanical models suspicious. <br /><br />2. There are circumstances where mechanical models work --- and by that I mean models without a forward-looking agent somewhere. Whenever expectations about the future are not terribly important. If the future is perceived as impossibly bleak (end of the world, we're all going to die with the Lehman brothers, etc.), then maybe mechanical models will do just fine, and your IS-LM model probably doesn't need to be terribly sophisticated to get the basics right about the effects of multiplier --- some rough number for the mpc is probably good enough.<br /><br />3. Another example where microfoundations may not matter very much is where the aggregation process nullifies it, as it were. For instance, if back in 2004 you were not buying American or Spanish houses, you'd have been wrong for 3 years, because millions of backward-looking buyers were irrationally extrapolating the present into the future. In this example, the correct microfoundations are (probably) 1 forward-looking agent for 9 backward-looking agents.<br /><br />4. Related examples, the effect of taxes on labor supply and saving: it's so difficult to predict future taxes that it's probably not worth trying, no wonder that Ricardian equivalence has no empirical basis. Who would have thought that an "audacity of hope" president would extend cowboy tax cuts for the rich? This is really a Knight-Keynes uncertainty situation I'm describing here. Your microfoundations would have to be incredibly smart to deal with this problem.<br /><br />5. Another example, off the top of my head, is where externalities are overwhelmingly strong. Krugman's stuff on the formation of cities is a good example where you don't need forward-looking agents to make a prediction, adaptive expectations do just as well, but you can have them in if you want, it's "robust."<br /><br />All this doesn't sound as smart as I thought it might ...pat tochehttps://www.blogger.com/profile/04888255529035603919noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-27085792314939067952012-03-04T14:17:04.192-05:002012-03-04T14:17:04.192-05:00A big thing is what you referred to a few posts ag...A big thing is what you referred to a few posts ago. If you're going to start out micro and aggregate up to a very complicated reality, then it's super hard to do without making extremely strong, simplifying, and unrealistic assumptions, and that's where the microfondations models can be very unrealistic and bad for understanding, predicting, and policy.<br /><br />This issue is in finance too. One of the biggest, and certainly loudest, critics of microfounded finance models is Robert Haugen. Haugen now runs an investment services firm, but he was previously a professor at UC Irvine, and is #17 on a list of finance's most prolific authors (http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1355675).<br /><br />Haugen's criticism is that the aggregate of very complicated, highly interacted, micro behavior can be better understood if you just observe the behavior of that aggregate, rather than trying to understand it, predict it, and make good policy from modeling micro unit behavior and then aggregating up.<br /><br />In finance, then, you can understand and model the behavior of financial asset markets just by looking at how those markets behave over time, and creating a model to fit that observed behavior. This will get you a much more accurate, realistic, and useful model, than if you make very simplifying assumptions about individual behavior and interaction so that it's tractable to aggregate up to the market as a whole.<br /><br />So in other words, a model of aggregates can be much more realistic and accurate in describing the behavior of those aggregates because you aren't forced to make extremely unrealistic simplifying assumptions about micro units in order to make aggregating them tractable.<br /><br />In Haugen's own words:<br /><br />Chaos aficionados sometimes use the example of smoke from a cigarette rising from an ashtray. The smoke rises in an orderly and predictable fashion in the first few inches. Then the individual particles, each unique, begin to interact. The interactions become important. Order turns to complexity. Complexity turns to chaotic turbulence... ("The New Finance", 2004, 3rd Edition, page 122)<br /><br />How then to understand and predict the behavior of an interactive system of traders and their agents?<br /><br />Not by taking a micro approach, where you focus on the behaviors of individual agents, assume uniformity in their behaviors, and mathematically calculate the collective outcome of these behaviors.<br /><br />Aggregation will take you nowhere.<br /><br />Instead take a macro approach. Observe the outcomes of the interaction – market-pricing behaviors. Search for tendencies after the dynamics of the interactions play themselves out.<br /><br />View, understand, and then predict the behavior of the macro environment, rather than attempting to go from assumptions about micro to predictions about macro... (page 123)<br /><br />For more on this see: http://richardhserlin.blogspot.com/2009/04/induction-deduction-and-model-is-only.htmlRichard H. Serlinhttps://www.blogger.com/profile/09824966626830758801noreply@blogger.com