tag:blogger.com,1999:blog-17232051.post4045270503822645139..comments2024-03-28T03:16:14.104-04:00Comments on Noahpinion: How macro answered its criticsNoah Smithhttp://www.blogger.com/profile/09093917601641588575noreply@blogger.comBlogger104125tag:blogger.com,1999:blog-17232051.post-77235940193814594202014-03-14T10:39:19.539-04:002014-03-14T10:39:19.539-04:00You might believe it, but it isn't going to ha...You might believe it, but it isn't going to happen (oooh, violation of rational expectations!); what is going to happen if that search models with individualized transactions will be integrated into the models (Lagos-Wright or Burdett-Judd). That isn't ABM, which is fundamentally about stupid agents doing stupid things.<br /><br />I can see why you spend your time posting on Noah's sad little website -- you aren't capable of doing anything useful.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-17232051.post-31782140650582786582014-03-14T10:32:15.911-04:002014-03-14T10:32:15.911-04:00Rational expectations =/= expected utility. If yo...Rational expectations =/= expected utility. If you're going to speak in public, then you should at least be aware of work that is nearly 40 years old at this point. So many stupid people visit this site, but I suppose it isn't surprising given the stupidity of the producer.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-17232051.post-68642832700993109962014-03-14T09:41:10.035-04:002014-03-14T09:41:10.035-04:00Noah Smith9:46 AM
"Who do you think are the ...Noah Smith9:46 AM<br /><br />"Who do you think are the "powerful entrenched interests"? The Fed? Who else supports macro research?"<br /><br />Wall St and the Mega Corps are pulling in sky-high profits; the rest of us are in hard times. They like it.Barry DeCiccohttps://www.blogger.com/profile/04735814736387033844noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-23963306212507535242014-03-14T08:41:53.409-04:002014-03-14T08:41:53.409-04:00Noah Smith8:16 AM
"Well, compare it to strin...Noah Smith8:16 AM<br /><br />"Well, compare it to string theory...or postmodern literary critical theory... ;-)"<br /><br />Forgive me for my ignorance, but how much of applied physics and engineering is based on string theory? I believe that no matter how many good minds it sucks in, we are not basing public policy on string theory. <br /><br />And that's really important.Barry DeCiccohttps://www.blogger.com/profile/04735814736387033844noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-28255130661273376442014-03-14T08:40:26.541-04:002014-03-14T08:40:26.541-04:00"In 2011, a lot of the people who supposedly ..."In 2011, a lot of the people who supposedly got 2008 were predicting another crisis - a wave of government defaults, followed by hyperinflation. Didn't happen."<br /><br />I'd like to know who got 2008 right (in advance), and who also predicted 'a wave of government defaults, followed by hyperinflation'.<br /><br />From my casual recollection, reality was the opposite - it was a pack of right-wing economists who predicted the latter, usually year after year for several years (if they've stopped - have they?).Barry DeCiccohttps://www.blogger.com/profile/04735814736387033844noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-27426593906858141202014-03-14T08:38:11.079-04:002014-03-14T08:38:11.079-04:00And Noah, it's not 'predict the crisis'...And Noah, it's not 'predict the crisis', in the sense of 'in the year XX, company YY will fail due to an increase in ZZ of item ZZZZZ'; although right-wing macro guys like to say that that's the critique.<br /><br />Their failure (and this is shared across the macro spectrum) was that they deregulated the financial industry, when history documented very strongly its crisis-prone nature. If you destabilize the ship, one might not know the exact timing of the wave which capsizes it, but it is prone to capsizing.<br /><br />And your comment about macro not having banking and the financial industry in it makes it worse; it's like destabilizing a ship when you have deliberately factored out key parts of the ship from your models.<br /><br />And in addition, if macro did not have those factors in their model, this supports the idea that modern macro (main on the right) ignores data.<br />Krugman was citing Tobin's work from the 1960's; where does one see that in the RBC literature from the 90's and (pre-Crash) 2000's?Barry DeCiccohttps://www.blogger.com/profile/04735814736387033844noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-7417349330930719012014-03-13T21:29:15.697-04:002014-03-13T21:29:15.697-04:00Noah: "This one never really seemed to stick...Noah: "This one never really seemed to stick in the first place. First of all, precious few people predicted the crisis, and a number of those that did have tended to be the type of people who predict crises every week. In 2011, a lot of the people who supposedly got 2008 were predicting another crisis - a wave of government defaults, followed by hyperinflation. Didn't happen. Meanwhile, people remembered that there are things out there that are just really hard to predict, like earthquakes.<br /><br />And also, it's not like macroeconomics betrayed the people's confidence in this regard. I don't think many people inside or outside of the profession thought in 2007 that macro was able to predict recessions, financial crises, etc."<br /><br />The charge is that their 'reforms' destabilized the financial system, in ways well known from history. That charge is true. Predicting the exact *date* on which a major crisis started was the issue.<br /><br />Macro is pulling a strawman fallacy here.Barry DeCiccohttps://www.blogger.com/profile/04735814736387033844noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-9752389263887592762014-03-13T13:11:51.737-04:002014-03-13T13:11:51.737-04:00Noah, you seem a bit willfully blind here, because...Noah, you seem a bit willfully blind here, because in fact a damned goodly number of people -- all economists in the holistic sense -- largely and confidently predicted the crisis, not least in the shorting industry, where a minority made an absolute KILLING. (And you like to mark to market that way, so you should note this.)<br /><br />So the question is, and I think something like this is what Dean Baker is saying, is that macro is a toolset, but the tools are used in a sociopolitical context, and that context is what drives the distribution of prediction and opinion. Clearly, macro as a whole did not anticipate the crisis, but the fact that some people using macro toolsets did indicates that the cause of the misdistribution lies elsewhere, yes?ralphnoreply@blogger.comtag:blogger.com,1999:blog-17232051.post-70546594480167586242014-03-12T04:49:05.260-04:002014-03-12T04:49:05.260-04:00Noah - also (as I just noticed) the fact that the ...Noah - also (as I just noticed) the fact that the USD increased after the crisis is a result of the problem that caused the problem. The US is not vulnerable to hot money flows because all its debts are in its own currency (it is countries that borrow in foreign currencies that are deep water if the currency devalues). The problem is that the trade deficit was both huge and persistant, and the currency markets were not responding appropriately (i.e. making US exports cheaper and imports more expensive). In Europe the EUR had the same effect and creating and sustaining huge balance of trade imbalances.<br /><br />I admit Japan is different (and I wish I understand why). The trade surplus means that money was flowing into Japan - which should have pushed up the Yen and reversed the trade surplus. Instead the surplus remained and all that extra purchasing power went into a mega land bubble instead of imports (as it would in almost any other country). Noah it is Japan that is different, rather than the example.reasonhttps://www.blogger.com/profile/10958786975015285323noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-65049325574335948882014-03-12T04:38:57.915-04:002014-03-12T04:38:57.915-04:00Noah - the European countries worst affected by th...Noah - the European countries worst affected by the crisis are all deficit countries. Look Noah - I agree Japan is an exception - but remember that before the financial crash Tokyo had the most expensive land in the world. The thing is that a deficit means (in general) that wealth is flowing out of the country, and depending how that is distributed that probably means that debt/income ratios are increasing substantially somewhere. And that means that there is a potential sustainability issue. <br /><br />When I was reading about the approaching storm, the people who were worried were looking at balance sheets, the people who weren't were looking just at flow statistics. It is like draining a dam - eventually it will be empty (saying when is difficult because the flows into the dam are stochastic). Sure it is possible for the flows to reverse and everything to be dandy - but there was no obvious way for that to happen.reasonhttps://www.blogger.com/profile/10958786975015285323noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-68910397294301299892014-03-11T18:32:41.865-04:002014-03-11T18:32:41.865-04:00I don't think the trade deficit made a crash m...I don't think the trade deficit made a crash more likely. Japan had a trade surplus in the 80s but crashed all the same. We had a trade deficit in the 80s and 90s but our crashes were minor during that time. And after the 2008 crisis, the dollar rose rather than fell; very different than the standard narrative of a country with a trade deficit that experiences a sudden capital outflow.<br /><br />So I'd reexamine that basic assumption...Noah Smithhttps://www.blogger.com/profile/09093917601641588575noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-52318109830721657842014-03-11T18:15:33.641-04:002014-03-11T18:15:33.641-04:00P.S. After reading Dean and others (including the ...P.S. After reading Dean and others (including the economics team at Morgan Stanley, where I was working at the time), I sent an email around to friends warning them that a crash was coming (this I think was in 2006 or 2007). Dean was not alone in seeing the problems (the most obvious of which was the massive sustained US trade deficit and the massive increase in household sector debt).<br /><br />What was impressive, was that the warnings were coming from both conservatives and progressives.reasonhttps://www.blogger.com/profile/10958786975015285323noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-24749600456521041362014-03-11T15:45:56.976-04:002014-03-11T15:45:56.976-04:00Noah - you need to think more about how peer-revie...Noah - you need to think more about how peer-review breaks down. Many of the criticisms you cite as answered all boil down to the same thing in practicality. There's a stranglehold on the big journals by particular schools of thought and nothing that doesn't fit gets published. Those schools of thought tend to be funded by outside interests.<br /><br />Economics is uniquely vulnerable in this way because it take a scientific view of peer review - "data will shift the paradigms" - but in reality we just haven't solidified (and some would argue that since it's a complex human system, we can't) the theory of the discipline enough to use data in this way. Natural experiments are better than nothing, but even those invariable are filled with external influences. So data never overturns the paradigm and the interests can keep their lock hold of the journals.Metatonehttp://eurotrib.comnoreply@blogger.comtag:blogger.com,1999:blog-17232051.post-40529453058746968522014-03-11T05:37:05.946-04:002014-03-11T05:37:05.946-04:00If rational expectations are based on Expected Uti...If rational expectations are based on Expected Utility (as it is....) then rational expectations has been refuted a hundred-fold. There is a vast literature on this (c.f. Allais paradox, Ellsberg Paradox etc.).<br /> Finding rational expectations in "simple situations" is a useless test of rational expectations. It is too easy a test to pass. Being a bit of a Popperian I would argue that one should test Rational Expectations *severely*- in complex situations. (I would, incidentally say the same for some "market experiments" that find market equilibrium in a situation where it is virtually impossible to avoid).Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-17232051.post-24161670872309875812014-03-10T22:01:01.883-04:002014-03-10T22:01:01.883-04:00I truly believe that dsge models will eventually b...I truly believe that dsge models will eventually be replaced by agent-based computational models. As computation becomes exponentially cheaper it becomes easier and easier to model the real world without the assumptions required of any general equilibrium model. Genetic algorithms (or alternatives) allow agent preferences to update in a more realistic way. Emergent phenomena caused by non-rational thinking can be better examined to discern macro fluctuations. <br /><br />One of the more interesting lines of study in ACE is the idea of norms and how culture affects rational expectations. The basis is that people have limited ability to ascertain optimal reactions so as to update expectations. Instead, they use societal norms as a simple heuristic and save the necessary brain power by adopting the strategies of others who have already confronted the situation. <br /><br />Many assumptions in macro models have held up OK in some ACE models. Things like the permanent income hypothesis is a fairly good rule of thumb in many situations with the caveat that it works better if the agents have a variable time horizon over which they optimize.<br /><br />As a younger more computer savvy generation takes over Macro I think we will see economic forecasts more akin to weather forecasts.<br /><br />Of course, true long term forecasts will be beyond the ability of any amount of computation nor will the theories developed necessarily be elegant or easy to communicate to a lay audience.Unknownhttps://www.blogger.com/profile/13305124836711242805noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-8464701414884490402014-03-10T12:05:02.329-04:002014-03-10T12:05:02.329-04:00Repeat after me: Realism is not the objective, und...<i>Repeat after me: Realism is not the objective, understanding an otherwise complex world is.</i><br /><br />I feel like that's not going to make a good catchy saying, even if repeated.Noah Smithhttps://www.blogger.com/profile/09093917601641588575noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-66645627361220907112014-03-10T12:04:16.983-04:002014-03-10T12:04:16.983-04:00That's just how it played out.That's just how it played out.Noah Smithhttps://www.blogger.com/profile/09093917601641588575noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-29981264958799627952014-03-10T12:00:12.769-04:002014-03-10T12:00:12.769-04:00An interesting piece as always, but one inevitably...An interesting piece as always, but one inevitably that would spark off disagreement.<br /><br />I think this comment:<br /><br />"Nor is the world losing interest in macro - it remains the single biggest, most glamorous, and most popular field of economics, and the biggest destination for top job market candidates."<br /><br />I wonder whether that is a good thing. If it is a way into Goldman Sachs it probably isn't a good gage of its social value. If it is because people feel that it is contributing to our knowledge about how to reduce poverty and unemployment, sure.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-17232051.post-4369506349524322722014-03-10T05:49:43.601-04:002014-03-10T05:49:43.601-04:00Noah - not predicting the crisis is a bit odd here...Noah - not predicting the crisis is a bit odd here. The exact timing of the crisis was always difficult to forsee, but that one was coming was easy to see (just look at total endebtedness compared to realistic expected growth - particularly in median incomes). But models were not even pointing at potential fragility (perhaps because they are not actually built to measure risk - despite calling themselves "stochastic").<br /><br />reasonhttps://www.blogger.com/profile/10958786975015285323noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-24067338111565167042014-03-10T01:34:49.535-04:002014-03-10T01:34:49.535-04:00I am not sure what equilibrium has to do with this...I am not sure what equilibrium has to do with this. The economy can still be in equilibrium during a crisis, just not a good one. See, for example, Roger Farmer's work. CAnoreply@blogger.comtag:blogger.com,1999:blog-17232051.post-17602331195848557462014-03-10T01:31:10.208-04:002014-03-10T01:31:10.208-04:00Repeat after me: Realism is not the objective, und...Repeat after me: Realism is not the objective, understanding an otherwise complex world is. What is it that you learn if you have 30 degrees of heterogeneity than 3? What about 300? Is the increased complexity worth it? This is the right question to ask.<br /><br />So what are you proposing? To have 300 million different agents? Different in how many dimensions (risk aversion, patience, age, cognitive skills,...)? Good luck with that! Or, since we cannot model 300 million people different in many more than one ways than one, should we give all of them up and study aggregate relationships without reference to human behavior? Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-17232051.post-51383285162538163632014-03-10T01:20:56.814-04:002014-03-10T01:20:56.814-04:00"The dominance of libertarian policy proposal..."The dominance of libertarian policy proposals in part comes from a vast body of economics in which the role of the state and public works is purely as cost - supposedly because the math is too hard otherwise"<br /><br />Like, which ones? Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-17232051.post-34411371579014313632014-03-09T22:28:31.031-04:002014-03-09T22:28:31.031-04:00Does the Lucas Critique really say "any micro...Does the Lucas Critique really say "any microfoundations are better than none" or is that just how it played out?Alphonsehttps://www.blogger.com/profile/02441923856941011283noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-84564055556264236182014-03-09T18:03:44.513-04:002014-03-09T18:03:44.513-04:00Part 2
John Maynard Keynes would also not have ap...Part 2<br /><br />John Maynard Keynes would also not have approved his ideas being subsumed into general equilibrium theory, particularly insofar that it would have to conform with classical micro-foundations:<br /><br />"Perhaps the reader feels that this general, philosophical disquisition on the behaviour of mankind is somewhat remote from the economic theory under discussion. But I think not. Though this is how we behave in the market place, the theory we devise in the study of how we behave in the market place should not itself submit to market-place idols. I accuse the classical economic theory of being itself one of these pretty, polite techniques which tries to deal with the present by abstracting from the fact that we know very little about the future" (Keynes, QJE 1937, p 215).<br /><br />Classical Economics arose in a certain place and time for a reason. It arose in Britain as the first country to industrialise. Its new middle class needed soft power (check precise meaning) in addition to gunboat diplomacy to subsume foreign markets (hence comparative advantage theory) and challenge existing power arrangements and the distribution of resources (hence market efficiency theory) until then monopolised by the aristocracy. The US also had to win a battle of ideas during the Cold War. These are some of the possible explanations for why we get certain hegemonies, by beginning to understand these things we can properly understand why we do things the way we do, why things have come to mean what they mean. By being open to such questioning the discipline will be on a sounder footing. <br />Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-17232051.post-65248586963124184302014-03-09T18:00:11.303-04:002014-03-09T18:00:11.303-04:00What do you mean by "subjectivity", and ...What do you mean by "subjectivity", and what do you mean by "real understanding"?<br /><br />Epistemology and Ontology (Part 1).<br />These areas have revolutionised other social sciences. Take a political scientist or a 101 student of international relations or anthropology and they would know what these terms mean. <br />They are important for demolishing intellectual hegemonies. What you have written would be unacceptable in many other disciplines, even if it might be considered very astute to an economist. Intellectual hegemonies are dangerous, because of the reasons commentators above have identified: they marginalise other viewpoints and lines of enquiry, ultimately stifling creativity and innovation and consolidate existing power arrangements. Your definition of “irrational” reflects by association a view of “rational” which has come to monopolise the meaning of the word. The dominance of DSGE and classical micro-foundations in economics is arguably an example of such an intellectual hegemony. You dismantle these hegemonies by asking questions.<br />How do these intellectual hegemonies arise? One explanation links it to international capitalism: <br />“The bourgeoisie has through its exploitation of the world market given a cosmopolitan character to production and consumption in every country. To the great chagrin of Reactionists, it has drawn from under the feet of industry the national ground on which it stood. All old-established national industries have been destroyed or are daily being destroyed. They are dislodged by new industries, whose introduction becomes a life and death question for all civilised nations, by industries that no longer work up indigenous raw material, but raw material drawn from the remotest zones; industries whose products are consumed, not only at home, but in every quarter of the globe. In place of the old wants, satisfied by the production of the country, we find new wants, requiring for their satisfaction the products of distant lands and climes. In place of the old local and national seclusion and self-sufficiency, we have intercourse in every direction, universal inter-dependence of nations. And as in material, so also in intellectual production. The intellectual creations of individual nations become common property. National one-sidedness and narrow-mindedness become more and more impossible, and from the numerous national and local literatures, there arises a world literature (Karl Marx 1872).<br />There are other explanations. A Realist explanation, which is probably a political science theory probably most closely linked with the dominant paradigm associated with rational choice theory in economics, would explain the world wide use of DSGE, for example, as basically the good weeding out the bad. But anyway the important thing is the questions. Then we can get real critical reasoning and understanding. We can, however, do without mathematical formalisation (another word that has been appropriated – would you call the General Theory or Plato’s Republic informal?) – if the goalposts are set to a gospel of contestable and political foundations. How did key concepts become to imply what they do and by association have implications for what they are not. Are they marginalising non-DSGE based forms of enquiry? <br />Anonymousnoreply@blogger.com