I realized long ago that I'm much more interested in the philosophy-of-science issues of macroeconomics than in the subject matter itself! So when John Cochrane came back from the NBER Summer Institute with a big post about the latest trends in macro methods, I was understandably excited. I don't have a heck of a lot to add, but here are the highlights:
Math as Storytelling
Back in 1991, Larry Summers complained that macro models create the illusion of science-y-ness by pretending that the parameters in their model represented real things instead of stylized allegories. In 2010, Ricardo Caballero argued something similar, saying that the crisis had exposed the faults of the overly-precise "fully-specified DSGE" approach.
The argument is really not about the content of models - it's about the use of math itself. One way to use math is the way physicists and chemists use it - to make quantitative predictions of stuff. The other, less ambitious, way is to use math to be precise about your ideas, to check your logic, and to explain your ideas in a universal language. The latter way isn't bad; what's bad is when you mistake the latter for the former, and take your models "too seriously."
The crisis and recession seemed like it should have told macroeconomists that they were taking their models a bit too seriously. And in fact, that seems like exactly what has happened. Cochrane:
Most of the theory papers had some "motivating" facts...Not one paper wrote down a model, estimated or calibrated its parameters, and compared that model to data...This isn't a complaint, really, it's just where we are. The kinds of things people want to investigate are just too hard to write down models rich enough to take to the data...
[B]oth of the macro theory papers stopped well short of serious confrontation with data. We didn't see anything like the standard fully specified models...compared to, say, impulse-response functions. The models are so stylized you can't begin to quantify them...This too is not really a criticism. I've been working with simpler and simpler models, as I find it hard to keep the intuition and quantitative parable aspect alive as models get more complex.So mainstream macro people seem to have converged on the Caballero idea. This also provides yet more evidence that modern mainstream macroeconomics is very much alive and kicking as a research program.
More stylized models doesn't necessarily mean simpler models, though:
Sam [Kortum] gently chided Ufuk et al. for presenting 24 pages of complex model all to "motivate" some regressions.It will be interesting to see whether the move toward stylization will be followed by a move toward simplicity in model-making. Maybe macroeconomists, groping for big ideas to explain the unprecedented events we've just seen, will go back to telling the kind of simple stories that Milton Friedman used. Or maybe even "24 pages of complex model" is so simple compared to the real thing it's trying to model that to make it even simpler would lose too much of the logic.
Growth vs. Business Cycle Theory
The idea that growth and development econ were two completely different fields always struck me as a little weird. I mean, sure, maaaaaaybe you could use an endogenous-growth model to tease a couple extra bips of growth out of a mature economy for a few years, if you had enough data to really find the best endogenous-growth model, which (let's be honest) you don't. Endogenous growth theory is very kewl and interesting, but it just doesn't seem that important relative to development econ, which deals with the monumental challenge of boosting poor countries to middle-income level. (Robert Lucas seems to agree.)
I don't follow growth theory much, but according to Cochrane, the top growth people are indeed becoming more interested in development issues, and adopting the methods more commonly associated with development econ:
Economic Fluctuations merged with Growth in the mid 1990s. At the time there was a great confluence of method as well as interest. Growth theorists were studying growth with Bellman equations, dynamic general equilibrium models of innovation and transmission of ideas, thinking about where productivity shocks came from...
That confluence has now diverged. I enjoyed spending an hour or two thinking about how religion has blocked or adapted to ideas over the centuries, and Paul [Romer]'s view on social norms or neuroeconomics. But I don't really have any expertise to contribute to that debate...[W]hen Daron Acemoglu, who seems to know everything about everything, has to preface his comments on macro papers with repeated disclaimers of lack of expertise, it's clear that the two fields really have gone their separate ways. Perhaps it's time [for] growth to merge with institutions and political or social economics.Cool. Though this may not sit well with Japanese macro people, a lot more of whom do growth econ rather than business-cycle theory.
Verbal Arguments and the Wisdom of the Ancients
Probably the most striking sentence in Cochrane's post was the following:
In my 30 years as an economist, our field has become much more literary and less quantitative.That's interesting. I had thought it was the opposite. Was there a U-shaped pattern, where things became more quantitative leading up to the mid-80s, and then trended back toward literary-ness?
In times of uncertainty, we humans have a natural tendency to reach for the wisdom of the ancients. Cochrane isn't such a fan of this, but recognizes that he may be swimming against the tide:
The use of ancient quotations came up several times. I complained a bit about Eggertsson and Mehrotra's long efforts to tie their work to quotes from verbal speculations of Keynes, Alvin Hansen, Paul Krugman and Larry Summers. Their rhetorical device is, "aha, these equations finally explain what some sage of 80 years ago or Important Person today really meant." Ivan Werning really complained about this in Paul Beaudry's presentation. What does this complex piece of well worked out "21st century economics" have to do with long ago muddy debates between Keynes and Hayek? It stands on its own, or it doesn't...
Physics does not write papers about "the Newton-Aristotle debate." Our papers should stand on their own too. They are right or wrong if they are logically coherent and describe the data, not if they fulfill the vague speculations of some sage, dead or alive...
Sure, history of thought is important; tying ideas to their historical predecessors is important; recognizing the centuries of thinking on money and business cycles is important. But let's stand up for our own generation; we do not exist simply to finally put equations in the mouths of ancient economists.
But...perhaps I'm just being an old fogey. Adam Smith wrote mostly words. Marx like Keynes wrote big complicated books that people spent a century writing about "this is what they really meant." Maybe models are at best quantitative parables. Maybe economics is destined to return to this kind of literary philosophy, not quantified science.My instincts are with Cochrane on this issue. There is nothing more annoying than when you argue with some idea, and then some guy comes along and says "Go read Ludwig von Mises, then you'll understand everything." No you won't. You'll just get a warm glow of understand-y-ness, and you'll end up parroting words and phrases from the Old Master without being any better able to think critically and originally about the issues.
Then again, a lot of those old folks were really smart, and there are probably insights embedded in their writings that are too vague or complex to be translated directly into math, but which contain information, the way the priors of a portfolio manager carry valuable information in a Black-Litterman model. But the flip side of that is that you probably have to be a really, really smart person to extract that deep-buried insight. Economic history, in other words, seems like very dangerous sauce to me - in the right hands it can be useful, but it is usually in the wrong hands.
But that's just my thought. I feel like I may annoy Brad DeLong with this thought...
The Upshot: Halfway Back to the Drawing Board
So from what Cochrane saw at the NBER macro meeting, the field is becoming more literary, more stylized in its modeling, and more eclectic in its approach. To me, these all seem like manifestations of one single, underlying process: Macroeconomists are going back to the drawing board in the wake of the crisis and the recession. Not all the way back, but part of the way back. They are searching for new ideas, by making their models more conjectural and conceptual, by bringing in a mix of techniques and "out-there" ideas, and by picking through ideas from the past.
It seems to me that this is exactly what good scientists do. If you are one of the people who thinks that macroeconomics is utterly compromised by dogma, politics, or non-scientific thinking, Cochrane's report should cause you to update your priors somewhat.
One More Thought: The Impact of Blogs
I suspect that blogs have played a largely helpful, though marginal role in the evolution of macro since the crisis - encouraging macro people to realize that something big was broken and needed fixing, tossing around ideas and brainstorming, etc. But I've come to think that blogs have also injected too much contentiousness and aggression into the discussion. For example, Cochrane writes:
[Paul Romer] pointed to my use of "paleo-Keynesian" to describe the static models from the 1960s, guessing nobody would remember anything else from my discussion. When I complained that Paul Krugman invented the term, he pointed out (correctly) that such borrowing just made its use more rhetorically effective. There go the cortisol levels.When I started blogging a few years ago, I took a very confrontational and sometimes even insulting tone. That was because I thought A) this is the internet, B) everything on the internet is a joke, and C) everyone gets that it's a joke. I guess I had spent too much time in the bowels of the net. I always meant it as a joke, and I never imagined that top academic people would read, much less care about, my blog.
Turns out I was naive. Over time, fellow bloggers like Tyler Cowen and Adam Ozimek convinced me that more civility was needed, so I try to confine my chain-yanking to those who are more used to getting their chains yanked. Academics need to be able to think clearly and objectively, without their cortisol levels being spiked.
Basically, in the wake of the crisis, blogs have fulfilled the same role as the verbal debates between Keynes, Hayek, Sraffa, Robinson, etc. during the Depression. But like those debates, it has generated its fair share of acrimony.