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January 10, 2012

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 Luis Enrique

hang about - don't mainstream models show Lucas and Cochrane are wrong? I'm sure Krugman would tell you they've gone wrong because they are relying on "common sense" rather than a model.

 Luis Enrique

oh and great to see a UK academic macroeconomist of his stature blogging

chris

Yes - mainstream models do say L and C are wrong. But this is only because they contain the consumption smoothing mechanism. You don't need loads of equations to show they're wrong - just that one point.
And mechanisms are NOT necessarily common sense. Some (eg perverse incentives, selection effects, self-refuting beliefs etc)are non-commonsensical.

 Luis Enrique

OK. It occurs to me that a common criticism of mainstream economic modelling is that it typically shuts down (simplifies away) many aspects of reality in order to focus on a single mechanism, which is the subject of the model (paper). Perhaps the problem in doing so is that this necessarily creates a modelled environment in which the mechanism is operable, thereby pushing aside exploration of conditions under which it may not be?

[I didn't (mean to) equate mechanisms with common sense]

gappy

The premise of your post ("how can very clever people make silly errors?") is plainly incorrect. Very clever people make silly error all the time of course, but ascribing one to Lucas shows *your* ideological bias, if anything.

I say this because Simon Wren-Lewis' dismissal of Lucas argument is very cursory, and just instrumental to his main point: that his argument is motivated by ideology. Things are not that simple, however, and the superficiality of his counterargument shoudl have raised a red flag. Lucas' statement was heavily debated and if you read other comments on the web by many other economists, at the very least you have to concede that Lucas' argument is not as trivially wrong as Wren-Lewis' makes it to be; and it's not primarily one of Ricardian equivalence as Krugman read it.

I am not into credentialism, but Lucas started thinking about these problems in the early 60s, and this is his very research area. He is aware (and has quoted) literature different from his. To dismiss his argument simply by pointing out to smoothing effects is presumptuous.

There is no doubt he has his biases. The interesting questions are whether a) his theoretical framework is at least consistent, b) it has higher predictive power than the alternatives.

There is another statement that is very, very wrong in your post: "But lots of brilliant economists don’t think merely in terms of mechanisms but rather build impressive models."

I say this is wrong because if you were well-acquainted in at least *some* area of economic theory, you would have written: "Mediocre economists build [seemingly] impressive models, which quickly fall into obscurity. Brilliant economists build models that have a strong interpretability and use the required toolkit". Otherwise stated, great economists are not obsessed with technique, but with meaning. Occasional readers get stuck on the technical details, and think the authors must have been too.

Talk about bias.

Nick Rowe

Good post Chris.

Keith

Your readers might want to read the lengthy criticism of Cochranes opposition to fiscal stimulus by Prof Bradford Delong at UC Berkeley. Which is a dismissal of a "Nobel winner" as talking nonsense. Not that Nobel actually created a prize in economics. But the dismissal is based on textual examination of published interviews. Enjoy!!

BenP

"The interesting questions are whether a) his theoretical framework is at least consistent, b) it has higher predictive power than the alternatives"

Neo-classical can be consistent (with some 'calibration') but the assumptions required are laughable.

Also if you knew Lucas's work you would know crisis is unpredictable within his model.

Neo-classical economics is ideology, Capitalism failed and had to be bailed out.

Keith

Well BenP you could argue that deregulated finance capitalism has gone tits up as it has often before; but the regulated welfare state form has been quite successful compared to Soviet style communism and un regulated greed is good capitalism. The thing that is odd is how there has been a huge ideological move away from the successful humanistic form of Capitalism towards versions that are both less humane and less successful in purely economic terms. As Prof Krugman points out economic growth has declined as social democratic institutions are weakened. Which also seems to go along with the rise of various odious reactionary ideas and unpleasant political movements. Nothing succeeds like failure.

John West

Chris - an interesting post. It led me to wonder whether you'd come across Prof. Emanuel Derman's book 'Models Behaving Badly', which covers similar ground. I found a WSJ review (they, rather unsurprisingly, think Derman's too harsh on the Efficient Market Model).

Of more interest is this podcast where he's interviewed on what he means by models behaving badly. A former physicist, he says metaphors work well in science and economics/finance but that models act like physical laws - except the 'science' of these laws is based on constantly shifting human behaviour and are consequently doomed to failure.

http://www.scienceofbetter.org/podcast/derman.html

rjw

very interesting post Chris

Models and mechanisms are not really complete alternatives, of course - it's just that (as Luis above highlights) formal economic models are generally "thin" in the sense that they typically focus on a quite limited number of mechanisms, and that users of the models are sometimes not predisposed - either politically or methodologically- to continually ask themselves whether their models actually capture the relevant mechanisms in particular cases.

Lucas, of course, is a good example of why economists should read more philosophy of science. I distinctly recall reading as an undergraduate something he wrote in which he claimed that any model not based on rational optimising inidividual agents could not possibly be "scientific". It was a valuable thing to read. It taught me that very smart people sometimes have ideological (or cognitive) blinkers on that are so enormous, they end up saying incredibly stupid things. A lesson I've never forgotten.

BenP

"As Prof Krugman points out economic growth has declined as social democratic institutions are weakened"

But you recognise this is the wrong way round?

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