Some mainstream economists have recently attacked DSGE models. Olivier Blanchard says (pdf) there are “many reasons to dislike” them. And Paul Romer says (pdf) they’ve caused “intellectual regress” into a “post real” doctrine which attributes economic fluctuations to imaginary causes.
I want to ask a question which is implicit in Romer’s paper: is the problem here (assuming it be such) specifically with economists, or rather with academia in general?
I ask for three reasons.
First, macroeconomic analysis outside universities does not use DSGE models. Neither economic writers nor investment bank economists use them: they might often be wrong, but not I suspect because of this. And the role such models play in central banking is mixed. Yes, the Bank of England has one, but the Fed’s main model isn’t a DSGE one. And I’m not sure how far DSGE models influence policy-making. Month-to-month policy changes rely more upon judgement and interpretation of high-frequency data than pure modelling. And the main policy innovation of recent years – QE – didn’t emerge from DSGE thinking. As Ben Bernanke said, “The problem with QE is it works in practice, but it doesn’t work in theory.”
Secondly, Romer says there are “striking parallels” between what he calls “post-real macroeconomists” and string theorists in physics: groupthink and a tendency to interpret evidence optimistically. This suggests there might be a problem common to some academics rather than just economists.
Thirdly, whenever we see intelligent people doing things that look silly, we must ask the economists’ questions: what are the incentives and constraints here? Might it be that incentives in academia sometimes generate a bias towards the habits Romer deplores? For example, whilst peer review helps maintain high standards it might also encourage fashion and groupthink: methods and results that please referees are the way to get published. This generates an incentive to do what Kuhn called normal science rather than work that challenges the paradigm. And perhaps a little distance from the “real world” leads to excessive weight upon theoretical elegance and too much tolerance of reliance upon unobservables.
Now, I stress that I’m only posing a question here. I’m not rubbishing academic economics in general. For every Thomas Sargent or Robert Lucas there’s a Wendy Carlin and Simon Wren-Lewis. And as Noah has said, many fields of economics have become more empirical in recent years - though some doubt whether this will reap the hoped-for fruits. I’m merely asking a conventional question in economics: do incentives occasionally have perverse effects? As Jon Elster said, mechanisms are sometimes switched on and sometimes off.
Nor am I arguing that universities must change, except perhaps that they should, as Blanchard says, embody more cognitive diversity ; the idea of them becoming even more corporatized appalls me. Perhaps my point is just that all institutions are necessarily imperfect that that all professions are subject to their own biases, and that occasionally the two might combine to ill effect.