Thursday, November 24, 2016

The Trouble with Macroeconomics

Good Old Pierre-Joseph Didn't Give Up

If you unfortunately missed this article and the surrounding controversy, AA has your back. 
Funny thing about the controversy Dr. Romer is not the first economist to criticize economics, though perhaps his naming and shaming of specific practitioners is what has the economists’ guild in an uproar. 
Here’s a link to his thought-provoking article “The Trouble with Macroeconomics”   and his bio . He was appointed this year to be the World Bank’s Chief Economist. 
His paper deals with the “identification problem” which is tech speak for determining that an equation or model is specified properly.  That is, that the major causal factors have been identified and their relative causative impacts properly determined.   If these factors have been properly “identified”, then the economist understands the underlying processes and can use model to predict the results of certain (policy) actions. 
Thus, the model is not only descriptive but also normative.   
Romer levies a savage critique against macroeconomics spiced with some positively delightful “digs”:
  1. comparison of certain macroeconomic “principles” to the long-abandoned theory of phlogiston
  2. a call out of “FWUTVs” (facts with unknown truth values) assumptions that are treated as facts without any proof-- particularly relevant in this post-truth age
  3. analogies to dogmatic beliefs or religions where theory “trumps” (I’m allowed to use that word) the truth
Well worth a read. 
Some quotes to whet your appetite.  Headings and boldface are AA’s. 
One quibble with Dr. Romer.  There’s always at least one quibble when AA is involved! 
Economics is not a science as that term is properly understood.  Complex systems cannot be reduced to descriptive much less predictive models because of the interplay of causes and the interplay of effects.  That means economics is more a “social science”. 

“For more than three decades, macroeconomics has gone backwards. The treatment of identification now is no more credible than in the early 1970s but escapes challenge because it is so much more opaque. Macroeconomic theorists dismiss mere facts by feigning an obtuse ignorance about such simple assertions as "tight monetary policy can cause a recession." Their models attribute fluctuations in aggregate variables to imaginary causal forces that are not influenced by the action that any person takes. A parallel with string theory from physics hints at a general failure mode of science that is triggered when respect for highly regarded leaders evolves into a deference to authority that displaces objective fact from its position as the ultimate determinant of scientific truth.”

Assume Your Way to Truth

“Relying on a micro-foundation lets an author can say, ‘Assume A, assume B, ... blah blah blah .... And so we have proven that P is true.’ Then the model is identified”

Comparison to the Theory of Phlogiston

“Once macroeconomists concluded that it was reasonable to invoke an imaginary forcing variables, they added more. The resulting menagerie, together with my 5 suggested names now includes:
  1. A general type of phlogiston that increases the quantity of consumption goods produced by given inputs  An "investment-specific" type of phlogiston that increases the quantity of capital goods produced by given inputs 
  2. A troll who makes random changes to the wages paid to all workers 
  3. A gremlin who makes random changes to the price of output 
  4. Aether, which increases the risk preference of investors 
  5. Caloric, which makes people want less leisure

With the possible exception of phlogiston, the modelers assumed that there is no way to directly measure these forces. Phlogiston can in measured by growth accounting, at least in principle. In practice, the calculated residual is very sensitive to mismeasurement of the utilization rate of inputs, so even in this case, direct measurements are frequently ignored.”

Seven Characteristics of String Theorists (Physics) and Comparison to Macroeconomists
  1. “Tremendous self-confidence
  2. An unusually monolithic community
  3. A sense of identification with the group akin to identification with a religious faith or political platform 
  4. A strong sense of the boundary between the group and other experts 
  5. A disregard for and disinterest in ideas, opinions, and work of experts who are not part of the group 
  6. A tendency to interpret evidence optimistically, to believe exaggerated or incomplete statements of results, and to disregard the possibility that the theory  might be wrong 
  7. A lack of appreciation for the extent to which a research program ought to involve risk
The conjecture suggested by the parallel is that developments in both string theory and post-real macroeconomics illustrate a general failure mode of a scientific field that relies on mathematical theory. The conditions for failure are present when a few talented researchers come to be respected for genuine contributions on the cutting edge of mathematical modeling. Admiration evolves into deference to these leaders. Deference leads to effort along the specific lines that the leaders recommend. Because guidance from authority can align the efforts of many researchers, conformity to the facts is no longer needed as a coordinating device. As a result, if facts disconfirm the officially sanctioned theoretical vision, they are subordinated. Eventually, evidence stops being relevant. Progress in the field is judged by the purity of its mathematical theories, as determined by the authorities.”

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