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Friday, July 8, 2016

Good Article By J.W. Mason

J.W. Mason has a good article on mainstream economic theory "I Don't See Any Method At All." The argument is that it is a mistake to assume that mainstream economic theory has anything to do with the economy of the real world. This article is quite brief; I may expand on my comments about "economics mathematics" later.

I like this description:
Economic theory is essentially closed formal system; it’s a historical accident that there is some overlap between its technical vocabulary and the language used to describe concrete economic phenomena. Economics the discipline is to the economy the sphere of social reality as chess theory is to medieval history: The statement, say, that “queens are most effective when supported by strong bishops” might be reasonable in both domains, but studying its application in the one case will not help at all in applying it in in the other. 
It should be noted that "mainstream economics" covers a wide area of research, and some of it is empirical in nature. That empirical work is a mixed bag; in some cases good, in others, obvious mistakes are made. The varying quality of the output might be understood as the result of the fact that there is no useful theory guiding how to apply statistical techniques; if you apply statistical tests at random to randomly chosen sets of data, you cannot expect consistent quality of results.

However, J.W. Mason is more generous than I am with regards to the quality of the analysis of the closed formal systems within mainstream economics.

I ask:
  • How is possible that mainstream economists cannot trivially determine whether raising the interest rate raises or lowers the rate of inflation (the "neo-Ricardian debate")? I have never seen control system engineers debating the effect of changing a control input; they would look at a model output.
  • Since representative household optimisations were supposed to be taken over all trajectories (a global optimum), how is possible that the "zero lower bound" effect was only "discovered" by creating new models to capture this effect?
  • How is it possible that a mathematical theory that says that the price level is completely determined by fiscal policy (the Fiscal Theory of the Price Level) can coexist with the rest of DSGE macro, which says that central bank policy determines everything? After all, it should be possible to prove one wrong.
(Before any one complains, those are rhetorical questions. I know what the standard excuses responses to those questions are; however, they are to use the technical mathematics term, "lame." I am not interested in writing a 3000 word article on the topic right now.)

In any event, using J.W. Mason's analogy, I am interested in medieval history, not chess theory. There is no point studying a formal theory that is set down in largely unintelligible fashion (if not mathematically incoherent), if it tells us nothing about the real world. This explains why I have given up looking at DSGE macro results.

(c) Brian Romanchuk 2016


  1. Thanks Brian. You are right about that there is a lot of empirical work which is not all good (by any means) but at least is studying observable reality. The real problem is with the core theoretical part of the discipline.

    Your third example is a good one.

    1. Thanks.

      The "explanation" about the first example would be very hard to explain to someone unfamiliar with the literature ("you see, the central bank does not set the rate of interest, it sets a reaction function"), but anyone who objects about the third one (the Fiscal Theory of the Price Level, or FTPL) would have to go explain to John Cochrane how he is wrong about the mathematics. (Unless he recanted his heresy...)

      I know that Woodford tried dealing with the FTPL, but I do not remember finding his explanation particularly convincing. However, not a topic I want to waste any more time on.


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