Winner of the New Statesman SPERI Prize in Political Economy 2016

Friday, 25 April 2014

Retiring macroeconomic theory

Dear Professor Diamond

Thank you for sending your paper ‘National Debt in a Neoclassical Growth Model’ to the American Economic Review. The paper has now been read by two referees, and I’m afraid the news is not good.

Referee A raises a fundamental objection. Your model has a two period structure, where agents work in the first period but do not work in the second. This assumption is simply stated in one paragraph on your page 2, but is not justified in any way. In that sense it appears entirely ad hoc. Furthermore, as referee A stresses, it appears to contradict (is internally inconsistent with) another fundamental part of you model, which is that agents attempt to smooth consumption over time. The referee is quite happy with that assumption, as it clearly comes from standard postulates about the utility of the consumption of goods. Yet why should these postulates not also apply to the consumption of leisure? As the referee points out, if agents tried to smooth leisure in the same way as they smoothed consumption, there would not be any ‘retirement’. As this concern strikes at the heart of your model, it is troubling.

Referee B raised rather different issues. They pointed out that the model implies a constant interest rate that is only a function of the population growth rate. The model therefore makes a clear prediction, but as the referee points out interest rates have fallen in this country over the last two decades, without any matching declines in the population growth rate. So the model has been clearly falsified by events, and therefore cannot be the basis of any meaningful discussion of the impact of national debt. The referee is also concerned that you failed to locate your analysis within an ontological discussion of the open rather than closed nature of the social realm, which makes your deductivist and formalist reasoning about socially constructed variables problematic, to say the least.

I am therefore very sorry to inform you that we will be unable to publish your paper. Referee A did make a number of helpful suggestions about how ‘retirement’ could be microfounded, and I am sure you will find the extensive reading list referee B provided on economic methodology helpful in any future work. 

My apologies to Nick Rowe, whose post gave me the idea. I actually think asking the question why we have retirement is revealing, but writing the above was easier than attempting an answer. (And I also think economic methodology is important!)  


  1. "The referee is also concerned that you failed to locate your analysis within an ontological discussion of the open rather than closed nature of the social realm, which makes your deductivist and formalist reasoning about socially constructed variables problematic, to say the least."

    Great sentence.

  2. Good one!

    Reminds me of a friend in grad skool, whose paper got rejected. Referee A said the result was wrong. Referee B said the result was trivial, and everyone knew it already.

  3. Brilliant. If the author took on board the referee's comments, it would dramatically raise the bar in macro.

  4. Well noted! After reading this elegant post, I was wondering what would happen if nearly 50-years-old papers were re-submitted to today's referees in their respective journals.

  5. Please correct me about this because I'm a bewildered outsider to economics. More than almost any other intellectual discipline, economics seems riven by controversy with opposing schools of thought who each can claim that the other is in a muddle. As far as I can make out, the problem with economics as a whole is that it doesn't test itself properly and so we never establish what works and what doesn't and so it is a question of debate what is valid and so should be taught in universities, accepted by top journals etc.
    With say weather forecasting, any forecasting model is constantly being scrutinized. Likewise I don't see why any economics program hoping for respectability shouldn't need to provide an ongoing continuous forecast for numerous different countries around the World. Let's say provide one month, six month, five year and ten year forecasts for USA, Japan, China, UK, France, Germany, Brazil, India, Indonesia, Nigeria, Russia or whatever giving child mortality rate, median wage, unemployment rate, GDP, inflation, government debt, current account deficit etc. It would need to be a formal commitment to keep up the comprehensive forecasts for the wide slew of countries otherwise it would be no true test, just an anecdotal, inconclusive mess such as we currently suffer from.
    Economics is, I guess, really a form of engineering -it is understanding how certain policy frameworks translate into what happens in the economy. Hopefully that understanding can inform policy makers to make better decisions. But if we don't know what will have what effect, we can't move on.
    In principle weather forecasters could make "elegant" mathematical models with ill foundered simplifying assumptions and claim that those models gave them insight even though they didn't predict the weather. We would nevertheless still want proper weather forecasts.

    1. @stone "More than almost any other intellectual discipline, economics seems riven by controversy"

      Yes, because more than most other intellectual disciplines economists are influential actors in the field that they are studying.
      The core controversy, to what extent government should intervene in the economy, turns a blind eye to the fact that government is the basis for any modern economy.
      There are no economic 'laws' that do not depend on laws passed in parliaments and upheld by 'the strong arm of the law'.
      There would be no 'law of supply and demand' governing prices without laws protecting property and regulating ownership that limit rent-seeking, for instance.
      If they are not main actors in the economy themselves, economists are at least advisors and educators of main actors, determining what the actors treat as given institutions and what institutions they feel free to tweak.
      Economic ideology ('market' ideology most of the time) isTHE main tool in the hands of the main economic actors to influence government policies and private sector strategies to serve their interests.
      The economic realm is not decribed, analyzed and predicted, but built by the theories of economists
      That building is done in the conversation among professional 'leading' economists, to this date to a large extent by including some and excluding others from the conversation as reflected in 'leading journals'.

    2. Wim Nusselder, I totally agree that economists (just like everyone else) are likely to disagree as to what is the most desirable outcome. Some will want to maximize defense spending, some will want to eliminate poverty or whatever. But my impression is that the controversy goes beyond that. It is as basic as disagreeing as to whether a certain intervention will increase or exacerbate poverty or increase or decrease available funds for defense spending or whatever.
      I realize that we will always want different outcomes from each other. This isn't about that. It is about knowing how to get the economy we want not about what economy we want. I do think there is plenty of scope for making MUCH better use of the myriad natural experiments that constantly occur across the world when events and interventions lead to macroeconomic outcomes and macroeconomists have failed to stand up and be counted with formal rigorous and transparent predictions as to what consequences they believe will come of them.

      It is as if there was controversy as to whether we wanted to live in a hot or cold part of the world AND there was controversy as to whether living near the poles or near the equator would likely be warmer.

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  7. There is a book on great papers rejected by top journals. summary is at

    The great papers of the century were often rejected by the leading journals and pushed to second tier journals.

    Tullock’s rent seeking article in 1967 was rejected by the famous editors of the three top journals because its main points were obvious and well known, then wrong, and then minor.


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