Winner of the New Statesman SPERI Prize in Political Economy 2016

Friday, 15 January 2016

Heterodox economists and mainstream eclecticism

I knew when I wrote this post some economists would not like it. These are economists who locate themselves outside the mainstream: heterodox economists. They often claim that mainstream economics is this narrow discipline wedded to particular assumptions that are both implausible and ideological. So when I argue that in principle and practice it is not, they will not like it. Simply saying (as I do) that economists are often too reluctant (sometimes for good reason in terms of the sociology of economists) to explore this freedom is not enough for them. Some of them require mainstream economics to be beyond redemption.

Sure enough, Lars Syll attacks my post. He writes 
“And just as his colleagues, when it really counts, Wren-Lewis shows what he is — a mainstream neoclassical economist fanatically defending the insistence of using an axiomatic-deductive economic modeling strategy.” 

I can only think that reading my post got him so angry he temporarily lost his critical faculties. Because what he writes is completely false. I wrote a comment on his blog but it has not appeared, although fortunately Bruce Wilder makes my point in very gentle terms. As I have been here before with Syll (see the footnote to this post), I will be less gentle.

My post ended with the following sentence:
“Mainstream academic macro is very eclectic in the range of policy questions it can address, and conclusions it can arrive at, but in terms of methodology it is quite the opposite.”

I argue in the post that “this non-eclecticism in terms of excluding non-microfounded work is deeply problematic.” I then link to my many earlier posts where I have expanded on this theme. So how I can be a fanatic defender of insisting that this modelling strategy be used escapes me. Unless I have misunderstood what an ‘axiomatic-deductive’ strategy is. Perhaps for Syll not following this strategy means being able to completely (180 degrees completely) misrepresent what someone else says.

That out of the way, I wanted to say something more substantive. In macro, the insistence on using microfounded models also works as an exclusion device. (I am suggesting this as a fact, not a deliberate strategy.) You cannot just write down an aggregate macro model, based on other people’s work or empirical findings or whatever. You have to microfound it, and that requires a lot of skill and practice, as many a PhD student has found out.

If it also turns out when doing this that the issue you want to address or the innovation you want to make is ‘difficult’ in terms of finding an acceptable microfoundation, there are many wise supervisors who will suggest that the student tries something else. It is hardly surprising that this might put some people off mainstream macro.

I think some knowledge of these things is essential - the kind of knowledge to be able to read and understand a journal article. But the depth of knowledge required to be able to create your own microfounded model, if your own interests are more empirical but you nevertheless want to explore the implications of your empirical work for the economy as a whole? Here I think what Lars Syll says has validity. But his wish to tar even the critics of this aspect of mainstream macro with this brush is just bizarre. More generally heterodox economists misdirect their fire when they accuse mainstream macro of being inescapably narrow in its subject matter or assumptions, when their criticism should be directed at the limitations implied by microfoundations formalism.



40 comments:

  1. Syll has responded: https://larspsyll.wordpress.com/2016/01/13/wren-lewis-on-macroeconomic-eclecticism/

    And I have to admit, he has you, Simon. You did miss a big facet of his critique (and not just there, but in many of his posts--and even beyond his posts and heterodox economists into political science, sociology, anthropology, etc etc)--not just microfoundations, but the very way economists think about the economy (or any other social interaction, for that matter). This is a blind spot most of you have (Noah Smith can be really bad about this, Krugman too, et al), although to your credit you have entertained some of these critiques in the comments sections of some of your posts (and I'm too lazy to dig those up right now, I think there were a few in December of last year and January of this year). A different way to think of it is this way: When you are critical of economics, it is on the margins. Syll and others think the whole core is rotten--not just the methods, not just the math, not just the microfoundations, not just the unrealistic behavioral assumptions, but the whole mess aggregated into this systemic pattern of perceiving the world. Now, you might argue that economics has made strides and given good advice at times. Sure--and the Ptolemaic model of the heavens helped people navigate and make sense of limited facets of the physical world. But then came Kepler and others...and you know the rest of the story. (And remember how those guys were persecuted for breaking orthodoxy--to what extent do we see something similar in the economics profession, albeit it nowhere near as deadly?)

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    1. Yeah, yeah, we know Kepler was right in the end. But challenging the mainstream doesn't make you right. Syll and his ilk conveniently love to compare themselves to Kepler, when they're more like the kind of non-mainstream that showed up in Gardner's Fads and Fallacies In The Name of Science.

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    2. Ah, I see what you did there: Mainstream=Ptolemy, Hetrodox=Kepler. Could be true.

      But with the same arguments so could: Mainstream=Darwinism, Hetrodox=Creationism. (and remember that the latter are "just demanding" a pluralistic approach to biology, in which creationism is taught alongside the mainstream).

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    3. The analogy does not apply. Kepler et al. Actually had something better to replace the old.

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    4. Actually Kepler etc didn't. They had models, but there was no empirical reason why those models should have been believed over the existing models (read Against Method by Feyerabend)

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    5. Original anon: I read Syll's response to this post as saying he (Syll) does not like equations. Can you give me a better interpretation.

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  2. "You have to microfound it".

    Haha! When will economists ever learn?

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  3. That you have to microfound it is a dogma of the subject.

    John E King has a nice book on this.

    http://www.e-elgar.com/shop/the-microfoundations-delusion?___website=uk_warehouse

    "The Microfoundations Delusion Metaphor and Dogma in the History of Macroeconomics"

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  4. "I can only think that reading my post got him so angry he temporarily lost his critical faculties. Because what he writes is completely false."

    Temporarily lost? He writes completely false rubbish about (Bayesian) statistical inference / probability theory too. Really awful illogic and bad maths which would embarrass even a hardened frequentist (and he seems to allow corrections/criticisms in the comments but just ignores them).

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    1. What Syll does is approving quite damning corrections several days after they are made. In that way most readers will not see them.

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  5. Mainstream eclecticism is a nice idea, can we have it?
    The rreal problem is that corectly using microfoundation recuiers skills of an artists, and that is why only few can and know how to use it.
    You, SW-L is in top 0.1% of proper economics. Because you can understand models and how to use it.
    But why it has to be so dificult for others? If you can use heterodox economics which incorporate reality, like money creation, destruction, banks and debt into models, then economics would not be so difficult so that only 0,1% academics can properly use it.

    This eclectic nature of proper economists is abused by jurnalists and politicians who come in with agenda and destort what economists say.

    Incorporate real world fact about banking, debt and money and you can get easyly understandable macro which then no politician can abuse because layman can understand it.
    But, do you think of protecting the turf?

    How long it took you to understand the difference between countries that do borrow only in their own currency and those that do not? Was it only with EZ crisis that this came to your view? Well, heterodox knew it long before it came into your view. Becouse they studied money and banks, and you did not(i asume).
    I know how long it took us, postkeynesians, to persuade Krugman about such difference between "former" Empires and colony's monetary set ups.

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    1. I hait when thay destort wat I say!

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    2. Please get real. You think only heterodox economics has "money creation, destruction, banks and debt" in their models? You will not understand mainstream economics by reading heterodox economists.

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    3. I would be greatful to you if you allow some time to provide me an example of more of money issue in mainstream.
      I know of non-formal Paradox of thrift which is not showing in any model.

      Also the monetary policy of Central Bankers is not understanding yet why monetary policy stops working before ZLB. It stops at 2% because banks do not follow in offering to the borrowers official rate bellow that line. Going up is around 1,5% when it gets traction, hence Yellen's raising rates had no effect untill reaches 1,5%. Then banks start to follow moves in the official rate.

      But that can not be modelled.

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  6. Lars Syll clarified his views and says it is not only about the insistence on microfunded formalism, it is also the insistence on formalism.

    Silly? Maybe. How can we forecast without models? Surely, we need the Treasury needs a model to understand the effects on GNP of a tax rate increase? We need an estimate of the multipliers?

    But on the other hand, maybe not. Minsky was not formal. The financial crisis showed that we need people who work that way. Maybe some of this stuff can be modelled, but I think there is reason to doubt that it ever will be and whether it is even a desirable objective.

    Paul Krugman thinks everything has to be modelled.

    http://web.mit.edu/krugman/www/dishpan.html

    He acknowledges above that economists who rejected formalism made important advances in our understanding of why some countries grew and others did not. But he said the marginalisation of these economists and their work was justified as the mainstream concentrated on formalisation.

    I strongly disagree.

    Formalisation has not given us strong benefits to justify the consequences of this ignored knowledge. We are dealing with issues like the failure of the Arab Spring and the rise of Islamic State. This was largely because the Middle East did not get on the growth curve and a path of economic, social political stability. Potentially ignoring what these economists did, whose conclusions were based on painstakingly and multidisciplinary work came with a massive opportunity cost, affecting potentially billions of people who remain in poverty and with failed aspirations.

    Likewise governments have to make decisions about the future that includes evaluations of factors which are unlikely to ever be effectively modellable.

    So in the end we need real methodological plurality. Not only positivist, but knowledge only effectively acquired through non-positivist approaches as well.

    NK.

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    1. I do not want to suggest that those who do not use formalism cannot tell us anything about macroeconomics - that would be silly. But Syll is doing the opposite, saying that the use of formalism renders mainstream economics useless. That, if I may say so, it patently absurd.

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  7. Looking back at your 2012 post, there is something interesting going on. You wrote that you appreciate evolutionary over revolutionary models (fair enough), and then wrote that being "radical" might make it difficult to get published, for people to read what one writes, etc. But isn't this a betrayal of "science"? If there are all these problems with macro (and even micro), then why defend the paradigm? Sure, I understand human nature the the politics of professions. But then let's just call a spade a spade: the real issue is politics (and maybe ideology), rather than defending NK or whatever because "it works."

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    1. It does work (in the sense of helping central banks set rates), and that is the point. Would you rather rates were set on a political or ideological basis?

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  8. Because universities need research funds. Each staff member needs at least four articles for the reserach exercise. How do you get a good score in this - you send your articles to the top journals. Where are they based? In the US. Why? Because it is the hegemonic power and therefore its elite institutions dictate the terms of intellectual discussion and you go along with this unless you want to be on the margins. Good for intellectual enquiry? Obviously not, it suppresses knowledge and important avenues of enquiry. But what are you going to do about it?

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    1. "Because universities need research funds."
      So fund research. Duh. A government that issues its own currency and has the power to impose tax obligations can use resources in its own country.
      "Where are they based? In the US. Why? Because it is the hegemonic power and therefore its elite institutions dictate the terms of intellectual discussion and you go along with this unless you want to be on the margins."
      Why do the lefties love pretending they are powerless?

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    2. Anon: the top journals tend to be US based because that is where the best economics is done.

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    3. Yeah right. I guess the people in the 1 per cent are there because they are also the best.

      There's marginalisation, there is concentration that harms diversity - in this case in knowledge. This is unfortunately part of the story. Dealing with it requires first that you recognise it.

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  9. Indeed.

    I'm a big fan of Simon's most of the time, and no fan of Syll's vituperation, but that's the thing, this post is complacent about the fact that there are massive obstacles in the way of thinking differently in a discipline in which it's clear should be encouraging many attempts to think differently.

    If physics worked to the guild rules being tolerated here, Einstein could have produced special and general relativity, but only if they were micro-founded - something we know he couldn't have done (because he tried to do so for the rest of his life)! Ditto Keynes (who produced micro-foundations for the General Theory alright, but discursive, not formal ones, which, given the nature of those foundations would likewise have been impossible).

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    1. "If physics worked to the guild rules being tolerated here ..." I am just now in the middle of "How the hippies saved physics : science, counterculture, and the quantum revival" by David Kaiser. I cannot, or at least have not, tried to check the tale told here, but it appears that for at least long periods of time, physics has had its own guild rules -- in this case concerning thinking and talking/writing about bizarre implications of quantum mechanics -- and that these rules only fell either when it was absolutely necessary to drop them because of the accumulation of evidence, or perhaps because of the expected value of profits of the bizarre implications (in this case quantum entanglement aka "spooky action at a distance"). Peter Woit has a critical but largely positive review here.

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    2. I haven't read Kaiser's book but from what you say it sounds like it gives the impression that QM is (now) understood to have bizarre implications. If so it's deeply misleading. To paraphrase the QBists, "there is no bizarreness in QM; there are only some bizarre interpretations of QM". (QBism, like the Copenhagen interpretation, is a 'spooky action at a distance'-free* interpretation.)

      * http://www.mth.kcl.ac.uk/~streater/EPR.html

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    3. Nicholas. What I was trying to do in that earlier post was isolate what the main obstacle was: the methodology rather than the range of ideas considered.

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  10. Who was it said "There is no economics, just political economies". Anyway, for fanatical heterodox types this battle of ivory tower dwellers, is current at the best daily MMT aggregating site. http://mikenormaneconomics.blogspot.co.uk/2016/01/simon-wren-lewis-heterodox-economists.html?m=0

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  11. Confused Orthodoxy vs. confused Heterodoxy
    Comment on ‘Heterodox economists and mainstream eclecticism’

    It is widely known, except among economists, how science works “Research is in fact a continuous discussion of the consistency of theories: formal consistency insofar as the discussion relates to the logical cohesion of what is asserted in joint theories; material consistency insofar as the agreement of observations with theories is concerned.” (Klant, 1994, p. 31)

    Or, in simplified Popperian terms, science is an upward spiraling two-step process of conjecture, i.e. formulation of a theory/model, and either refutation or eventual admittance to the corpus of knowledge until a better theory/model appears.

    Accordingly, refutation can take TWO routes (i) proof of logical inconsistency, and (ii) proof of empirical inconsistency. The proof of one inconsistency is sufficient for the rejection of the whole theory/model.

    The logical consistency of a theory/model is secured by applying the axiomatic-deductive method which is well-established since the ancient Greeks defined science as knowledge in contradistinction to mere opinion “When the premises are certain, true, and primary, and the conclusion formally follows from them, this is demonstration, and produces scientific knowledge of a thing.” (Aristotle, Posterior Analytics)*

    The fundamental methodological mistake of Lars Syll consists in rejecting Orthodoxy BECAUSE it applies the axiomatic-deductive method. Orthodoxy indeed has to be rejected because of gross methodological defects but NOT for the application of the axiomatic-deductive method. So, in his rejection of Orthodoxy Lars Syll is right but for the wrong reason.

    Heterodoxy in turn has to be criticized for completely ignoring the requirement of logical consistency. It can readily be shown that the profit theories of Keynes, Kalecki, Minsky, and Keen are different. Elementary logic tells one that not all four can be true, in fact all four are provably false.** So, Heterodoxy in its present shape and form has to be rejected because of logical inconsistency.

    It is NOT possible to idealize inconsistency and conceptual confusion as pluralism or eclecticism. Scientific truth is strictly exclusive “There cannot be both opinion and knowledge of the same thing at the same time.” (Aristotle, Posterior Analytics)

    Orthodoxy has been based on a properly defined axiom set “The [neo-Walrasian] program is organized around the following hard core propositions:
    HC1. There exist economic agents.
    HC2. Agents have preferences over outcomes.
    HC3. Agents independently optimize subject to constraints.
    HC4. Choices are made in interrelated markets.
    HC5. Agents have full relevant knowledge.
    HC6. Observable economic outcomes are coordinated, so they must be discussed with reference to equilibrium states.” (Weintraub, 1985, p. 109)

    The fact of the matter is that there is no such thing as an equilibrium in the economy. Methodologically, HC6 is what is known since antiquity as petitio principii. This is a quite primitive methodological blunder. Likewise for HC3.

    Clearly, when one axioms fails the whole formal basis breaks apart and with it the whole theoretical superstructure. The Orthodox microfoundation approach is axiomatically flawed, and because of this ALL variants of DSGE models are false and have to be rejected. There is no such thing as eclecticism of false models -- except in Wren-Lewis’s confused methodology.

    Egmont Kakarot-Handtke

    References see
    http://axecorg.blogspot.de/2016/01/confused-orthodoxy-vs-confused.html

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    1. Take HC3. What is the problem with using that. Sure, sometimes it does not apply, or it may apply approximately. But to then suggest that any theory that uses HC3 is flawed is silly. You need to abstract to make models.

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    2. Of the other assumptions, HC5 cannot be justified. Agents have access to only a subset of relevant knowledge, often a very small subset, which is why data have become so valuable. It is impossible to explain the rise of IT to its 'commanding height' from an axiom of complete knowledge.

      HC5 lacks the plausibility to be acceptable as an axiom for any model. Indeed we would do better to assume agents start with no knowledge and incorporate information search into our model. Knowledge has a price.

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  12. Hey Simon! You may be interested in this paper by Scott Fullwiler- Interest Rates and Fiscal Sustainability:

    http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1722986

    And I agree debate until now has not been constructive.

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  13. Lars Syll creatively destructs Wren-Lewis
    Comment on ‘Heterodox economists and mainstream eclecticism’

    [Because of space restriction to 4096 characters the first two sections are posted here. For the complete post see link.]

    1. Destruction

    Boiled down to the essentials Wren-Lewis’s methodological position is “most of what I and many others do is sorta-kinda neoclassical because it takes the maximization-and-equilibrium world as a starting point ...” (Krugman).

    More explicitly and formally, i.e. axiomatically, the position has been defined as “The [neo-Walrasian] program is organized around the following hard core propositions:

    HC1. There exist economic agents.

    HC2. Agents have preferences over outcomes.

    HC3. Agents independently optimize subject to constraints.

    HC4. Choices are made in interrelated markets.

    HC5. Agents have full relevant knowledge.

    HC6. Observable economic outcomes are coordinated, so they must be discussed with reference to equilibrium states.” (Weintraub, 1985, p. 109)

    The fact of the matter is that there is no such thing as an equilibrium in the economy. Methodologically, HC6 is what is known since antiquity as petitio principii. This is an indefensible methodological blunder. Likewise for HC3.

    HC6 and HC3 are, for reasons given in prior debates, methodologically unacceptable. Because of this the whole set of hard core propositions -- the sorta-kinda starting point -- breaks apart and with it the whole theoretical superstructure of DSGE.

    2. Keynesian Revolution 2.0

    “The [neo-]classical [sorta-kinda] theorists resemble Euclidean geometers in a non-Euclidean world who, discovering that in experience straight lines apparently parallel often meet, rebuke the lines for not keeping straight -- as the only remedy for the unfortunate collisions which are occurring. Yet, in truth, there is no remedy except to throw over the axiom of parallels [i.e. HC6 and HC3] and to work out a non-Euclidean geometry. Something similar is required to-day in economics.” (Keynes, 1973, p. 16)

    3. Creation

    The new set of hard core propositions must not contain the concepts of equilibrium and constrained optimization. The non-Euclidean paradigm is macrofounded instead of microfounded.

    To be continued:

    http://axecorg.blogspot.de/2016/01/lars-syll-creatively-destructs-wren.html

    Egmont Kakarot-Handtke

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  14. As an example of the limitations of mainstream macroeconomics we could consider prognoses for the world economy over the next few years. Everyone agrees that what happens in China will be critical. It's impossible to form a judgment on that without a view on likely political developments within and beyond the CCP and their repercussions on the Chinese and world economy. DSGE microfoundations do not help with this.

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    1. and hammers are not very useful for sawing wood.

      Yes one variant of an economics model cannot tell us everything we might wish to know about the economy. Hey, I think Rodrik might have written a book about that

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  15. Lousy scientists
    Comment on ‘Wren-Lewis and the Rodrik smorgasbord view of economic models’

    The underlying binary code of criminal proceedings is guilty/not-guilty. The accused has an interest at a clear-cut not-guilty outcome if he is indeed not the wrongdoer. On the other hand, the accused, if he is indeed the wrongdoer, has an interest to arrive somewhere in the middle between guilty/not-guilty. Therefore, what he applies is a stratagem, that is, he blurs and obstructs the underlying binary distinction in all possible ways.

    The situation is analogous in science where the underlying binary code is true/false. The genuine scientist tries to sharpen the issue at hand in order to eventually arrive at a clear-cut true/false answer. Everything in-between is scientifically worthless. The cargo cult scientist (Feynman’s term), on the other hand, tries everything to keep the issue safely in the no-man’s land between true/false, where “nothing is clear and everything is possible.” (Keynes)

    The term ‘conventionalist stratagem’ has been introduced into methodology by Popper.* Boiled down to essentials it amounts to the application of all possible communicative means to prevent a clear-cut true/false outcome.

    As a matter of fact, the stratagem issue goes back to the origin of science. Plato had been confronted with the Sophists whose selling proposition has been that they could win the client’s case no matter whether they were de facto right or wrong.

    “Plato’s main concern with the Sophists is that their rhetoric does not provide an adequate view of justice
    Doxa – public opinion: Sophistic manipulation of doxa is aimed at persuasion only,
    Episteme – true knowledge: Plato’s goal beyond persuasion is to discover epistemic truth.”**

    By proudly advertising that they have a model for every season, Wren-Lewis and Rodrik fall back methodologically to the proto-scientific position of the Sophists.

    There is no better empirical proof of scientific incompetence than to apply proto-scientific stratagems. To be sure, this holds for both orthodox and heterodox economists in equal measure. Wren-Lewis and Rodrik are not the exception but the rule. And this is why economics is a failed science.

    Egmont Kakarot-Handtke

    References
    * See the section which starts with ‘The Marxist theory of history . . ’
    http://www.stephenjaygould.org/ctrl/popper_falsification.html
    ** http://people.uwplatt.edu/~ciesield/platovsoph.htm

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    1. Quick question, then. Is Newtonian Mechanics true, or is it false?

      Reality dwells in the space between true and false, buddy. Almost no scientific 'fact' can be clear-cut placed into one of those two categories. And placement into those categories is often totally tangential to the real question - is it useful?

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    2. Like, do you never turn up to work because special relativity has proven it to be true that simultaneity does not exist?

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  16. Micro-founding macroeconomics is no virtue. It is similar to basing physiology on a foundation of molecular biology.

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  17. Keynes had FAKE formalism, right? The IS-LM stuff and everything else, had pretty much zero to do with the essential insight in GT Chp 1. "price and wages are sticky in a downward direction". He saw that.. spending = income, savings = debt. It is quite true to say that attempts at economic formalization through equations ... IS-LM, monetarism, EMH, etc... I would generally look back on all these as specious, and sad. Can economists learn from that?

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  18. The point about these micro foundations: I've searched, but I can't find any useful definition of 'scoial utility. Let alone of some kind of mechanism or even black box which leads to optimization of social utility. There is no empirical definition of social utility, there is no research program which even tries to measure it in a direct way. The models do not know unemployment. Government consumption (education and the like) is generally trated as 'wasteful'. The definition of capital in the models is not consistent with capital as statisticians define and measure it; one glaring example of this is that statisticians make a difference between produced and unproduced capital (land, clean air, whatever) which is absent in the micro founded models. There is no way in which economists even try to aggregate real individual decisions into decisions of the representative consumer). Syll is, as far as I'm concerned, right about ergodicity: we do not know the future. It's a clear example of Hubris that the econmists who write these models down think that central bankers as well as the public have the same idea about inflation as the economists who writes the models down, you might read the literature about FROOP (in new sealand, the cradle of ínflation targeting, it even seems that the only FROOP capitains of industry encounter is the price of gasoline, which indeed seems to shape their ideas of inflation). The lists goes on, and on. Is 'Intertemporal optimization' consistent with global warming (oops, not in the models, so it just does not exist). Whatever variable you look at (labour, capital, production, consumption, government consumption (which is consumption by households of government production) - the models are deeply, deeply flawed. I challenge you: can you give me the literature about how social utility is measured, which statistical institutes do this?

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