tag:blogger.com,1999:blog-2546602206734889307.post1363663121104991278..comments2024-03-28T04:29:22.717+00:00Comments on mainly macro: The heterodox versus the superhuman representative agentMainly Macrohttp://www.blogger.com/profile/09984575852247982901noreply@blogger.comBlogger67125tag:blogger.com,1999:blog-2546602206734889307.post-59015076380452429182012-08-19T04:14:26.567+00:002012-08-19T04:14:26.567+00:00In case you are still interested, I found this whi...In case you are still interested, I found this while looking for something else. "What is the balanced-budget multiplier?" bilbo.economicoutlook.net/blog/?p=12914<br /><br />I think it is fair to say that he uses a sectoral balances approach to this analysis. The marginal propensity to consume is also a factor- not sure if that is considered microfounded. If I have understood him correctly, a balanced-budget increase in spending would be mildly stimulating to the economy. jbrown981noreply@blogger.comtag:blogger.com,1999:blog-2546602206734889307.post-28782590454428766732012-07-24T16:44:21.299+00:002012-07-24T16:44:21.299+00:00"Personally I don't see how any model - f..."Personally I don't see how any model - formal or otherwise - that introduces new elements can avoid new assumptions, implicit or otherwise"<br /><br />A new model with new elements supposedly has to incorporate the old model with all its assumptions. If it does not then it has to reject it.<br /><br />If you start with specific assumptions and then push them towards a general case you can end up anywhere you want in the sense of Kuhn. Your final result can be pretty much arbitrary and that is how Kuhn described scientific progress. If mainstream admitted this fact I guess everybody would be fine.<br /><br />However, while applying the Kuhnian logic of scientific push-progress of "relaxing assumptions" mainstream assumes the Popperian logic of "pull progress", i.e. gradual and inevitable movement towards absolute truth. That is a clear contradiction. It is challenged on correct grounds and it can not be defended.Игры рынкаhttps://www.blogger.com/profile/12001273098690387194noreply@blogger.comtag:blogger.com,1999:blog-2546602206734889307.post-64339353193892894342012-07-24T14:31:19.868+00:002012-07-24T14:31:19.868+00:00You are not making any sense.You are not making any sense.Luis Enriquehttps://www.blogger.com/profile/09373244720653497312noreply@blogger.comtag:blogger.com,1999:blog-2546602206734889307.post-13313424215894335432012-07-24T13:13:20.055+00:002012-07-24T13:13:20.055+00:00You'd expect the theory to get more realistic ...You'd expect the theory to get more realistic as it developed. You're defending an approach that starts with a vast array of incredibly unrealistic assumptions, relaxes some, introduces others and always has a large number at every level.<br /><br />You might need to introduce new assumptions when you introduce a new aspect to a model. But this should always be with a view to - and a clear idea of how - they would be relaxed. I just don't see how DSGE models pass this test.Unlearningeconhttps://www.blogger.com/profile/13687413107325575532noreply@blogger.comtag:blogger.com,1999:blog-2546602206734889307.post-90208970188289089542012-07-24T09:26:18.647+00:002012-07-24T09:26:18.647+00:001. no... I don't see what your point is. Say o...1. no... I don't see what your point is. Say one relaxes the assumptions behind a representative household and introduces some heterogeneity. These new elements are going to require some modelling, some new assumptions. And that is supposed to be a flaw in mainstream economics is it? Personally I don't see how any model - formal or otherwise - that introduces new elements can avoid new assumptions, implicit or otherwise.Luis Enriquehttps://www.blogger.com/profile/09373244720653497312noreply@blogger.comtag:blogger.com,1999:blog-2546602206734889307.post-56700733159857763482012-07-23T17:27:25.810+00:002012-07-23T17:27:25.810+00:001. Remains true and you haven't disputed it.
...1. Remains true and you haven't disputed it.<br /><br />2. I was unclear - by imperfect information I meant information asymmetry more than anything, rather than the kind of lack of knowledge about other firm's strategies/lack of knowledge about the model itself faced by many DSGE market participants, and the subsequent use to heuristics and guesswork.<br /><br />When transactions are characterised by information asymmetry even the standard economic assumptions lead to different behaviour. When I say 'start again' I don't mean reinvent macro; I just mean the kind of approach Akerlof used.Unlearningeconhttps://www.blogger.com/profile/13687413107325575532noreply@blogger.comtag:blogger.com,1999:blog-2546602206734889307.post-61929750086214873522012-07-23T14:34:08.136+00:002012-07-23T14:34:08.136+00:00not a terribly good example, I feel.
Simon says: ...not a terribly good example, I feel.<br /><br />Simon says: start simple then complicate<br />You say:<br />1. more advanced models introduce new assumptions rather than relax them<br />2. Perfect information is an example of a 'domain' assumptions ... once you abandon that, you must start again<br /><br />but in text book macro, the assumption of perfect information is relaxed, and nobody has to start again. And of course the conclusions change once policy makers lack perfect information. This example supports Simon, not your supposed critique - you can start by teaching how things would work under perfect information, then relax that assumption and see what happens then.Luis Enriquehttps://www.blogger.com/profile/09373244720653497312noreply@blogger.comtag:blogger.com,1999:blog-2546602206734889307.post-45955756939283797362012-07-23T06:01:22.951+00:002012-07-23T06:01:22.951+00:00Well, I have asked a few "heterodox" eco...Well, I have asked a few "heterodox" economists how they would approach your question. I have not received a direct reply, which is understandable. However, Bill Mitchell of billy blog, who is one of the pre-eminant MMT economists, explained in his subsequent post that sectoral balance analysis is his preferred method. There is, of course, little reason to assume he was responding to my or your particular question. Since then you have done a post on sectoral balances which I found quite interesting. And that makes me wonder why that wouldn't be your first approach.<br /><br />Anyways, since that time there have been a lot of posts by a lot of economists on this subject. Thank you for allowing me to be a small part of this discussion. But please remember that this economy is not working for millions of people in my country and yours. So come up with an answer, whatever model is used.jbrown981noreply@blogger.comtag:blogger.com,1999:blog-2546602206734889307.post-53801604040852801392012-07-22T15:30:16.792+00:002012-07-22T15:30:16.792+00:00"No one has yet told me where my simple analy..."No one has yet told me where my simple analysis of a balanced budget multiplier is wrong"<br /><br />Because your assumption of a balanced budget is wrong. It is *ir*rational to assume it will be balanced.Игры рынкаhttps://www.blogger.com/profile/12001273098690387194noreply@blogger.comtag:blogger.com,1999:blog-2546602206734889307.post-40273689659408008722012-07-22T15:23:16.008+00:002012-07-22T15:23:16.008+00:00As for 2 the challenge was that government spendin...As for 2 the challenge was that government spending is done in absolute terms while taxes are fixed in relative % terms. Therefore it does not follow that increasing government expenditure automatically requires increasing taxes to balance the budget again. As Ramanan said increasing government spending might require *dec*creasing taxes in order to balance budget.<br /><br />Another point is that the problem setup is pretty irrelevant for any economy. Intentional government spending increases happen ex ante while taxes are realized ex post. It is irrational to expect that ex ante will be equal ex post because reality says that realized budgets are never like planned ones. And so your problem does not exist and therefore any answer to a non-existent problem does not prove anything relevant for the real world (even assuming it is correct). Does it imply that heterodox and mainstream are like euclidean and lobachevsky?Игры рынкаhttps://www.blogger.com/profile/12001273098690387194noreply@blogger.comtag:blogger.com,1999:blog-2546602206734889307.post-31050060191529479122012-07-21T13:39:15.070+00:002012-07-21T13:39:15.070+00:00Yep, I was just using it as an example.Yep, I was just using it as an example.Unlearningeconhttps://www.blogger.com/profile/13687413107325575532noreply@blogger.comtag:blogger.com,1999:blog-2546602206734889307.post-4749815741894693812012-07-20T13:07:39.942+00:002012-07-20T13:07:39.942+00:00Professor,
I am not an economist, but I think you...Professor, <br />I am not an economist, but I think your example shows very well the problems of standard macro. What is wrong with it? <br />If I understand you correctly, your example assumes away the most important problems in this case, namely income and wealth distribution, propensity to spend and - most importantly - the time lag between spending and income/taxes. <br />When you want to analyze policy options, I think you cannot just ignore these aspects. <br />The government may decide to spend more by say increasing unemployment benefits or providing showel ready projects for the unemployed to work at, boosting their income. This increase of income is almost certainly going to be spent on reasonable things (food, rent, clothing) and thus generate other incomes (Kalecki: spending determines income!). This will, almost certainly, increase GDP as well as inflation BEFORE new taxes are collected. Especially if the tax is not targeted at the recipients of government spending (but at, say, the higher echelons of society who have enough wealth and income but are not spending it for one reason or other). At the end of the day the government may be imposing a tax of nominal value equivalent to its prior spending, but since GDP and inflation have probably increased, the real ratio of government spending and taxing will probably have shifted in some way. As a result your balanced budget assumption does not really make much sense to me, since it ignores the time lag between spending and taxing. In that lag, a lot of things can happen.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-2546602206734889307.post-69539808197921083402012-07-20T09:22:07.765+00:002012-07-20T09:22:07.765+00:00Understood. Analysis seems to invariably lead to a...Understood. Analysis seems to invariably lead to advocacy/implementation, so perhaps more than theorists and/or empirical analysts realize, they have a very real impact (in fact, my argument above follows this form). I would regard theorists and/or empirical analysts as the very foundation of civilization. Human life exists in the context of theory. <br /><br />To emphasize through analogy; pure mathematics often leads to the applied, e.g., non-euclidean geometry and its relation to Einstein's relativity.<br /><br />Here in the states I'm afraid a temporary increase, while nice, would be a band-aid on a ruptured artery. I hope we can recognize the underlying soundness of heterodox theory as described above and use it as a long term prescriptive solution. Science would undoubtedly be the benefactor. Like most things, it requires funding, and there's an easy place to acquire it from what I believe to be sound economic theory. <br /><br />Pleasure.Robert Ricenoreply@blogger.comtag:blogger.com,1999:blog-2546602206734889307.post-38244252334938429132012-07-20T08:29:15.140+00:002012-07-20T08:29:15.140+00:00This comment has been removed by a blog administrator.Anonymoushttps://www.blogger.com/profile/17008094208460561549noreply@blogger.comtag:blogger.com,1999:blog-2546602206734889307.post-89298206956082272542012-07-20T07:56:07.056+00:002012-07-20T07:56:07.056+00:00I appreciate your long response, and your closing ...I appreciate your long response, and your closing thoughts. But it is really important to distinguish - whether you are mainstream or heterodox - between policy analysis and policy advocacy. As a macroeconomist I need to be able to analyse the impact of what a government might do, whether the policy is wise or not. But having said that, I would take a temporary increase in output right now, if temporary was as long as it takes for a the economy to recover under its own steam.Mainly Macrohttps://www.blogger.com/profile/09984575852247982901noreply@blogger.comtag:blogger.com,1999:blog-2546602206734889307.post-61920942373307132012-07-20T07:40:35.385+00:002012-07-20T07:40:35.385+00:00With respect professor, while I agree with you age...With respect professor, while I agree with you agents do not need to be omniscient to model economies (observable patterns emerge, which is all agents need to model with approximate predictive accuracy), I think you might be missing the underlying, principal point of heterodox economists. There is no reason to have a balanced budget increase for some brief, temporary increase in output. It appears you're operating under a paradigm which assumes budgets ultimately need balancing. To the contrary, I would propose to you balanced budgets are useful only within a specific economic context, i.e., within the context of healthy aggregate levels of demand, employment, and output (which are largely three sides to the same coin). In this context, to run a government surplus would reduce consumer incomes, and hence acts to reduce aggregate demand. Conversely, within this same context, running a deficit risks inputing excessive income. Excess incomes lead to excess demand and hence to potentially harmful levels of inflation. Naturally then a balanced budget is the sensible choice. This choice however is specific to this economic context, not to all. <br /><br />As is no secret, economies throughout the West do not find themselves in the aforementioned healthy economic environment. Rather, they suffer from insufficient aggregate demand, high levels of unemployment, and lower than potential output. At their root, these conditions are a function of insufficient consumer incomes. Increase incomes, demand increases, employment increases. What heterodox economists (HEs) have realized is this: Central governments which create their own, non-convertible currency--aka currency issuers--operate under an entirely different paradigm from currency users (i.e., entities which cannot create money, e.g., households, businesses, state governments within the U.S., countries in the EU, and so on). HEs have recognized the means to increasing consumer incomes depends on currency issuers recognizing they have a responsibility to deficit spend <i>funded from direct money creation</i> when demand/employment/output levels are unhealthy. <br /> <br />In this underproductive environment, historically central governments would often borrow money to increase spending. This is to say they run debt financed deficits. The fact is, there is no need to borrow money to fund deficit spending. Central governments, such as that found in the U.S. as well as found in your country, are not operating within the paradigm of the currency user. They can create money on demand (there may be legal hurdles, but in theory they can do this) to fund deficit spending. <br /> <br />Often the policy prescription which I'm describing is met with anxiety (or vehement antipathy) over inflationary side effects. This fear typically arises from an a-priori, axiomatic acceptance of the quantity theory of money. It is held that any level of money creation will have a direct, proportionate, inflationary effect on aggregate prices. There is no other way to put it than this inflation theory is false. Increases in income do not necessarily lead to a proportionate rise in prices or any rise in prices at all. Instead, in economic environments such as our own, an increase in incomes raises employment and output with relatively stable prices. The objective of the central government is to avoid too much money creation, which would drive demand higher than healthy levels of employment and output could support, thereby causing prices to rise at harmful rates.<br /> <br />It is important for central governments and their economic advisors to begin to recognize there is not just a single paradigm, but two--that of the currency user and that of the currency issuer. Balanced budgets are much more the concern of the latter than the former, with the exception being a healthy economy where maintenance is the objective. <br /> <br />I appreciate your consideration of heterodox economics and the opportunity to discuss these important issues with you. Your open-mindedness is in the spirit of real science ever so vital to our civilization.Robert Ricenoreply@blogger.comtag:blogger.com,1999:blog-2546602206734889307.post-51547312486156401732012-07-19T16:38:20.880+00:002012-07-19T16:38:20.880+00:00"[If] the tax increase is permanent then cons..."[If] the tax increase is permanent then consumption falls by the same amount, with no net impact on the demand for domestic output. That is pretty obvious, ..."<br /><br />It is? If the tax increase is targetted at components that are added to make up a higher monetary aggregate, and the spending increase is targetted at the components that make up a lower monetary aggregate, why wouldn't we expect an increase in velocity?Benedict@Largenoreply@blogger.comtag:blogger.com,1999:blog-2546602206734889307.post-3034031593559426062012-07-19T15:41:25.997+00:002012-07-19T15:41:25.997+00:00"If you do not assume rational expectations, ..."If you do not assume rational expectations, what do you assume?"<br /><br />One could assume complete ignorance by having the agent make choices completely at random. While this might not generate behaviour that is any more realistic than that generated by the perfect omniscience of agents with rational expectations, it would at least cover the opposite end of the spectrum and demonstrate how much or how little the rational expectations assumption affects the predictions of the model concerned.Derekhttps://www.blogger.com/profile/06296053477905542366noreply@blogger.comtag:blogger.com,1999:blog-2546602206734889307.post-17911631637763942492012-07-19T09:13:22.024+00:002012-07-19T09:13:22.024+00:00Luis,
I had in mind a very particular type of het...Luis,<br /><br />I had in mind a very particular type of heterogeneity (that's the problem isn't it? You can add heterogeneity in infinitely many ways, but impose homogeneity in only one way!) in which agents vary by their skills, and ultimately by their wealth. Just the fact that some are rich and some are poor matters very little for aggregate movements. But there might of course be situations which I am unaware of where this type of heterogeneity might matter.<br /><br />With respect to beliefs and, more precisely, information heterogeneity matters a lot! See for instance the work by Guido Lorenzoni. But Prof. Lorenzoni would still insist that the agents he models are indeed "representative agents". Why? The agents are all identical in all aspects apart from information. This means that if two agents receive the same information, they will behave identically.<br /><br />To be honest, it bugs me a little when post-keynesians shit on representative agents. First of all, there is never one rep. agent. There is always a household, a firm, a central bank, a government, a banking sector and so on. Coordination failures are everywhere (see for instance the Diamond and Dybvig model on bank runs which relies on representative agents and rational expectations! In fact, their idea hinges on rational expectations), and they would still be there even if only ONE type of agent was considered. Second, most post-keyenesians speak about different groups having different "marginal propensity to consume" and so on. But this is representative behavior! And representative behavior is an even stricter assumption than a representative agent!pontushttps://www.blogger.com/profile/08321967966569420139noreply@blogger.comtag:blogger.com,1999:blog-2546602206734889307.post-5497392354666494912012-07-19T08:40:59.500+00:002012-07-19T08:40:59.500+00:00Tom Hickey says I should reply, so lets take these...Tom Hickey says I should reply, so lets take these points in turn:<br />1) In my problem I need to know how consumers react to a tax cut, and how FOREX traders react to a change in government policy. How would calling consumers households change things?<br />2) Nonsense. Of course the government can increase spending and raise taxes at the same time. At no point is there any implication that they should do so.<br />3) You are absolutely right about MF, which is why I said it does not apply in this case. So it would be irrational for FOREX traders to think that result applied. But there I go again, assuming rationality.<br />4) I do not really understand the last paragraph so will not comment.Mainly Macrohttps://www.blogger.com/profile/09984575852247982901noreply@blogger.comtag:blogger.com,1999:blog-2546602206734889307.post-38510240285930790222012-07-18T19:51:20.326+00:002012-07-18T19:51:20.326+00:00Pontus,
Oh i am surprised to hear that. I think I...Pontus,<br /><br />Oh i am surprised to hear that. I think I see what you mean ....I don't have any expertise in this area, although I have read some surveys that take the position that heterogenous agents yield new insights. Could you lift the veil of Internet anonymity and link to your work? I had in mind studying the importance of things like heterogenous beliefs, but even if, as you say, it is possible to use representative agents to think about strategic behaviour where agents are identical and face symmetric problems, there are other potentially important avenues of heterogeneity. Multiple sectors, for example, modelled as multiple representative agents, I suppose.Luis Enriquehttps://www.blogger.com/profile/09373244720653497312noreply@blogger.comtag:blogger.com,1999:blog-2546602206734889307.post-63640900965780014952012-07-18T19:09:21.375+00:002012-07-18T19:09:21.375+00:00"If your assumptions are wrong you can prove ..."If your assumptions are wrong you can prove anything, which means your calculation is wrong."<br /><br />No, it doesn't mean your calculation is wrong. It just means your assumptions are wrong.pontushttps://www.blogger.com/profile/08321967966569420139noreply@blogger.comtag:blogger.com,1999:blog-2546602206734889307.post-75403386358810546762012-07-18T19:05:30.887+00:002012-07-18T19:05:30.887+00:00Luis,
I think your first comment makes some impor...Luis,<br /><br />I think your first comment makes some important points, but that the last is misguided. The idea that representative agents and rational expectations forces us to ignore coordination problems is simply a misunderstanding. Here, let me take an example: You seem literate enough to know about the classic game theoretic device of the "prisoners' dilemma". Both prisoners are in fact "representative agents". They are identical in all aspects! Yet, there is a clear coordination failure in which one of the Nash equilibria are suboptimal.<br /><br />Rep. agent does not imply that everyone acts in harmony. Everyone acts in his or her own interest. These interests are identical across agents, but they would all like something to happen at the loss of someone else. We don't need heterogeneity to reach that point!<br /><br />I'm personally a macroeconomist who has worked a lot on heterogeneity. But my conclusion from this work has been that there is very little to learn about macroeconomic aggregates from heterogenous agents. Cross-section, though, is another game altogether.pontushttps://www.blogger.com/profile/08321967966569420139noreply@blogger.comtag:blogger.com,1999:blog-2546602206734889307.post-42241326016652515252012-07-18T18:24:13.703+00:002012-07-18T18:24:13.703+00:00Have a look at James K. Galbraith, "The Final...Have a look at James K. Galbraith, "The Final Death (and Next Life) of Maynard Keynes" (Keynote address, May 13, 2011) for suggestions about other approaches, like ones that actually predicted the crisis and explained whys and wherefores. These approaches also explain the solution.<br /><br />http://www.netrootsmass.net/2011/08/james-k-galbraith-the-final-death-and-next-life-of-maynard-keynes/Tom Hickeyhttps://www.blogger.com/profile/08454222098667643650noreply@blogger.comtag:blogger.com,1999:blog-2546602206734889307.post-73415414060376248462012-07-18T14:41:27.835+00:002012-07-18T14:41:27.835+00:00"If you do not assume rational expectations, ..."If you do not assume rational expectations, what do you assume?" You assume only very local knowledge and very basic choice -- kind of like gas molecules bumping around, converging on a global equilibrium. Eric Smith and Duncan Foley have done this in "Classical thermodynamics and economic general equilibrium theory" JEDC 32, 7-65. <br />http://www.santafe.edu/~desmith/PDF_pubs/DYNCON2011.pdf <br /><br />Turns out you can still get pretty much all the equilibrium results you really need without unrealistic assumptions. <br /><br />Foley has elsewhere written much more on this kind of model.jedhttps://www.blogger.com/profile/11258416181053973027noreply@blogger.com