tag:blogger.com,1999:blog-2546602206734889307.post1796338003054331732..comments2024-03-28T04:29:22.717+00:00Comments on mainly macro: Microfoundations - the illusion of necessary superiorityMainly Macrohttp://www.blogger.com/profile/09984575852247982901noreply@blogger.comBlogger27125tag:blogger.com,1999:blog-2546602206734889307.post-76634179077956496762014-02-15T11:11:53.749+00:002014-02-15T11:11:53.749+00:00Sahibabad industrial area infrastructure is so nic...Sahibabad industrial area infrastructure is so nicely groomed that you can never stuck inside , you will always find a road connected to main road.<br />http://propertydealerontips.com/Property+Dealers-in-Sahibabad+Industrial+Area-Ghaziabad-65556555<br />Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-2546602206734889307.post-41988717181966572552014-01-07T11:16:28.994+00:002014-01-07T11:16:28.994+00:00Your "eclectic approach" is known as &qu...Your "eclectic approach" is known as "Data-Based Mechanistic" modelling in hydrology (although the theory is quite general) . I recommend the papers by Peter Young. Felix Andrewshttps://www.blogger.com/profile/01758189910311454522noreply@blogger.comtag:blogger.com,1999:blog-2546602206734889307.post-62237754799445049082013-12-27T23:50:08.425+00:002013-12-27T23:50:08.425+00:00To reinforce Jason Dick's point - Boyle's ...To reinforce Jason Dick's point - Boyle's law - the phenomenological law relating pressure and volume of a gas - was stated in 1662. It took almost 100 years to for the correct micro-foundations to be proposed, and another almost 100 years for it to be accepted. The progress of physics would be very slow indeed if we waited for micro-foundational explanations.<br />Arunhttps://www.blogger.com/profile/03451666670728177970noreply@blogger.comtag:blogger.com,1999:blog-2546602206734889307.post-5700634877441771372013-12-22T12:19:26.125+00:002013-12-22T12:19:26.125+00:00I don't think anyone is talking about doing aw...I don't think anyone is talking about doing away with maths. <br /><br />I think we can do away with a hell of a lot of it. For sure the mathematicisation of the discipline is right there at the centre of the problem. Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-2546602206734889307.post-15784263293566679262013-12-21T19:44:25.069+00:002013-12-21T19:44:25.069+00:00On the first point, yes, that is what I had in min...On the first point, yes, that is what I had in mind. To me, the biggest point on microfoundations is that people simply cannot compute the macroeconomy: it is too profoundly uncertain and indeed incomprehensible. This, of course, is why Keynes introduced the notion of "animal spirits" to which you refer.Thus, the notion of utility maximising choice in this setting just makes no sense to me.<br /><br />On the second point, the financial sector is a very big exception to the representative agent formulation, since it drives just about everything in the modern economy.<br /><br />Martin Wolfhttps://www.blogger.com/profile/06865994744430634646noreply@blogger.comtag:blogger.com,1999:blog-2546602206734889307.post-80814540884393238832013-12-21T19:26:21.336+00:002013-12-21T19:26:21.336+00:00On the first point, I agree that microfoundations ...On the first point, I agree that microfoundations in macro very often means rather basic (econ 101) micro, and in that sense it is rather old fashioned. In other words we do not see enough of behavioural economics, such as in Akerlof and Shiller's Animal Spirits for example. Is that what you had in mind?<br /><br />On the second, I am less convinced that this is a major problem. I cannot think of many well established aggregate macro relationships which cannot in principle be explained by thinking about micro behaviour. An exception might be short term interactions in financial markets, where network analysis along the lines that Haldane has been working on looks very interesting. However, with advances in computing power, we are beginning to see more analysis of very heterogeneous systems, and it will be interesting if these start generating alternative explanations of aggregate relationships that cannot be explained by simpler, representative agent set-ups. They have not yet.<br /><br />However, I included both of your doubts, and more, in this post here (http://mainlymacro.blogspot.co.uk/2012/08/arguments-for-ending-microfoundations.html), which argued that it was a mistake to put all our eggs in the microfoundations basket. In the 1970s and 80s there was a rich tradition of empirical macro modelling in the UK, of which Ken Wallis's ESRC Macromodelling Bureau was a key part, but that was killed off by the more fashionable DSGE approach. I think this was a shame, because I think both approaches to macro are worth pursuing. Mainly Macrohttps://www.blogger.com/profile/09984575852247982901noreply@blogger.comtag:blogger.com,1999:blog-2546602206734889307.post-59262242892929743472013-12-19T17:40:14.144+00:002013-12-19T17:40:14.144+00:00I am not at all expert on this. But there seem to ...I am not at all expert on this. But there seem to be two very large problems with the micro-foundations idea.. <br /><br />First, the assumption is that the micro-foundations of economics are generally correct. That is, we can credibly model the behaviour of individuals as utility maximisers in a deterministic manner, in all relevant circumstances. I no longer believe this. <br /><br />Second, the assumption is that we can aggregate from the individual "atoms" to the behaviour of the entire complex economic system. But, as the physicist above argues, that is impossible for complex physical systems. Why should it be possible for equally complex economic ones?<br /><br />These are not debating points. I would really like to know the answers. Martin Wolfhttps://www.blogger.com/profile/06865994744430634646noreply@blogger.comtag:blogger.com,1999:blog-2546602206734889307.post-5870275593531399082013-12-18T08:32:40.773+00:002013-12-18T08:32:40.773+00:00Very good post.Very good post.neminoreply@blogger.comtag:blogger.com,1999:blog-2546602206734889307.post-59757410766126258162013-12-18T02:24:38.497+00:002013-12-18T02:24:38.497+00:00Response up:
http://noahpinionblog.blogspot.com/2...Response up:<br /><br />http://noahpinionblog.blogspot.com/2013/12/i-love-microfoundations-just-not-yours.htmlNoah Smithhttps://www.blogger.com/profile/09093917601641588575noreply@blogger.comtag:blogger.com,1999:blog-2546602206734889307.post-62195836737314878042013-12-17T19:03:25.705+00:002013-12-17T19:03:25.705+00:00Given that the economy is a collection of individu...Given that the economy is a collection of individual units I can see the need for an explanation of macroeconomic systems to be founded in micro behaviour, but I have never heard a respectable explanation for why that needs to be expressed in equations. Equations make economics hard to write and tedious to follow, not least because different authors may use different symbols for any given variable, and severely limits the range of people who can evaluate its reasonableness, especially when it comes to the individuals actually making the economic decisions. If the resulting model yields no analytic solution, reverting to some numerical solution (like log-linearising around the steady state) must squander an unknown amount of the economic intuition represented in the basic equations. Equation-based explanations divert teaching into mathematical tricks that add nothing to the students' understanding. And equations are no more rigorous than logical mechanistic description - as I used to say to my academic colleagues, if you were on trial for a crime you did not commit, you would hope that the process was very rigorous, but your heart would sink if your lawyer presented an argument in equations as to why you had no motive to commit the crime.<br /><br />As far as I can see, the role for equations is when the parameters can be known well enough to draw quantitative conclusions.<br /><br />I suspect that economics has got itself stuck in this wasteful method of enquiry by an emperor's new clothes dynamic - to reject it is to declare yourself incapable such that your opinion on the matter is to be discounted.Tim Youngnoreply@blogger.comtag:blogger.com,1999:blog-2546602206734889307.post-81578902059694524422013-12-17T17:48:11.905+00:002013-12-17T17:48:11.905+00:00Look at option (and similar) valuations or the who...Look at option (and similar) valuations or the whole Beta stuff.<br />It is clear that sometimes the past gives a very good representation, but other times it differs.<br />There is not a better system it depends on the situation.<br /><br />Anyway there are a lot of other possibilities.<br />Cut Macro in smaller parts for instance.<br /><br />History usually works when the situation is more or less normal. No extraordinary funny stuff. Which is one of the main issues/questions now.Riknoreply@blogger.comtag:blogger.com,1999:blog-2546602206734889307.post-64116628501111765802013-12-17T17:42:24.253+00:002013-12-17T17:42:24.253+00:00Maybe the right question is how closely the models...Maybe the right question is how closely the models predict reality and how robust the predictions are. <br /><br />If any of them performed well, it wouldn't matter if they were based on spherical frictionless cows or epicycles. <br /><br />Instead, we have people arguing that QE causes deflation, hyperinflation, and neither, and since none of the models work very well, they can choose their preferred model because it supports their value system and political beliefs, and spend their time debating how many angels can dance on the head of a pin.CurmudgeonlyTrollhttps://www.blogger.com/profile/02004282752334460717noreply@blogger.comtag:blogger.com,1999:blog-2546602206734889307.post-91209333662016598572013-12-17T12:35:43.827+00:002013-12-17T12:35:43.827+00:00@Luis
Is Nick really talking about microfoundatio...@Luis<br /><br />Is Nick really talking about microfoundations? Or is he talking about mechanisms?<br /><br />He says microfoundations, but I think he really wants a clear description of the underlying mechanism that is moving the system to or away from an equilibrium. The lack of mechanisms is an endemic problem for DSGEs. I recall Matt Rognlie describing Smets-Wouters(US) as ( from memory) "more an arbitrary decomposition into shocks of dubious interpretation, than a model." <br /><br />Unfortunately, this description would be true for virtually every DSGE model.Hermannoreply@blogger.comtag:blogger.com,1999:blog-2546602206734889307.post-75206242867123089362013-12-17T12:14:03.092+00:002013-12-17T12:14:03.092+00:00Read Ronald Coase on microeconomics. Is this what ...Read Ronald Coase on microeconomics. Is this what you think you should micro-found on?<br /><br />"This separation of economics from the working economy has severely damaged both the business community and the academic discipline."<br /><br />http://ineteconomics.org/blog/institute/saving-economics-economists-tribute-late-ronald-coase<br /><br />Time to forget microfounding, and start looking outside the economics profession for answers about how people and societies and its institutions actually behave.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-2546602206734889307.post-80174394720942117992013-12-17T11:44:48.461+00:002013-12-17T11:44:48.461+00:00Herman,
maybe so, but I was channelling Adam Pose...Herman,<br /><br />maybe so, but I was channelling Adam Posen, whose claim math+microfounded models have "no merit" is I think a call to abandon them Luis Enriquehttps://www.blogger.com/profile/09373244720653497312noreply@blogger.comtag:blogger.com,1999:blog-2546602206734889307.post-58494595396757753192013-12-17T11:16:21.551+00:002013-12-17T11:16:21.551+00:00I don't think anyone is talking about doing aw...I don't think anyone is talking about doing away with maths. It seems to me to be a call for broadening the mathematical toolkit and complementing formal models with less formal methods of reasoning. And in empirical work, moving beyond the statistical properties of time series to also allow other types of data. Bob Solow has been calling for this for ages :<br /><br /><i>"No one could be against time-series econometrics. When we need estimates of parameters, for prediction or policy analysis, there is no good alternative to the specification and estimation of a model. To leave it at that, however, to believe as many American economists do that empirical economics begins and ends with time series analysis, is to ignore a lot of valuable information that can not be put into so convenient a form. I include the sort of information that is encapsulated in the qualitative inferences made by expert observers, as well as direct knowledge of the functioning of economic institutions. Skepticism is always in order, of course. Insiders are sometimes the slaves of silly ideas. But we are not so well off for evidence that we can afford to ignore everything but time series of prices and quantities." </i><br />----Robert Solow (Nobel Lecture)<br /><br />An example from Lucas on the importance of more eclectic modelling and data. Note Lucas's *reason* for dismissing the possibility of a recession in 2007<br /><br />Robert Lucas (Sept 2007):<br /><i>"I am skeptical about the argument that the subprime mortgage problem will contaminate the whole mortgage market, that housing construction will come to a halt, and that the economy will slip into a recession. Every step in this chain is questionable and none has been quantified." </i>Hermannoreply@blogger.comtag:blogger.com,1999:blog-2546602206734889307.post-87244886879215005232013-12-17T10:35:12.277+00:002013-12-17T10:35:12.277+00:00Jason,
well maybe in physicists thought a bit mo...Jason, <br /><br />well maybe in physicists thought a bit more carefully about what economists are trying to do, as opposed to what physicists do, they'd understand the motivation for microfoundations a little better. <br /><br />read this:<br />http://worthwhile.typepad.com/worthwhile_canadian_initi/2013/12/microfoundations-for-peoples-sake.htmlLuis Enriquehttps://www.blogger.com/profile/09373244720653497312noreply@blogger.comtag:blogger.com,1999:blog-2546602206734889307.post-40831028058402523622013-12-17T10:23:09.995+00:002013-12-17T10:23:09.995+00:00this point could also be made about empirically in...this point could also be made about empirically informed "verbal reasoning" versus maths. Tony addresses Adam Posen, whom I presume uses microfoundations in the sense <a href="http://worthwhile.typepad.com/worthwhile_canadian_initi/2013/12/microfoundations-for-peoples-sake.html" rel="nofollow">Nick Rowe uses here, just not with maths.</a> <br /><br />It could be that maths is a straitjacket and that less formal reasoning is more flexible. Yes, maths helps avoid certain varieties of errors, but perhaps it introduces another kind of error by limiting what we are able to embody in maths, and again it's not obvious which errors matter more. <br /><br />personally, these thoughts do not make me want to abandon microfoundations+maths, merely to keep an open mind about other approaches. Luis Enriquehttps://www.blogger.com/profile/09373244720653497312noreply@blogger.comtag:blogger.com,1999:blog-2546602206734889307.post-72702906749134056482013-12-17T09:50:11.828+00:002013-12-17T09:50:11.828+00:002003 Robert Lucas, “[the] central problem of depre...2003 Robert Lucas, “[the] central problem of depression-prevention has been solved, for all practical purposes, and has in fact been solved for many decades.”<br /><br />Micro is looking very Hobbesian in its form of rationality. Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-2546602206734889307.post-55970483271730086822013-12-17T09:43:24.003+00:002013-12-17T09:43:24.003+00:00I think you miss the point here. This was an examp...I think you miss the point here. This was an example of how, by looking at the data, we can make ad hoc corrections to a microfounded model that can improve that model. Now of course macroeconomists will then want to microfound those improvements, but this is a never ending process. At any particular time, we can take the best (but misspecified) microfounded model, and potentially improve it by making ad hoc modifications suggested by the data. Discovering how to build a better microfounded model may take a long time. <br /><br />If you are still not convinced, look at the Carroll paper I discuss in the penultimate paragraph of this post: http://mainlymacro.blogspot.co.uk/2013/05/data-theory-and-central-bank-models.html. We are only just beginning to microfound precautionary saving, but Carroll suggests Friedman's PIH captured the key points decades ago.Mainly Macrohttps://www.blogger.com/profile/09984575852247982901noreply@blogger.comtag:blogger.com,1999:blog-2546602206734889307.post-69659522884691748962013-12-17T09:16:56.295+00:002013-12-17T09:16:56.295+00:00I have a question about the statement: "There...I have a question about the statement: "There are basically two ways to model the economy. The first is using microfounded models, which when done right avoid the Lucas critique. The second is to do something like a VAR, which lets the data speak...."<br /><br />How are you planning on microfounding changing preferences over time?<br /><br />Putting aside whether people are rational in their decisions, I see a gigantic catch-all category at the foundation of microeconomic theory that we are assuming never moves or moves in an incredibly simplistic way. I guess I just don't see why a theory grounded on such shaky foundations would necessarily be better than all other theories.D.R. Bakernoreply@blogger.comtag:blogger.com,1999:blog-2546602206734889307.post-51756901754392380622013-12-17T08:40:33.836+00:002013-12-17T08:40:33.836+00:00SW-L: "Let’s take a very basic example. Suppo...SW-L: "Let’s take a very basic example. Suppose in the real world some consumers are credit constrained, while others are infinitely lived intertemporal optimisers. A microfoundation modeller assumes that all consumers are the latter. An eclectic modeller, on finding that consumption shows excess sensitivity to changes in current income, adds a term in current income into their aggregate consumption function, which otherwise follows the microfoundations specification."<br /><br />Why would a microfoundation modeller necessarily assume that all consumers are infinitely lived intertemporal optimizers? (and even if they are, such consumers can presumably also be credit constrained, since life spans and objective functions tell us nothing about the credit market). There are plenty of models out there with credit/liquidity constraints. For a simple example of a macro model with such heterogeneity, see Mankiw's AER P&P where he combines life cycle people and hand-to-mouth consumers. For empirical evidence on such heterogeneity, see Kreiner, Lassen and Leth-Petersen, CEPR DP 2012.David Dreyer Lassennoreply@blogger.comtag:blogger.com,1999:blog-2546602206734889307.post-35058718162666448982013-12-17T07:15:31.212+00:002013-12-17T07:15:31.212+00:00But we also know that the microfounded model will ...<i>But we also know that the microfounded model will be wrong, because it will not have the right microfoundations. The eclectic model may be subject to the Lucas critique, but it may also - by taking more account of the data than the microfounded model - avoid some of the specification errors of the microfounded model. There is no way of knowing which errors matter more.</i><br /><br />YES. YES. A THOUSAND TIMES YES. YESTHOUSAND.Noah Smithhttps://www.blogger.com/profile/09093917601641588575noreply@blogger.comtag:blogger.com,1999:blog-2546602206734889307.post-64238473535732023992013-12-16T22:20:11.842+00:002013-12-16T22:20:11.842+00:00 It is my opinion that both eclectic models and mi... It is my opinion that both eclectic models and microfounded models, as currently formulated, are always prone to failure because they do not adequately account for the huge inertia that is associated with most disturbances to the economy. The time between the cause of the input disturbance (e.g. interest rate change, tax rate change) and its final effect on say unemployment, is a matter of many months and sometimes years. If the modelling of these (many) inertial effects is approached in the correct manner, as is done for example in the model featured in website www.economyuk.co.uk. then a great deal of the fog currently enveloping macro-economic modelling simply disperses.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-2546602206734889307.post-92145417015181488012013-12-16T21:29:55.913+00:002013-12-16T21:29:55.913+00:00SW-L:
"At any particular time, even the best ...SW-L:<br /><i>"At any particular time, even the best available microfounded model will be misspecified, and an eclectic approach that uses information provided by the data alongside some theory may pick up these misspecifications, and therefore do better."</i><br /><br /><i>"But the key point I want to make here is that I do not know of any epistemological reasons for thinking eclectic models must be inferior to microfounded models, yet many macroeconomists seem to believe that they are."</i><br /><br />Well put. <br />I'll also point out that many such economists are also committed to axiomatic theorising and are disdainful of inductive reasoning. They also insist on restricting allowable data to almost nothing other than time-series of P and Q, so if your eclectic approach requires some other form of data, it will be disallowed.<br />Hermannoreply@blogger.com