Narayana R. Kocherlakota, President of the Minneapolis Fed, writes,
modern macro models are designed to be mathematical formalizations of the entire economy. This ambitious approach is frustrating for many outside the field. Many economists like verbal intuitions as a way to convey understanding. Verbal intuition can be helpful in understanding bits and pieces of macro models. However, it is almost always misleading about how they fit together. It is exactly the imprecision and incompleteness of verbal intuition that forces macroeconomists to include the entire economy in their models.
Thanks to Greg Mankiw for the pointer.
I think being precisely wrong is worse than being vaguely right, but then, that’s why Kocherlakota is President of the Minneapolis Fed and has an outstanding reputation in academia, while I write a blog. I stand by my remarks on the econometrics controversy.
READER COMMENTS
Norman
May 15 2010 at 12:21am
I think being precisely wrong, knowing about it, and trying to improve is better than being vaguely right but stagnant. The best position, I suppose, would be to start from the vaguely right verbal intuitions and then find ways to formalize the connections between ideas wherever possible.
ajb
May 15 2010 at 7:31am
Nothing has changed in 30 years. The problem is that they have no good standards for how well a model matches reality or makes predictions that can be sold to an outsider who has not already drunk the Kool-Aid. This reminds me of grad school. When you protest that their formalizations are wrong, they insist that they are better than nothing. Where “nothing” is defined as the more imprecise but more accurate models that preceded them. Accuracy is a moving target and they can never show that their versions are “better;” they’re just more formal. They free ride off the reputation of economists who do more useful research while reserving a large corner of journals and funding to themselves. They use money and journal control to ward off outsiders. Because the field is self-referencing, arbitrage is difficult. Disgusting.
Rebecca Burlingame
May 15 2010 at 9:18am
There is at least one important reason why the macro models are wrong. Most individuals depend upon others for services which the receiver may or may not be able to reimburse for, either economically or more importantly, legally. The only way recognition for these unpaid services actually exists is when they move into a category of self-employment. Most services that individuals provide are too integrated into total life needs for this to happen.
fundamentalist
May 15 2010 at 11:17am
Kocherlakota: “Many economists like verbal intuitions as a way to convey understanding.”
That’s a straw man, which is a typical, but dishonest way to respond to opponents. There are no “verbal intuition” economists out there. Austrian econ is often disparaged as “literary” economics because it eschews math models, but they are comprehensive models of the economy and are not based on intuition.
The Austrian model of the macro economy is far more comprehensive than any mainstream math model because economists had to simplify reality to ridiculous degrees and make silly assumptions in order to force reality into their simplistic models. Anyone who knows anything at all about macro models knows that the assumptions behind them are so unrealistic as to be laughable.
Take the issue of making the macro models more micro based. Modelers couldn’t include equations that represented even a few groups of individuals, so they assume a “super” rational individual who represents 400 million people. And he has the balls to say “It is exactly the imprecision and incompleteness of verbal intuition that forces macroeconomists to include the entire economy in their models.” There is nothing more incomplete and more imprecise than mainstream macro models.
Dr Kling you’re wrong. Kocherlakota is “President of the Minneapolis Fed and has an outstanding reputation in academia” because he tows the party line, not because he is a better economist. You’re in good company. Ludwig von Mises was one of the greatest economists of the 20th century, but because he refused to tow the party line he couldn’t get a teaching position in Vienna or the US when he immigrated. As you know well, politics is far more important in academia than is scholarship. Kocherlakota proves that he is dishonest about the scholarship, so to get where he is he must be one hell of a butt kisser.
Hume
May 15 2010 at 11:31am
To Arnold, David, and Bryan:
If you were forced to choose two books/articles to recommend to a statist “liberal” in hopes of converting such person, what would they be?
fundamentalist
May 15 2010 at 11:38am
PS, When Hayek immigrated to the US, he couldn’t get a job teaching economics, either. He taught sociology at Chicago, not economics.
fundamentalist
May 15 2010 at 11:46am
If Kocherlakota thinks that mainstream macro models are precise and complete, then why can’t they predict depressions? All they ever do, because it’s all they can do, is tell us that the present trend will continue. And they are right, until they are wrong and a depression hits. Which means they are right about 90% of the time if you consider that on average the economy follows an upward trend for about 9 years and then a depression hits. They never predict the depression, but they don’t care because they get the trend right, so they look pretty good.
What they don’t realize is that most of us don’t care about the trend. We can predict that with sufficient accuracy for our purposes. What we need to know is when the trend will end! And the macro models are no help at all! Macro models are like road signs that tell us a curve is up ahead but can’t tell us that the bridge over the Grand Canyon is out.
fundamentalist
May 15 2010 at 12:12pm
I apologize to the many posts, but as you can tell Kocherlakota got my fever going. The biggest complaint I hear about Austrian economics, the “literary” economics, is that it is hard to follow, not that it is too simple. When Milton Friedman read Hayek’s “Pure Theory of Capital” he called it incomprehensible. Now Friedman was no dummy, yet I have read it three times because I thought it was so brilliant and I only have an MA in econ.
Anyone who sticks with Hayek or Mises (Human Action) comes out of it with a sense of awe about how much these two guys knew about economics that mainstream economics isn’t even aware of. Compare the works of Hayek and Mises with mainstream econ models and the models reflect a childish understanding of macro.
Rebecca Burlingame
May 15 2010 at 12:28pm
Apparently economics is one of several disciplines in which those who break new ground cannot be decently paid or recognized. In my recent philosophy class, a lot of the discussion was how certain philosophers ahead of their time could scarcely get a teaching position and sometimes died in poverty.
Doc Merlin
May 15 2010 at 5:33pm
“I think being precisely wrong is worse than being vaguely right,”
I think that makes you an Austrian.
Adam
May 17 2010 at 4:59am
Seems desirable to have a “vaguely right” intellect in a policy position like President of the Minneapolis Fed rather than a “precisely wrong” theorist. Precisely wrong is fine if it’s (a) in an true ivory tower and (b) making progress. But macro theorist love to dabble in policy and where is progress in the last 30 or even 70 years? More models, certainly, but where is the substantive progress?
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