Mar 17, 2011

Will the Crisis Break the Dogma? (if there is one)

And will more heterodox approaches to economic thinking receive more attention?

Compared to today, suggested Blanchard, macroeconomics pre-1940 looks like “a period where confusion reigned, for lack of an integrated framework”.

According to his account, the inter-temporal general equilibrium model provided that missing framework. Now, ten years later, we can see that framework in a different light, as the origin of the “beauty” that economists mistook for truth, and apparently still do, if only by force of intellectual habit. The important takeaway is that the crisis has opened the ground for alternative frameworks as well as tweaks of the existing one.
Mark Thoma

Paolo Sylos Labini once proposed: "torniamo ai classici" (back to the classics). He had a great understanding of economic thought and he was very skeptical of mainstream economics, with its exasperated mathematics and too mechanical view of things. "Back to the classics" is a provocation implying that the attempt to formalize ideas within a mathematically consistent framework, sometimes within a logical framework that doesn't belong to that in which the original ideas were produced, led us to depart from them, sometimes radically.

Frydman-Goldberg are among those who are trying to develop a different approach to economics, their approach explicitly admit imperfect knowledge avoiding precise quantitative prediction in macroeconomics (pdf and another post by Mark Thoma).

You may disagree and think that today mainstream modeling represents the highest point ever in economics, that's fine. But here it's a matter of how we should think about economics as a discipline (or as science if you see it in this way) and if less orthodoxy may be good.

A theory or a model, although internally consistent, can not be right or wrong per se. They can only be proved wrong, or not, against reality, and we must have a way to test it (otherwise it's faith).

Now suppose I have a model so complicated, with so many parameters that I can virtually calibrate it to reproduce whatever data I want. This model can't be proved wrong. Even if you try to forecast something and it doesn't work, you can simply say that a parameter structurally changed, that the world changed, but the model is still right, once you adapt it. Obviously this model is useless and believing in it is a matter of religion, not science.

It is somewhat funny that one may have this feeling from the latest highly formalized models that look very "scientific", something that should enhance testing against facts. Formalization is without a doubt a plus and allows more rigorous thinking and easier empirical analysis: it is a necessary part of economics.

The problem, is the excessive of search for internal consistency, math beauty and the standardization of the theoretical instruments. All of these without any final proof that this is the only right direction...

I just wish I knew enough to properly judge advancements in economics.

It is better to be vaguely right than exactly wrong.
Carveth Read

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