RE: Questions about the stagflation episode... Advice to journalists
First off, if macro is at all close to a science, there should be near unanimity, among macro experts, on exactly: why did the dot.com bubble keep growing, even after Greenspan's 1997 (?) irrational exuberance comments? Why did Argentina turn into such a mess? I don't think there is agreement. Until macro-economics can reliably provide policy prescriptions to avoid turning any given country into such mess, or to avoid such bubbles, it is ridiculous to call it a science. Please, please inform me if I'm wrong. (Alex?) (Those who claim macro is pre-science can say these are cases of are what is too complex.) It's very interesting to me to see how: somebody does decide on the national interest rate, but, nobody decides on the unemployment rate, nor does anybody decide on the trade deficit. The Pres. Congress do decide on the Federal budget deficit and tax rates, but nobody decides on the number of bankruptcies, loan defaults, business starts; not even housing starts. Economics is a mix of decisions taken at different levels. This is why the rational actor is so important, as well as why micro is more important, it's where the real decisions are being made. My point is that macro, as a descriptive exercise, useful for understanding what has happened, may be a science like (very recent) archaeology. (Of course, I never liked, nor believed, the Samuelson Keynesianism I was taught, so I might well be missing current macro thought) But what politicians want, which Keynesianism promised much More than Mises-Hayek Austrians, is policies for control. Thus, even more than stories, journalists are interested in how to use (very simplified) economics to explain (support/ criticize) specific political policies. Krugman, for instance, feeds this desire for using econ to criticize policies, or advocate others. As do the Freidmans and other quoted economists. They also, occasionally, make predictions. I think the simple concepts most important are: 1) trade is not a zero sum game - trade increases wealth. 2) All markets depend on the definition of property rights, and the enforcement of contracts. 3) The correct (min) gov't role is to define property rights well, to enforce contracts, and to punish theft and fraud. 4) The vast majority of world poverty is caused by government failure to do its job. 5) Policies have unintended consequences, which can be predicted based on analyzing incentives. eg. policies to reduce corporate raiders from taking over underperforming companies meant that top management insiders were able to get all the available money instead of the investors. Tom Grey -Original Message- From: Alex Tabarrok [mailto:[EMAIL PROTECTED]] Subject: Re: Questions about the stagflation episode... I think that today there is a unified macro (Bill recognized that saying there wasn't was going out on a limb). Macro is now in a period of normal science. The profession has decided that the corect way to do macro is using a stochastic dynamic general equilibrium model. Some people include sticky prices in such models and others do not but either approach is well within the mainstream. Also, almost all the profession will now also agree that sticky prices or not a large fraction of what we call business cycles are the natural responses of an economy to real shocks. Although stagflation opened the door to new ideas what has driven the process more than anything is the internal dynamic to make macro models more micro-based. Alex -- Alexander Tabarrok
Re: Questions about the stagflation episode...
I'm actually not a Kuhnian on these issues, but I am trying to see how far Kuhn's theory goes in accurately describing economic research. Is it really true that there aren't reigning paradigms in meteorology? That is not what I meant. Of course there is. Its thermodynamics. However, to an outsider it looks to impose about as much structure on weather modeling as the notion of general equilibrium imposes on macro-modeling - - that is that the devil is in the details, big models can be less informative than the careful eye of a specialist in local phenomena, and simple models which are consistent with, but not based explicitly on physical theory, do almost as well as very big very complex models with a very tight relation to the theory. Also, I doubt there has been anything that looks like a paradigm shift in meteorology though I suspect there have been changes in fashion with respect to how weather is predicted. I should note that experimental econ seems to be developing in a very Kuhnian fashion. In what sense. I would say its inverted. In Kuhn new ideas come into a profession because young people feel free to work with them while the dinosaurs continue doing what they do. With behavioral economics young people are only now starting to do it after a bunch of people with tenure fought like heck for 20 years to get the ideas accepted. the hallmark of modern physics. Sure there are physical problems where chaos and complexity cause the same sorts of problems that economists have dealing with the economy, but they aren't at the core of the discipline the way they are in economics. Thus I think that a lot of Some core parts of physics deal with complexity - how about statistical mechanics? Is there a macro counterpart to statistical mechanics? Not sure what you mean by this, but I suspect that is exactly what the stochastic mechanics of the typical general equilibrium model is about. But you miss my point. I'm arguing that the phenomena physicists study at the core of the discipline are amenable to sufficiently exact theory and exact measurement that you can have decisive paradigm shifts driven by anomalous research results. Economic theory is not as precise so measurement can't provide the sort of strong evidence that one sees in core physics. Of course Kuhn's point is that research results aren't decisive in physics either. That anomalous results can always be reinterpreted to fit with the old paradigm and that therefore paradigm shift is a social phenomena rather than a purely logical phenomena. However, what I'm suggesting is that sharp divisions between paradigms, and paradigm shifts aren't a good way of thinking about how we progress in economics. One could say that economics has never had a paradigm shift. ! We went from pre-science to science with the marginalist revolution and have been doing normal science ever since. I would argue that pre-1970s macro was fully within this tradition within economics though the connections to price theory were verbal rather than rigorously theoretical and allowed verbal theorizing about behavior that was less than perfectly rational. The changes that took place with respect to micro-foundations in the 70s and 80s may look like a paradigm shift but I would argue that they are not. The changes preserved the fundamental notion that the economy should be thought of as a general equilibrium system with markets moving between equilibriums as shocks impact the system. What changed was the specifics of how the equations of the general equilibrium model were derived, estimated and rationalized. While this didn't represent a sea change in the scientific view of the economy, it did represent a sea change in methodology and a sea change in the relative pow! er of the two main ideological camps in economics. For a while the models where tight ties to basic price theory ensured welfare results that were anathema to interventionist liberals. Since about 1985-1990 things have been swinging back the other way with more and more accommodation of rigidities into mainstream (academic) models (largely driven by the inability of models without such rigidities to fit the data). However, it is my distinct impression that there is still a large gulf between practitioners of the different schools. In this sense I think that macro is still quite fragmented. Talking about paradigms and paradigm shifts obscures what I think is the real dynamic. In the 70s and early 80s a confluence of forces including the difficulty Keynesians had with stagflation, but more importantly the internal drive of the profession to insist on tight connections between rational actor models and empirical research, led academic economists to abandon the old tradition of approximating the macro economy with linear equations meant to captur! e the behavior of different markets without explicit micro foundations. Starting in some sense with the failure of rational
RE: Questions about the stagflation episode...
--- Grey Thomas [EMAIL PROTECTED] wrote: First off, if macro is at all close to a science, there should be near unanimity, among macro experts, Is there unanimity among anthropologists and biologists and physicists and medical researchers? Fred Foldvary = [EMAIL PROTECTED]
Re: Questions about the stagflation episode...
Also, almost all the profession will now also agree that ... a large fraction of what we call business cycles are the natural responses of an economy to real shocks. Alex Would that fraction include the downturn that followed the 1990s techno-boom, the recession having begun before the Sept. 11 shock? Fred Foldvary = [EMAIL PROTECTED]
Re: Questions about the stagflation episode...
On Mon, 3 Feb 2003, William Dickens wrote: That is not what I meant. Of course there is. Its thermodynamics. However, to an outsider it looks to impose about as much structure on weather modeling as the notion of general equilibrium imposes on macro-modeling - - that is that the devil is in the details, big models can be less informative than the careful eye of a specialist in Thermo, by itself, is not an example of a paradigm for meteorology. A paradigm, in Kuhn's sense, is (a) a theory, (b) empirical observations that are predicted by the theory, (c) the acceptance of the theory by most practitioners in the field, who use the theory to resolve new cases. The empirical results are the blueprint for future research. It seems that thermo is simply a rule for constructing paradigms within meteorology - i.e., any paradigm must not contradict thermo. Kind of like any macro theory must have correct microfoundations. Of course, I can't say if your depiction of meteorology is accurate, but we can ask if macro satisfies (a)-(c). Is there currently a widely accpeted theory whose legitimacy rests on the successful prediction of a specific business cycle? Is that theory the blueprint for most work in macro? Alex says yes, there is a widely accepted theory, and Brookings Bill Dickens says no. But neither person has provided the model achievement - the business cycle or other economic phenomena whose successful prediction by the theory legitimizes is position as a dominant macro-economic theory. Is there any such empirical example? The stagflation episode overturned the old theory, but is there a new theory that uses stagflation as its main example? Some core parts of physics deal with complexity - how about statistical mechanics? Is there a macro counterpart to statistical mechanics? Not sure what you mean by this, but I suspect that is exactly what the stochastic mechanics of the typical general equilibrium model is about. Adressing the idea that complexity undermines attempts at econ's Kuhnian development as a science, I was simply pointing out that some parts of physics deal with complex systems but still have Kuhn style paradigms. Statistical mechanics is one such example: theory behavior gases - a complex system - has dominant theories. The theory of phase transitions might be another example. But you miss my point. I'm arguing that the phenomena physicists study at the core of the discipline are amenable to sufficiently exact theory and exact measurement that you can have decisive paradigm shifts driven by anomalous research results. Economic theory is not as precise so measurement can't provide the sort of strong evidence that one sees in core physics. Fair enough. Measurement definitely would preclude anamoly driven change because adherent of a theory could always claim that measurements do not capture the real story. [clipped a long discussion on recent history of macro] economics. If you mean neo or new-Keynesians then the differences between them and new-classicals (the heirs to 60s monetarism) is minor compared to their differences with Austrians or post-Keynesians. But so what? Post Keynesians and modern Austrians play absolutely no roll William T. Dickens The point of the thread - at least my goal - was to assess Kuhn's model. If it is indeed the case that general equilibria theory is the paradigm for macro, then schools of economics that reject gen equi. would small time players in the field. So gen eq succeeds as a paradigm because Austrians and post-Keynesians are marginal. However, to satisfy Kuhn's definition of paradigm, there has to also be a classic example and future research has to be derived from the example. I don't know macro well enough to judge, but so far no one has given me an example such an empirical prediction. Altough we know stagflation led to the revision of a given research tradition. Fabio
Re: Questions about the stagflation episode...
IIUC, macro was characterized by multiple schools but there was an outstanding critique that the micro picture was flawed or asbent, which served to undermine one popular school. The anomaly didn't serve to usher in a new macro, but unravel some old science, which still has adherents in a modified version. The new macro is still fragmented and there is no consensus yet. Sounds like an example of science as muddling through. Or in Kuhn's terminology, macro is pre-science - a stage where there is no central idea providing coherence for macro. Fabio On Sat, 1 Feb 2003, William Dickens wrote: None of the above. Macro was already fragmented and remained fragmented after the 70s. Hard core monetarism probably did pick-up some adherents due to the events of the 70s, but the internal dynamic of the profession - - the relentless march of the rational actor model into all aspects of the work of economists - - was probably only speeded by these events. What stagflation did was convince people of the correctness of the Friedman/Lucas critique. This set nearly everyone off on a much more determined search for micro foundations for macro theory. I'll go out on a limb and say we still haven't gotten there. Thus Keynesian theory is still taught to undergraduates and it is what is behind most commercial forecasting models (though they may have some new-classical tweaks here and there). This is why I don't think this was a paradigm shift in the sense of Kuhn because there was no alternative paradigm to take the place of the Keynesian model. Bill Dickens [EMAIL PROTECTED] 02/01/03 02:06PM What would be the most accurare description of the economic profession's response to stagflation: 1) Everybody dropped Keynesianism and adopted a new model (monetarism?). 2) Macroeconomics broke up into competing schools, with different concepts and theories. 3) Keynesians kept going, but new economists adopted one or more models. Fabio
Re: Questions about the stagflation episode...
For the most part a fair summary of what I wrote, but I'm not sure that macro is in a pre-scientific state. That's giving both too much and too little credit to the current state of macro. Pre-science implies that eventually there will be a unified scientific theory. For all the various reasons identified in past discussions of social vs. physical science I doubt that social science will ever look like physics. I suspect that we will always be muddling through. When systems reach a certain degree of complexity we have to deal with partial abstractions of the system and in the case of macro-economics I'm convinced that they are inherently seriously inadequate. They will always leave room for judgement and expert knowledge in their interpretation. On the other hand, I think there is fairly wide agreement on the framework that one should use to think about problems in macro-economics. Everybody in main stream economic thinking about macro-problems has a general equilibrium model with capital markets, labor markets, and money markets in mind. The specifics of how some of those markets should be represented and what the rationale is for the representations used is the main items for debate. - - Bill Dickens [EMAIL PROTECTED] 02/02/03 01:48AM IIUC, macro was characterized by multiple schools but there was an outstanding critique that the micro picture was flawed or asbent, which served to undermine one popular school. The anomaly didn't serve to usher in a new macro, but unravel some old science, which still has adherents in a modified version. The new macro is still fragmented and there is no consensus yet. Sounds like an example of science as muddling through. Or in Kuhn's terminology, macro is pre-science - a stage where there is no central idea providing coherence for macro. Fabio On Sat, 1 Feb 2003, William Dickens wrote: None of the above. Macro was already fragmented and remained fragmented after the 70s. Hard core monetarism probably did pick-up some adherents due to the events of the 70s, but the internal dynamic of the profession - - the relentless march of the rational actor model into all aspects of the work of economists - - was probably only speeded by these events. What stagflation did was convince people of the correctness of the Friedman/Lucas critique. This set nearly everyone off on a much more determined search for micro foundations for macro theory. I'll go out on a limb and say we still haven't gotten there. Thus Keynesian theory is still taught to undergraduates and it is what is behind most commercial forecasting models (though they may have some new-classical tweaks here and there). This is why I don't think this was a paradigm shift in the sense of Kuhn because there was no alternative paradigm to take the place of the Keynesian model. ù Bill Dickens [EMAIL PROTECTED] 02/01/03 02:06PM What would be the most accurare description of the economic profession's response to stagflation: 1) Everybody dropped Keynesianism and adopted a new model (monetarism?). 2) Macroeconomics broke up into competing schools, with different concepts and theories. 3) Keynesians kept going, but new economists adopted one or more models. Fabio
Re: Questions about the stagflation episode...
I think that today there is a unified macro (Bill recognized that saying there wasn't was going out on a limb). Macro is now in a period of normal science. The profession has decided that the corect way to do macro is using a stochastic dynamic general equilibrium model. Some people include sticky prices in such models and others do not but either approach is well within the mainstream. Also, almost all the profession will now also agree that sticky prices or not a large fraction of what we call business cycles are the natural responses of an economy to real shocks. Although stagflation opened the door to new ideas what has driven the process more than anything is the internal dynamic to make macro models more micro-based. Alex -- Alexander Tabarrok Department of Economics, MSN 1D3 George Mason University Fairfax, VA, 22030 Tel. 703-993-2314 Web Page: http://mason.gmu.edu/~atabarro/ and Director of Research The Independent Institute 100 Swan Way Oakland, CA, 94621 Tel. 510-632-1366
Re: Questions about the stagflation episode...
Well maybe macro *is* in a scientific state, from your description. Sticking to Kuhn's terminology, normal scientific activity occurs when scientists use existing models to solve outstanding issues. From one perspective, maco is organized around general equilibria, and the fighting is over the details of money, capital and labor markets, as you describe. The situation is similar in many branches of physics - people often accept very broad ideas (Newton's mechanics) and then squabble over details, which may seem huge to insiders, but small to outsiders. Also: I've never bought the whole social science is too complex argument for why economics and physical science differ. A lot of the life and physical sciences deal with complex systems - ever study turbulence theory? It's prettty friggin' hard and complex. Or ecology - lot's of interrelated parts. But we still consider them sciences. Fabio in macro-economics. Everybody in main stream economic thinking about macro-problems has a general equilibrium ! model with capital markets, labor markets, and money markets in mind. The specifics of how some of those markets should be represented and what the rationale is for the representations used is the main items for debate. - - Bill Dickens
Re: Questions about the stagflation episode...
On Sun, 2 Feb 2003, William Dickens wrote: don't fit easily into Kuhn's categories. We're in the same situation as meteorology (only worse because our subjects have minds of their own). We know that weather systems are chaotic and therefore unpredictable beyond very limited time frames. Same for economics. I'm actually not a Kuhnian on these issues, but I am trying to see how far Kuhn's theory goes in accurately describing economic research. Is it really true that there aren't reigning paradigms in meteorology? I should note that experimental econ seems to be developing in a very Kuhnian fashion. the hallmark of modern physics. Sure there are physical problems where chaos and complexity cause the same sorts of problems that economists have dealing with the economy, but they aren't at the core of the discipline the way they are in economics. Thus I think that a lot of Some core parts of physics deal with complexity - how about statistical mechanics? Is there a macro counterpart to statistical mechanics? Finally, You and Alex both seem to want to classify the state of modern macro as normal science. Personally, I think that the differences between the different approaches within macro are much more profound than either of you apparently do. Although everybody Is the difference between monetarists and post-Keynesians smaller than between post-Keynseians and Austrians? Austrians don't even accept equilibira theory as a starting point of economic analysis. Fabio
Re: Questions about the stagflation episode...
None of the above. Macro was already fragmented and remained fragmented after the 70s. Hard core monetarism probably did pick-up some adherents due to the events of the 70s, but the internal dynamic of the profession - - the relentless march of the rational actor model into all aspects of the work of economists - - was probably only speeded by these events. What stagflation did was convince people of the correctness of the Friedman/Lucas critique. This set nearly everyone off on a much more determined search for micro foundations for macro theory. I'll go out on a limb and say we still haven't gotten there. Thus Keynesian theory is still taught to undergraduates and it is what is behind most commercial forecasting models (though they may have some new-classical tweaks here and there). This is why I don't think this was a paradigm shift in the sense of Kuhn because there was no alternative paradigm to take the place of the Keynesian model. Bill Dickens [EMAIL PROTECTED] 02/01/03 02:06PM What would be the most accurare description of the economic profession's response to stagflation: 1) Everybody dropped Keynesianism and adopted a new model (monetarism?). 2) Macroeconomics broke up into competing schools, with different concepts and theories. 3) Keynesians kept going, but new economists adopted one or more models. Fabio
