Heterodox
Despite his ignorance of the Cambridge Capital Controversy, Paul Romer's recent criticisms of mainstream macroeconomics have some good points. Typical Dynamic Stochastic General Equilibrium (DSGE) model time series, with exogenous shocks to certain parameters with specified probability distributions. And those parameters are named to suggest they have common language meanings. But there is no reason to think any such correspondence between the mathematics and the labels exist. I assume, however, that his Nobel prize is for explaining economic growth as the result of some combination of endogenous innovation, the accumulation of human capital, and an increasing variety of capital goods embodying technical progress. Admirers of Adam Smith, Karl Marx, Piero Sraffa, Nicholas Kaldor and
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Despite his ignorance of the Cambridge Capital Controversy, Paul Romer's recent criticisms of mainstream macroeconomics have some good points. Typical Dynamic Stochastic General Equilibrium (DSGE) model time series, with exogenous shocks to certain parameters with specified probability distributions. And those parameters are named to suggest they have common language meanings. But there is no reason to think any such correspondence between the mathematics and the labels exist.
I assume, however, that his Nobel prize is for explaining economic growth as the result of some combination of endogenous innovation, the accumulation of human capital, and an increasing variety of capital goods embodying technical progress. Admirers of Adam Smith, Karl Marx, Piero Sraffa, Nicholas Kaldor and those with some grasp of economic history should applaud this emphasis on increasing returns to scale. Mainstream economists, however, claim not to be producing mere descriptive prose, but rigorous formal models that embody their ideas. And mainstream endogenous growth models, including those developed by Paul Romer are, deficient. They:
- Depend on knife-edge relationships between model parameters.
- Pretend to model nonhomogenous capital goods, but measure such goods in numeraire units in production functions, thereby ignoring price Wicksell effects.
- Are unclear on the meaning of human capital and of designs, including on measurement scales.
If you want formal models that emphasize entanglements between increasing returns to scale and the growth of capitalist economies, I recommend the work of Luigi Pasinetti on structural economic dynamics. By the way, these deficiencies in the work of Paul Romer should be well known among scholars. These points have been made in the literature, a selection of which I point out below. (I could probably find something from Solow on the first point. The Rogers' paper is on the failure of DSGE models to coherently include money and banks, that addresses the Hahn problem.)
References- Sergio Cesaratto (1999). New and Old Neoclassical Growth Theory: A Critical Assessment, in Value, Distribution and Capital: Essays in Honour of Pierangelo Garegnani (ed. by G. Mongiovi and F. Petri), Routledge.
- Sergio Cesaratto (2009). Endogenous Growth Theory Twenty Years On: A Critical Assessment, working paper.
- Man-Seop Park (2007). Homogeneity Masquerading as Variety: The Case of Horizontal Innovation Models, Cambridge Journal of Economics, V. 37 (Nov.): pp. 379-392.
- Man-Seop Park (2010). How to give up wrestling with time: The case of horizontal Innovation Models, in Economic Theory and Economic Thought: Essays in Honour of Ian Steedman (ed. by Vint et al.), Routledge.
- Colin Rogers (2018). The conceptual flaw in the macroeconomic foundations of Dynamic Stochastic General Equilibrium models. Review of Political Economy V. 30 (1): 72-83.
- Ian Steedman (2003). On Measuring Knowledge in Old and New Growth Theories: An Assessment (ed. by Neri Salvadori, Edward Elgar.