by Dangers of ‘running with the mainstream pack’ [embedded content] An absolutely fabulous speech — and Soskice and Carlin’s textbook Macroeconomics: Institutions, Instability, and the Financial System — that Dullien mentions at the beginning of his speech — is really a very good example of the problems you run into if you want to be ‘pluralist’ within the mainstream pack. Carlin and Soskice explicitly adapts a ‘New Keynesian’ framework including price rigidities and adding a financial system to the usual neoclassical macroeconomic set-up. But although I find things like the latter amendment an improvement, it’s definitely more difficult to swallow their methodological stance, and especially their non-problematized acceptance of the need for macroeconomic
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Dangers of ‘running with the mainstream pack’
An absolutely fabulous speech — and Soskice and Carlin’s textbook Macroeconomics: Institutions, Instability, and the Financial System — that Dullien mentions at the beginning of his speech — is really a very good example of the problems you run into if you want to be ‘pluralist’ within the mainstream pack.
Carlin and Soskice explicitly adapts a ‘New Keynesian’ framework including price rigidities and adding a financial system to the usual neoclassical macroeconomic set-up. But although I find things like the latter amendment an improvement, it’s definitely more difficult to swallow their methodological stance, and especially their non-problematized acceptance of the need for macroeconomic microfoundations.
Some months ago, another sorta-kinda ‘New Keynesian’, Paul Krugman, argued on his blog that the problem with the academic profession is that some macroeconomists aren’t “bothered to actually figure out” how the New Keynesian model with its Euler conditions — “based on the assumption that people have perfect access to capital markets, so that they can borrow and lend at the same rate” — really works. According to Krugman, this shouldn’t be hard at all — “at least it shouldn’t be for anyone with a graduate training in economics.”
Carlin & Soskice seem to share Krugman’s attitude. From the first page of the book, they start to elaborate their preferred 3-equations ‘New Keynesian’ macromodel. And after twenty-two pages, they have already come to specifying the demand side with the help of the Permanent Income Hypothesis and its Euler equations.
But if people — not the representative agent — at least sometimes can’t help being off their labour supply curve — as in the real world — then what are these hordes of Euler equations that you find ad nauseam in these ‘New Keynesian’ macromodels gonna help us? Yours truly’s doubts regarding the ‘New Keynesian’ modellers ‘ obsession with Euler equations is basically that, as with so many other assumptions in ‘modern’ macroeconomics, the Euler equations don’t fit reality.
All empirical sciences use simplifying or unrealistic assumptions in their modelling activities. That is not the issue – as long as the assumptions made are not unrealistic in the wrong way or for the wrong reasons.
If we cannot show that the mechanisms or causes we isolate and handle in our models are stable, in the sense that what when we export them from our models to our target systems they do not change from one situation to another, then they only hold under ceteris paribus conditions and a fortiori are of limited value for our understanding, explanation and prediction of our real world target system.
No matter how many convoluted refinements of concepts made in the model, if the “successive approximations” do not result in models similar to reality in the appropriate respects (such as structure, isomorphism etc), the surrogate system becomes a substitute system that does not bridge to the world but rather misses its target.
From this methodological perspective, yours truly has to conclude that Carlin’s and Soskice’s microfounded macroeconomic model is a rather unimpressive attempt at legitimizing using fictitious idealizations — such as Euler equations — for reasons more to do with model tractability than with a genuine interest in understanding and explaining features of real economies.
Running with the mainstream pack is not a good idea if you want to develop realist and relevant economics.