by Mainstream macroeconomics — rigorously irrelevant There is something about the way macroeconomists construct their models nowadays that obviously doesn’t sit right. One might have hoped that humbled by the manifest failure of its theoretical pretenses during the latest economic-financial crises, the one-sided, almost religious, insistence on axiomatic-deductivist modeling as the only scientific activity worthy of pursuing in economics would give way to methodological pluralism based on ontological considerations rather than formalistic tractability. But — empirical evidence still only plays a minor role in mainstream economic theory, where models largely function as a substitute for empirical evidence. Fortunately — when you’ve got tired of the kind of
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Mainstream macroeconomics — rigorously irrelevant
There is something about the way macroeconomists construct their models nowadays that obviously doesn’t sit right.
One might have hoped that humbled by the manifest failure of its theoretical pretenses during the latest economic-financial crises, the one-sided, almost religious, insistence on axiomatic-deductivist modeling as the only scientific activity worthy of pursuing in economics would give way to methodological pluralism based on ontological considerations rather than formalistic tractability. But — empirical evidence still only plays a minor role in mainstream economic theory, where models largely function as a substitute for empirical evidence.
Fortunately — when you’ve got tired of the kind of macroeconomic apologetics produced by ‘New Keynesian’ macroeconomists and other DSGE modelers — there are still some real Keynesian macroeconomists to read. One of them — Axel Leijonhufvud — writes:
New Keynesians adhere on the whole to the same DSGE modeling technology as RBC macroeconomists but differ in the extent to which they emphasise inflexibilities of prices or other contract terms as sources of shortterm adjustment problems in the economy … Except for this stress on inflexibilities this brand of contemporary macroeconomic theory has basically nothing Keynesian about it … Dynamic stochastic general equilibrium theory has shown itself an intellectually bankrupt enterprise.
If macroeconomic models – no matter of what ilk – build on microfoundational assumptions of representative actors, rational expectations, market clearing, and equilibrium, and we know that real people and markets cannot be expected to obey these assumptions, the warrants for supposing that conclusions or hypotheses of causally relevant mechanisms or regularities can be bridged, are obviously non-justifiable. Incompatibility between actual behavior and the behavior in macroeconomic models building on representative actors and rational expectations microfoundations is not a symptom of ‘irrationality.’ It rather shows the futility of trying to represent real-world target systems with models flagrantly at odds with reality.
A gadget is just a gadget – and no matter how brilliantly silly DSGE models you come up with, they do not help us working with the fundamental issues of modern economies.