by From Peter Radford What are we to say of a discipline that steadfastly ignores reality in its pursuit of ever more formality in its methods? Wow. Steve Levitt has really shaken me. I come not to mock, but to follow up … Stand up and take a bow Ben Moll! You daring soul. Clearly I need to explain. No sooner had I finished my comment on the irrelevancy of economics but I had confirmation — albeit unwittingly — in this morning’s Financial Times. There on the editorial page was a short column by Soumaya Keynes talking about the rise of Hank. For those of you not on the cutting edge, “Hank” stands for Heterogeneous Agent New Keynesian, as in a complicated model of the economy. Hank is a whole new way of looking at model economies, with the really big breakthrough being that it includes —
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from Peter Radford
What are we to say of a discipline that steadfastly ignores reality
in its pursuit of ever more formality in its methods?
Wow. Steve Levitt has really shaken me. I come not to mock, but to follow up …
Stand up and take a bow Ben Moll! You daring soul.
Clearly I need to explain.
No sooner had I finished my comment on the irrelevancy of economics but I had confirmation — albeit unwittingly — in this morning’s Financial Times. There on the editorial page was a short column by Soumaya Keynes talking about the rise of Hank.
For those of you not on the cutting edge, “Hank” stands for Heterogeneous Agent New Keynesian, as in a complicated model of the economy.
Hank is a whole new way of looking at model economies, with the really big breakthrough being that it includes — roll the drums please — more than one household.
Yes, economists are moving at a rapid pace. Their research has shown that the economy includes more than one household.
Gasp.
If you are a sociologist or anthropologist you are forgiven at this point for laughing out loud.
Reflect, if you will, on the enormous hubris expressed by Steve Levitt when he criticized economics for becoming too inwardly focused and potentially irrelevant. His condemnation was absolute. He said that economics risked falling into the kind of disrepair that, in his mind at least, make sociology and anthropology laughingstocks. Now, I don’t know sociology or anthropology all that well, but I imagine they don’t base a substantial amount of their theoretical effort on the notion that America has only one household. Even if that household is “representative”.
Representative of what? Some Chicago-trained logician masquerading as an economist?
I digress.
Littered throughout the FT article are hints at why the absurdity of economics has persisted so long. The word “simple” pops up, or is hinted at, several times.
The older models, those with that one representative household, were simpler. Why was this a good thing? Because it made the math tractable. And having tractable math was valued more than having models that might even vaguely resemble actual economies. But as this effort ran into the difficulty represented by the complexity of the real economy, economists turned inward and focused more and more on microeconomics. They left the big picture behind and made the absurd decision that the big picture was simply an aggregation of lots of micro pictures. Micro-foundations became the new buzzword.
This of course must sound ridiculous to anyone who has encountered the consequences of the massive interconnections found daily within an actual economy. But it was necessary too keep things simple.
Yes, I think I hear the sociologists and anthropologists chortling politely as they sip their morning coffee. If they are irrelevant and in disrepair, what are we to say of a discipline that steadfastly ignores reality in its pursuit of ever more formality in its methods?
Speaking of which, this week’s award of the annual John Bates Clark Medal went to Phillip Strack. Congratulations to him! Well done. A rising star is properly honored. Here is the first paragraph from the American Economics Association announcement of the award:
Philipp Strack is a deeply creative and prolific microeconomic theorist whose research has enriched our understanding of economics on several fronts. Among his many accomplishments are (1) contributions to studies of decision-making and behavioral economics, particularly in dynamic context settings that involve learning and information transmission; (2) the formalization of ideas, such as information cost functions or notions of privacy, so that these concepts can be more fruitfully applied; and (3) the development of a new analytical approach to mechanism design. His work on (1) has challenged conventional wisdom and significantly pushed the boundaries of theories of decision-making and behavioral economics outward, and his work on (2) and (3) represent a new wave of the economics of information.
Read that carefully. Our latest star is a micro guy. He is being recognized for all sorts of things such as “studies in decisions making”, “mechanism design”, and “learning and information transmission”. Micro. Narrow. Presumably the behavior he is elucidating is of more than one household. He’s obviously a very clever chap and I wish him well, but how that all helps society at large understand the economy as a whole is a little difficult to tease out. I invite him to explain.
What seems to be clear, though, is that Levitt is right. Economics, burdened by the complexity of the real economy, decided along the way to avoid that complexity and to go inward into its method and technique. There were great rewards for being gifted modeler. Whether the model made much sense in a real world setting slowly became less relevant. Which meant that economics itself became less and less relevant. It became more and more self regarding and self absorbed.
Which is why, possibly, people like Levitt can look at the other social sciences with such disgust. When you become obsessed with the superiority of your technique rather than the relevance of your output you can easily slide into the sort of hubris that epitomizes the attitude economics has of itself.
In the background to all this is another factor that economists prefer us to avoid engaging. Economics just isn’t very good at explaining the big things that go on in real economies. It ranks right down there with sociology and anthropology. Probably further down than those disciplines given the extravagant claims that economists have made through the years. What is that saying about protesting too much? This failure of macro thinking is another reason why so many economists sank into micro and why microeconomics came to be the place to play. It’s a more made up playground than macro and is fertile ground for the aspiring mathematicians and logicians who clutter up the halls of academic economics.
Comeuppance is due. And the current disregard for economics, well earned that it is, has finally shown up in policy circles. Neither Trump nor Biden uses academic economists much. Politicians, like them or not, have to deal with real and not made up worlds. I understand that until recently the lead economist in the Biden administration boasted a masters degree in public policy. A far more relevant qualification than a PhD in micro whatever or something to do with representative households.
How low can you go?
But maybe the message is sinking in because the FT article hints, gently, at progress beneath the surface. Not only do economists now recognize the possibility that America has more than one household — sociologists please be quiet — but there are other signs that the enormous damage done to the relevancy of economics by the likes of Lucas and his ilk is being shaken off.
Inequality, for instance appears to be seeping into Hank. I regard this as significant progress. After all it is a feature of the real world. Lucas, don’t forget, condemned the subject of inequality as being a major distraction to the study of “sound” economics. The problem, though, as the article suggests, is that inequality has been sidelined for so long that the current generation of modelers now building their versions of Hank are having difficulty figuring out how to incorporate it. Perhaps they need to spend more time with Gabriel Zucman, last year’s winner of the Clark medal, who writes a lot about inequality. Or Branko MIlanovic whose icy dismissal of mainstream economics as being “Cold War” economics pretty much sums up where and why the discipline sank into its present state. Economics was redesigned post World War II as an anti-state, anti-social, pathologically pro-market, and absurdly reductionist effort to bolster those American values associated with free enterprise, untrammeled capitalism, and the promotion of the very inequality that economists now seek to grapple with.
Whoops.
Maybe the household they modeled wasn’t vey representative after all.
And Ben Moll?
Daring soul that he is, Ben has suggested that perhaps, just maybe, and if you squint really hard, the totally ridiculous notion of rational expectations needs to be tossed overboard. Apparently Ben has spent some time with his family and noticed that they don’t carry around in their heads complete information about every darned thing coupled with the computational capacity to make instantaneous adjustments to every move that everyone else makes. Oh, and periodically they forget things, change their minds and generally behave very … well not quite rationally. This shocking discovery has motivated Ben to argue that Hank ought not be based on all seeing and all knowing rational actors. Something more akin to humans might be in order.
Please … anthropologists be quiet!
So there is hope. The current malaise might be cured by Hank. Although Soumaya Keynes let slip her cynicism at the end of her article when she says:
“In highlighting the power of fiscal policy and the importance of inequality, a cynical assessment of the Hank boom is that it is merely bringing the theory of macroeconomics up to speed with its practice. Even if there is some way to go, it is a move in there right direction.”
You could also suggest, possibly impolitely, that the Hank boom is simply an effort to shed the waste and destruction of the last fifty to sixty years of theorizing. Getting rid of the illusions, delusions, and outright errors of a generation or two of economists obsessed with the glitter of their own self-proclaimed cleverness, along with the arrogance the led economists to denigrate the less formal social sciences, seems like a good thing. Cathartic almost. It might even make economics relevant.
Make economics relevant again. Now there’s a slogan to rally behind.
It might even aspire to the stature of sociology or anthropology. That’s a goal to shoot for.
Isn’t it?