This Morning's Webloggy Navel Gazing: Live from Evans Hall

Economics: It's Much Worse than That!

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April Fools Day Is Coming Early This Year/Hoisted from Comments/Live from Le Pain Quotidien: We have, checking back through the archives, a very good question from the estimable Kaleberg:

Kaleberg: Comment on "Noted for Your Afternoon Procrastination for January 2, 2015: "So Robert Lucas rejects the idea of chemistry...

He is commenting on:

Lunchtime Must Read: Robert Lucas Rejects the "Microfoundational" Project:

Robert Lucas: Economics tries to... make predictions about the way... say, 280 million people are going to respond if you change something in the tax structure, something in the inflation rate, or whatever.... Kahnemann and Tversky haven’t even gotten to two people; they can’t even tell us anything interesting about how a couple that’s been married for ten years splits or makes decisions about what city to live in--let alone 250 million. This is like saying that we ought to build it up from knowledge of molecules or--no, that won’t do either, because there are a lot of subatomic particles.... We’re not going to build up useful economics in the sense of things that help us think about the policy issues that we should be thinking about starting from individuals and, somehow, building it up from there. Behavioral economics should be on the reading list.... But to think of it as an alternative to what macroeconomics or public finance people are doing or trying to do... not in my lifetime...

The rest of Kaleberg's comment:

...How can we predict the behavior of 6.023 x 10^23's of molecules? The very outer fabric of the atoms that comprise molecules are probabilistic, unpredictable charge clouds. The very idea is absurd. But then, strangely enough, I ignite a mixture of hydrogen and oxygen and get water. Why does anyone take anything he says seriously? Does he even have an inkling of how silly he sounds?

I do not think Lucas understands how silly he sounds.

I do not think Lucas understands that when he builds his models he is aggregating up the behavior of 310 million American individuals, having made certain assumptions about what things cancel out when that aggregation is made.

Lucas does say that economists definitely should not:

  • Model humans as they actually behave.
  • Model their economic interactions as they actually happen.
  • Aggregate up.
  • And look for emergent patterns to fit to the data.

Instead Lucas says economists should:

  • Do what macroeconomists currently do.
  • This is, assume one infinitely-lived hyper-rational representative price-taking agent.
  • Assume that all equilibrium-selection and coordination problems are automagically solved.

The second, Lucas says, is "science"! The first, Lucas says, is not--even though the first is a strict superset of the second.

And if econometric tools reject Lucas's approach? Then, Lucas says, so much the worse for econometric tools. And if the data reject that approach? Then, Prescott says, so much the worse for the data: "economic theory ahead of economic measurement"--our theories would not be falsified if we had the real data to work on...