Grasping Reality on TypePad, by Brad DeLong

Paul is, I think, the captive of a folk story about the economy and economics that only survives—that could only survive—only within the epistemically-closed empirically-irrelevant calibration-scholastic hothouse....

Solow’s Choice: "Robert Solow had a choice about how to respond [to Robert Lucas]. He chose sarcastic denial over serious engagement. His optimistic assessment of the prospects for the simulation models, a grade of B or B- but nothing ‘in that record that suggests suicide,’ is hard to reconcile with the decision by virtually all macroeconomists to abandon work on them.

Ummm...

That seem to me to be pretty completely wrong.

Consider Macro Advisers. [Larry Meyer's] Macro Advisors makes a very good living today selling its simulation models.... John Cassidy (1996): The Decline of Economics:

Meyer... "In our firm, we always thanked Robert Lucas for giving us a virtual monopoly. Because of Lucas and others, for two decades no graduate students are trained who were capable of competing with us by building econometric models that had a hope of explaining short-run output and price dynamics. [Academic economics Ph.D. programs] educated a lot of macroeconomists who were trained to do only two things—teach macroeconomics to graduate students, and publish in the journals...

Cassidy continues:

Meyer also pointed out that the large-scale Keynesian models that Lucas criticized have actually tracked the economy pretty accurately... when... modified....

People who have spent their lives doing macroeconomic forecasting and policy analysis know that over the last twenty-five years the Phillips curve has been the single most reliable tool in their tool kit...

And:

Meyer dismissed Lucas's followers as practitioners of what he terms closed-blind economics, saying mockingly:

When you close the blinds, you don't look out of your window and you don't care what's happening out there. You don't try to build models which are consistent with the real world. With the blinds closed, it's hard to see anything...

It is not just private-sector clients who are going to make investment decisions that depend on having a good macroeconomic forecast who are willing to pay handsomely for the output of the simulation models Romer scorns. The same holds true for central bankers as well....

From my perspective, to bet at the end of the 1970s that the right road was to require (a) consistency with the preferences of a rational representative agent, and (b) price-taking market-clearing—that was a completely wrong, disastrous, and highly irrational choice of academic fashion. I can think of a dozen alternative academic intellectual fashions that might have been adopted, and I cannot think that any of them would have been less productive.

Robert Solow tried to stop this when it started. And Robert Solow was right to do so:

Suppose someone sits down where you are sitting right now and announces to me that he is Napoleon Bonaparte. The last thing I want to do with him is to get involved in a technical discussion of cavalry tactics at the Battle of Austerlitz. If I do that, I'm getting tacitly drawn into the game that he is Napoleon Bonaparte. Now, Bob Lucas and Tom Sargent like nothing better than to get drawn into technical discussions, because then you have tacitly gone along with their fundamental assumptions; your attention is attracted away from the basic weakness of the whole story. Since I find that fundamental framework ludicrous, I respond by treating it as ludicrous—that is, by laughing at it—so as not to fall into the trap of taking it seriously and passing on to matters of technique...