Monday, June 28, 2010

One more take on Kartik Athreya's critique of economics bloggers

Athreya is arguing that the blogosphere's various critiques of modern macro are being made by insufficiently expert bloggers using insufficiently rigorous arguments. As is often the case, the best rejoinder comes from Mark Thomaand I suppose I don't have much to add myself. (I would link to the essay, but it seems to be broken right now)

But George Akerlof did [have a lot to add], way back in 2006, during his American Economic Association Presidential Address. which was entitled "The Missing Motivation in Macroeconomics." I remember finding the piece enthralling (I know, we economists aren't supposed to use such emotion laden words), because it made the very simple but devastating case that when the foundations of modern macro (the independence of consumption and current income (given wealth); the independence of investment and finance decisions (the Modigliani-Miller theorem); inflation stability only at the natural rate of unemployment; the ineffectiveness of macro stabilization policy with rational expectations; and Ricardian equivalence) are tested against data, they generally fail the test. I remember at the time that some economists thought that Akerlof had taken leave of his senses (and some friends of mine thought I had taken leave of mine because I so admired the address).

But in the end, we should be respecting evidence more than clever theoretical edifices. And yes, Kartik, while I am not an expert in macro, I did have to slog through lots of OLG models and rational expectation models and real business cycle stuff in graduate school, and pass prelim questions on them, so I have at least some idea of what it is that I find intellectually unsatisfying. Akerlof's view, expressed before we had the financial meltdown, that we really need to start over with modern macro, has, I think, largely been vindicated.