tag:blogger.com,1999:blog-2499715909956774229.post1177783898261258627..comments2024-03-22T22:37:02.639-07:00Comments on Stephen Williamson: New Monetarist Economics: Real Business CyclesStephen Williamsonhttp://www.blogger.com/profile/01434465858419028592noreply@blogger.comBlogger35125tag:blogger.com,1999:blog-2499715909956774229.post-71104496318943497512012-01-25T22:58:48.701-08:002012-01-25T22:58:48.701-08:00I was delighted to find this web site.I wanted to ...I was delighted to find this web site.I wanted to thank you for your time reading this wonderful! I really enjoyed every bit of it and I've marked to ensure that the blog post something new.<br /><br /><br /><a href="http://www.vitanherbs.com" rel="nofollow">natural minerals</a><br /><a href="http://www.vitanherbs.com/bestnaturals.html" rel="nofollow">best naturals </a><br /><a href="http://www.vitanherbs.com/supplements/doctor-s-best-curcumin-c3-complex-w-bioperiner-1000mg-120t.html" rel="nofollow">buy curcumin</a>saimhttps://www.blogger.com/profile/18281551295502083429noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-9663016184289521532010-07-17T07:25:53.964-07:002010-07-17T07:25:53.964-07:00Middle ground between what and what? What is your ...Middle ground between what and what? What is your model?Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-71553245168986990362010-07-16T03:42:22.069-07:002010-07-16T03:42:22.069-07:00So no answer? There's no mechanism? It's...So no answer? There's no mechanism? It's just some miracle of markets that they instantly clear now and into the future? And this is so clearly true that we should make it a requirement of a good economic model?<br /><br />I mean, what's your argument here? The US economy works better than Stalin's Five Year Plans, therefore we must conclude that the economy is always in equilibrium at all times? There's no middle ground?Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-8742944382310383112010-07-15T13:45:32.948-07:002010-07-15T13:45:32.948-07:00Richard H. Serlin
-The problem we too often see i...Richard H. Serlin<br /><br />-The problem we too often see is models -interpreted straight out literally, like -reality behaves exactly the same. Or -qualitatively literally, or just overly -literally.<br /><br />MaxManus:<br />Agreed, but I would say that economist should interpret the model literally and use it to say "if ..., then ..". And not set up a model and pretend that it is the model that says something about the real world when it is the economist's gut/experience/what ever.Max Manusnoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-50650316701623483562010-07-15T12:12:57.102-07:002010-07-15T12:12:57.102-07:00A model is only as good as its interpretation.
Th...A model is only as good as its interpretation.<br /><br />The problem we too often see is models interpreted straight out literally, like reality behaves exactly the same. Or qualitatively literally, or just overly literally.<br /><br />Models usually describe some force, or forces, at work, but not all. You have to use high level intelligence, not mechanical thinking, to consider how strong those forces are in the real world, and to consider other forces not in the model that are substantial, and how strong they are, and what direction they go in (considering any substantial interactions and feedback effects), to determine how things work in sum over the short, medium, long, and/or very long run.<br /><br />The models are an aid, and often a very valuable one, but when interpreted intelligently, not literally. And when combined with other important information from reality, emperical and just logic that's solidly linked to very reasonable, mild assumptions (often far milder than those common statistical tests are based on).Richard H. Serlinhttps://www.blogger.com/profile/09824966626830758801noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-16372054443217989642010-07-15T10:51:52.647-07:002010-07-15T10:51:52.647-07:00Another point related to this:
"There are 27...Another point related to this:<br /><br />"There are 2700 stocks listed on the New York Stock Exchange. God knows how many products Amazon and Walmart sell. How do prices in an economy of the size and complexity of the US economy get set into this equilibrium of prices, plans, and expectations?"<br /><br />That's what so amazing about a market economy. That's a hard problem to solve. You wouldn't want a central planner doing it.Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-72931423119796129762010-07-15T10:49:26.443-07:002010-07-15T10:49:26.443-07:00Sorry to offend you, but as Bullwinkle said, "...Sorry to offend you, but as Bullwinkle said, "I paint what I see." Another common line used in Minneapolis is: "It takes a model to beat a model." What's yours?Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-32521252961231896802010-07-15T08:46:23.188-07:002010-07-15T08:46:23.188-07:00Ah, the "you're like an undergraduate&quo...Ah, the "you're like an undergraduate" card, the go-to trump card of academics who've decided not to listen. I have read plenty, thank you, including the New Keynesians you mentioned. Now you can insult my reading comprehension instead.<br /><br />So all models are patently unrealistic, but you seem to like some unrealisms more than others. The idea that we are continuously in an equilibrium of prices, plans, and expectations, a la Radner, is A-OK with you, but the idea that prices don't instantly adjust to these new equilibria is an unrealistic chicken model. <br /><br />There are 2700 stocks listed on the New York Stock Exchange. God knows how many products Amazon and Walmart sell. How do prices in an economy of the size and complexity of the US economy get set into this equilibrium of prices, plans, and expectations? You assume that prices get set perfectly, except for some small deviation from perfection, such as search frictions, without ever explaining how this miraculous level of coordination happens. Walras' chicken auctioneer?Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-79449874537737076052010-07-15T07:05:32.597-07:002010-07-15T07:05:32.597-07:00I assume you haven't read much, because your m...I assume you haven't read much, because your misconceptions are like those of my undergraduates during the first week of class. All models are wrong or unrealistic in some fashion, and they all make assumptions that are "patently unrealistic." We construct the models with particular issues in mind, to address particular problems we are interested in. Keynesian models are not the only game in town, and there are plenty of other ways to think about policy that don't involve sticky wages and prices. We have models in wide use that go beyond Arrow-Debreu to think about private information, limited commitment, incomplete markets, search frictions, etc. All of these models are useful in some fashion for dealing with particular problems. IS/LM is not useful - that's why the New Keynesians abandoned it.Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-4618667637701971012010-07-15T04:34:23.597-07:002010-07-15T04:34:23.597-07:00Why would you assume that I haven't read much ...Why would you assume that I haven't read much about macroeconomics? I have read a very great deal. I have no problem with the idea that Arrow-Debreu is a useful model. But if models are going to be judged on usefulness, then they should be judged on usefulness. IS/LM is a useful model, too. You want to say that old Keynesianism is a bad model because it's assumptions are unrealistic, but then when you want to defend a model whose assumptions are patently unrealistic, you fall back on the fact that it's useful. Maybe in fact it's not that useful. Maybe it's time to rethink its usefulness, the same way that economists rethought the usefulness of IS/LM in the wake of stagflation. Maybe if we applied the usefulness criterion fairly, rather than first excluding some models because they failed to satisfy patently unrealistic assumptions, we would discover that lots of other models with fundamentally different assumptions were even more useful.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-64088969340416324642010-07-14T18:10:39.657-07:002010-07-14T18:10:39.657-07:00I now realize my comment is really long. sorry for...I now realize my comment is really long. sorry for spamming your blog!Parag Waknishttps://www.blogger.com/profile/06711521855245152023noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-73316452925001373872010-07-14T13:39:29.666-07:002010-07-14T13:39:29.666-07:00Parag,
Excellent. I think we more or less underst...Parag,<br /><br />Excellent. I think we more or less understand each other.Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-36287491879323537692010-07-14T13:25:49.570-07:002010-07-14T13:25:49.570-07:00Given some of the comments here and similar ones e...Given some of the comments here and similar ones else where on the blogosphere, I think more would have to be said about the basic anatomy of popular criticism of economic theory and methodology that seems to have mushroomed after the crisis. Karthik Athreya's piece was actually a good start. It is mind boggling the way in which various media have fed into each other to create a remarkably homogeneous criticism of way the macro-economists have conducted themselves for the past 25-30 years. Occasional sensational statements by otherwise sensible economists have only made things worse. <br /><br />Many ideas of economists sound bizarre to the layman, probably because its something like the blind-men and the elephant story. The point is that no body really understands the elephant and it is so easy to pick on someone who makes it his business to construct at times unreal [surreal ;)] models to infer something about the elephant. Put together all the elegant apparatus that economists have build over the years we at least have a somewhat accurate picture on how this extremely erratic beast called the economy should behave under certain conditions. This is an immense progress according to me as we at least can now have some careful if-then statements that can be evaluated using careful analysis.<br /><br />I sometimes think that it was actually good that people like Krugman said something sensational and sparked a useful public debate. But at times I am not sure. I firmly believe that he definitely knows how economics works. One can see that from his popular textbook on international economics. He starts with a perfect benchmark model of trade and slowly goes towards models dealing with more complicated issues. There is a multiplicity of models in international trade and each has its own utility depending on what issue you want to analyze. Why should Krugman expect any different from macroeconomics? And if he did not why would he embark upon a simple minded criticism of macroeconomics which probably was single most driving force in creating the popular criticism of economics in the wake of the crisis. Does he really believe that international economics has been more successful in dealing with policy issues than macroeconomics. If that was indeed the case why do trade talks fail so often than they succeed?<br /><br />In the past history and now economics seems to have become those branches of social sciences where many non experts believe they can do a better job than people who spend substantial part of their life tinkering with small details to come up with a tiny winy building block that contributes to the grand edifice of theoretical understanding. <br /><br />Also more importantly the internet has added its own flavor to the whole debate. In this regard I have come to firmly believe in Nicholas Carr's arguement in how internet is shaping the way we approach construction of knowledge. The facility of skimming through information and writeups without even resting for a bit to introspect and engage into deep thought is turning out be a bane for us as a knowledge seeking society. And I think no where this has been so evident than the way popular criticism of crisis has developed and spread across the internet. I think we will need a lot more efforts like yours to cut through this superficial semblance of understanding that has come to plague the popular consciousness.Parag Waknishttps://www.blogger.com/profile/06711521855245152023noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-42559729497479924532010-07-14T11:05:30.385-07:002010-07-14T11:05:30.385-07:00The model is useful, particularly as a starting po...The model is useful, particularly as a starting point for good science. If you think this body of work is driven by belief, you should read it and think about it. You might change your mind.Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-86440635980249024542010-07-14T09:19:41.658-07:002010-07-14T09:19:41.658-07:00You don't see how #1 exactly fits macro? I...You don't see how #1 exactly fits macro? I'm sure that Arrow and Debreu were motivated by the intellectual challenge, but in the hands of Lucas and his successors, how is general equilibrium is not a body of doctrine that guides a large group?<br /><br />You're saying the default model of economic interaction is a perfectly-functioning market were prices cannot be manipulated by participants, and not are prices such that markets clear today, but everyone agrees what prices will be in every future state of the world in such a way that markets will always clear forevermore. That this model is so intuitively plausible that it defines good scientific practice in the way that old Keynesian models do not. How is that not a doctrinal belief?Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-91004471314560527142010-07-14T07:28:16.824-07:002010-07-14T07:28:16.824-07:00Ideology:
1.
the body of doctrine, myth, belief, ...Ideology:<br /><br />1.<br />the body of doctrine, myth, belief, etc., that guides an individual, social movement, institution, class, or large group.<br />2.<br />such a body of doctrine, myth, etc., with reference to some political and social plan, as that of fascism, along with the devices for putting it into operation.<br />3.<br />Philosophy .<br />a.<br />the study of the nature and origin of ideas.<br />b.<br />a system that derives ideas exclusively from sensation.<br />4.<br />theorizing of a visionary or impractical nature.<br /><br />So what ideology is at play here? Did Arrow and Debreu have an ideology? If so, it didn't find its way into their theory, which in its most general form has absolutely no predictive content. You have to put more structure on it to make it useful. You said: "If we are to be practitioners of healthy skepticism, then we must be skeptical of both governments and markets." But that is exactly what I am saying.Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-79787743582589720682010-07-14T01:27:16.442-07:002010-07-14T01:27:16.442-07:00This argument, which is of course standard in macr...This argument, which is of course standard in macroeconomics, is completely ideological. What makes general equilibrium so "solid"? It's incredible empirical triumphs? The observed fact that market prices clear all markets simultaneously? Where does the conviction that Arrow-Debreu is the only possible starting point come from, if not ideology?<br /><br />Your formula that every government intervention must be justified in terms of externality or market failure is also ideological, in that it supposes that markets are innocent until proven guilty, and governments are guilty until proven innocent. If we are to be practitioners of healthy skepticism, then we must be skeptical of both governments and markets.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-90090598015739094062010-07-12T19:59:21.966-07:002010-07-12T19:59:21.966-07:00"One problem with the New Keynesian approach ..."One problem with the New Keynesian approach is that there is a chicken model lurking in there. Price flexibility is good, the private sector cannot produce it, but appropriate monetary intervention can produce the equivalent of price flexibility."<br /><br />But this may make sense. <br /><br />It's really hard, and hazardous, to cut an employee's real wage when there's no inflation, but if the government creates inflation, it then becomes a whole lot easier; just keep the nominal wage the same, or even raise it, just less than the inflation level. I know if you are unwilling to not assume that people are not super calculators who only care about maximizing a simple utility function that only includes current dollar consumption with no context, then you will think this is not an explanation. But just cause a group of economists doesn't like it doesn't mean it not true and supported far better by the evidence from reality than their assumptions.<br /><br />Likewise, if there's inflation, and the public understands that, that gives cover, a good excuse so as to not anger customers, to raise prices. And, a business can feel more comfortable about cutting the real price, knowing that if it doesn't work out they can more easily raise it back up again under cover of inflation. I know, again, this assumes that all people, or the vast majority, aren't super calculators, but while we're on a post about Prescott, let me give you this quote from Jodi Beggs (Harvard econ Ph.D. student) of the "Economists do it with Models" blog on Ricardian equivalence:<br /><br />"Given that many people seem barely able to even say what country the U.S. declared its independence from, I am not so concerned with such sophisticated and forward-looking behavior occurring on a large scale."<br /><br />at: http://www.economistsdoitwithmodels.com/2010/07/07/dear-jon-stewart-economists-are-happy-to-tell-you-about-unemployment-so-locking-us-in-closets-is-not-needed/Richard H. Serlinhttps://www.blogger.com/profile/09824966626830758801noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-53231323715093119792010-07-12T19:13:26.435-07:002010-07-12T19:13:26.435-07:00Keynesian macroeconomists should be the last to th...Keynesian macroeconomists should be the last to throw stones as Ed Prescott.<br /><br />Keynesian macroeconomics postulated that the economy slips into recessions for all sorts of reasons such as shifts and turns in the animal spirits and a loss of consumer confidence leading to a fall in autonomous investment and autonomous consumption. A collapse in autonomous investment and autonomous consumption is the Keynesian explanation for the great depression.<br /><br />At least Prescott and other RBC theorists accepted that they must eventually unpack productivity drops and name causes that can be explored further and perhaps found persuasive or perhaps wanting.<br /><br />By the time Keynesian macroeconomics fixed all the flaws mighty exposed by the 1970s stagflation, it rebranded itself New Keynesian macroeconomics. This is no more than becoming monetarist macroeconomists without having to admit all of your previous criticisms of Friedman were wrong. Admitting that error of judgment would put jobs and tenure track at risk!Jim Rosenoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-78748342999586555092010-07-12T15:50:12.311-07:002010-07-12T15:50:12.311-07:00Price stickiness is often called unexplained by so...Price stickiness is often called unexplained by some economists, but I think it's in large part that they just don't like the explanations because they go against the unrealistic assumptions that they want to make, like people are completely logical and only care about maximizing a super simple utility function whose only input is current consumption (no behavioral factors), people have perfect public information, perfect expertise and education regarding everything that make decisions on, analysis is instant and costless, etc.<br /><br />In reality, business are reluctant to change prices, and especially to cut nominal wages, for behavioral and practical reasons.<br /><br />Unlike most economists I have a lot of experience and training in business, MBA from one of the top schools and successful entrepreneur (in addition to having most of the econ PhD coursework from completing all but dissertation for a finance PhD, and a great deal of independent study). I often think of business as micro-microeconomics, because you study individual businesses, managers, workers, and consumers in depth rather than whole industries and markets, or in macro the aggregation of industries and markets. This business knowledge can be valuable sometimes in thinking about economics.<br /><br />I find the existence of sticky prices compelling because as a business person I know consumers hate price increases and jumpy prices. You don't want to cut prices if you're going to have to raise them again quickly and anger customers (and my experience is that business people tend to be overly resistant to cutting prices). It does work this way for commodities like oranges and tomatoes, but there's no brand to tarnish there, for consumers to become angry at, plus a culture of jumpy prices has been established for things like produce, but not for other products. <br /><br />In addition, the empirical research is clear that workers will resist a nominal wage cut far more than a wage freeze that equates to a real cut. They won't adjust their required wage down very quickly or easily at all, and if a business hurts morale and loyalty that can be very costly in the real world.<br /><br />Models that assume people only care about real consumption, with no context or emotion attached, won't include this, but the real world certainly does.Richard H. Serlinhttps://www.blogger.com/profile/09824966626830758801noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-72215500164712110762010-07-12T15:40:15.240-07:002010-07-12T15:40:15.240-07:00My background is that of a professional investment...My background is that of a professional investment manager who has spent over thirty years trading in real capital markets, analyzing real companies and investments and utilizing the tools of modern financial economics to do so. Having said that, it amazes me that economists still cling to Arrow-Debreu etc. when it is so obviously clear that modern capitalist economies behaving nothing like an <br />Arrow-Debreu world. And it is a matter of public policy for this to be so. Start with the a basic public policy deviation such as the granting of patents, allowing for at least temporary monopoly rents. This illuminates the real failure of neo-classical foundation models to really get what happens out there in real world markets. The most important to understand, I think, is that in reality most prices do not equal marginal cost, but are in fact much higher in both the manufacturing and service sectors of the economy. Every CEO in the world spends his day trying to figure out how to extract monopoly rent over the next planning time frame and in general, is fired when she and her staff fail to do so. Therefore, the entire foundation of Real Business Cycle theory is bogus, and of course has to therefore rely on the exogenous tooth fairy of technological progression and regression. And in the real world, technological progression and regression is endogenous to the functioning of real capitalism, which is characterized primarily by monopolist competition. In the real world of monopolistic competition technological progress is rewarded with the capture of monopoly profits, and is the focus of most value-added business activity. I would suggest a re-reading of Paul Romer on this point, which again, as somebody who paid his rent and accumulated some serious wealth by having to make real investment decisions with real money, is a model that much more accurately describes the business world I have been in for the past four decades.RPLnoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-82999104813043752642010-07-12T15:16:34.496-07:002010-07-12T15:16:34.496-07:00Evan,
"It sounds like you're saying that...Evan,<br /><br />"It sounds like you're saying that you'll never accept policy recommendations based on observed macroeconomic correlations between variables, unless given fully realized microfoundations that explain exactly why the given policies should work in the desired way."<br /><br />Yes, we want our models to be consistent with the observed correlations, but you can't do policy without firmly grounded theory.<br /><br />"And if I read Krugman right, he's saying that this business of microfoundations is fascinating and everything, but I'm trying to use a 600-word op-ed column to get the politicians to adopt those policies I think (based on sharing the same views as Rowe, I guess?) are most likely to put millions of people back to work when they really need it, and so I'm willing to elide these distinctions and stick to a basically obsolete model, because it's easier to explain to lay people."<br /><br />I can't read Krugman's mind, but if this is what he thinks, I think he is wrong. If the idea is good, that's in part because it is simple, and you should be able to explain it to anyone. My wife has a PhD in English literature and no knowledge of economics, but she seems to understand me.<br /><br />Anonymous:<br /><br />"When the "chickens" being talked about are people's jobs, it becomes difficult to explain why having the government create them might not be the best policy, at least it becomes difficult to explain without sounding like a callous, evil person."<br /><br />This is a problem we have as economists. We're willing to evaluate tradeoffs which involve life and death and events like unemployment that are a very big deal in the lives of individuals. That does not make us callous or evil. We're just doing our jobs. Personally, I am insuring more than my share of the unemployed within my own household.<br /><br />Citoyen,<br /><br />Representative agent is a useful starting point, but most cutting edge research goes for some heterogeneity. My models have lots of heterogeneity, private information, and other frictions, and I still do the welfare analysis.Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-45845458245502372782010-07-12T11:54:07.092-07:002010-07-12T11:54:07.092-07:00I think I can provide some defense for chicken mod...I think I can provide some defense for chicken models.<br /><br />the issue is that most modern macromodels actually deal with representative agents hypothesis. When you think really hard about you are actually with when you use a representative agent model, what you actually get to is that it is a really sophisticated "chicken model".<br /><br />As I see it, a representative agent does not have any counterpart in the real world; it is a theoretical construct that is usefull to reach interesting conclusions because, usually, economies or groups of agents act as if they were single agents, or for other reasons. The behaviour of the entire economy is an "emerging pattern" (that is, not an aggregation of identical behaviours) which similar from a epistemological point of view to the consumption and investment function you get in your ISLM.<br /><br />But it is one thing to think that microfoundations are useful to grap emerging patterns, and it is a very different one to think that you can apply welfare economics and th eeconomics of market failures in the same way you do it in micro. I mean, the utility function of a representative agent does not have any clear normative value in terms of individual preferences, you have to take an enormous logical step if you want to argue that since representative agents optimize intertemporally, fluctuations resulting from that optimization are in some sense optimal.Citoyenhttps://www.blogger.com/profile/17906750069883516187noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-6600989262274874232010-07-12T09:25:57.558-07:002010-07-12T09:25:57.558-07:00I have documented Prescott's views from 1 year...I have documented Prescott's views from 1 year ago, as I understood them (which means, I might be missing the entire point).<br /><br />http://agentcontinuum.wordpress.com/2010/05/29/prescott-on-the-crisis/Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-21662543719541902582010-07-12T08:11:29.497-07:002010-07-12T08:11:29.497-07:00Greg Hill
Arrow draws a different conclusion from...Greg Hill<br /><br />Arrow draws a different conclusion from his work on competitive equilibrium than you do, namely that requirements for GE are so stringent that the main application of the GE model is show where real world markets fall short.<br /><br />Everyone is familiar with Arrow's arguments regarding health care and learning by doing (increasing returns), but Arrow even made a case for "the socialization of investment" based on the lack of complete markets in contingent claims.Anonymousnoreply@blogger.com