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Lumifer comments on Valuable economics knowledge available, ironically, for free - Less Wrong
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Comments (37)
I would caution to be sceptical of undergrad-level economics, in particular macro. The usual models taught to students have huge problems dealing with the real world.
This is not to say that one should not study economics. However the state of this discipline is pretty bad right now (again, in particular concerning macro) and it's generally acknowledged that simple macro models are NOT how the world actually works.
Thanks for the warning! Do you have any references for this, btw, or is it just your own sentiment?
If for no other reason, that macro has lots of political implications which winds up being mind killy. Micro OTOH, is instrumentally useful, in that people who understand it generally evade some common errors.
Micro has a lot of political implications as well (minimum wages, regulations, taxes, barriers to entry...)
That there is a danger, though, that people who study micro but don't study macro will end up with a bias that will mislead them, especially in political terms. I know people who took microeconomics 101 and nothing else, and there is a danger there in that people who did that now think they now understand how the whole economy works, but actually don't.
I think the danger of people thinking that they understand how the economy works rises with the amount of economic causes the person takes.
Are they any more wrong than people who study macro and think they understand how the whole economy works? Do these wrong beliefs cash out in actions that negatively impact them? The only thing macro impacts for most people is their conversations with other people about macro.
Not directly. But in a collective tragedy of the commons style way, wrong beliefs about macro ultimately lead to had economic policy which in tern ultimately does negatively impact everyone.
FWIW I'm a grad student in econ, and in my experience the undergrad and graduate macro are completely different. I recall Greg Mankiw sharing a similar sentiment on his blog at some point, but can't be bothered to look it up.
I would say that undergrad and grad econ are very different methodologically (at least at most schools), but a lot of the content is the same.
Stephen Williamson's intermediate macro textbook tries to bring in a lot of grad-level models/concepts, albeit in a "toy" form.
What do you mean by 'content' here? The basic narrative each model tells about the economy?
I think I agree with you. The big difference between the models I learned in undergrad and the models I learned in grad school was that in undergrad, everything was static. In grad school, the models were dynamic - i.e. a sequence of equilibria over time instead of just one.
Right. Plus most undergrad models have an analog in grad macro, i.e. the AD-AS model and the New Keynesian model, or Quantity theory of money and a basic cash in advance model.
True in general. Some intermediate macro courses use a two-period framework to explore basic dynamics. Williamson's textbook does this.
See among others: http://en.wikipedia.org/wiki/Criticisms_of_neoclassical_economics http://en.wikipedia.org/wiki/Ronald_Coase
More tendentiously, http://en.wikipedia.org/wiki/Post-autistic_economics
(Edit: removed irrelevant bit)
Are complex macro models how the world actually works? What are our most successful macro models, and how successful have they been? My impression (based off not that much data, admittedly) was that this applied to all macro, not just undergrad.
It is true that this warning applies to all macro, not just undergrad. But by the time you get to the grad level and beyond you already understand (or should understand) the limitations of the models and the difference between academia and real world. At undergrad level you're still likely to be seduced by the simple narratives that these models offer.
Nope! All models are huge simplifications.
A controversial question!
The conventional approach in (academic) macro is to build (relatively) simple models that can match particular stylized facts. Thus we have lots of models that can predict certain patterns in the data, but don't pretend to explain everything. Some people think we shouldn't do anything beyond this! (See Caballero, Pretense of Knowledge Syndrome)
Other people do try to build models that can match all the data. A standard cite is Christiano, Eichbenbaum and Evans (2005), and for another approach see Smets and Wouters (2007) (they even call themselves Bayesians!).
Then there are macro forecasters who try to accurately predict the future using non-theoretical statistical models. An example of this would be the work of Frank Diebold at Penn. These models can do a lot better than the above at predicting future data absent changes in the policy regime, but are presumably less effective at predicting the effects of novel policies (see the Lucas Critique).
My own opinion is that if you want to predict the next data point, use a forecasting model, but if you want to know the effects of a new policy, your best bet is to rely on simple models plus judgement. Good economists know more than any model!
How do you know?
This is my primary rationalization against learning some economics. How worried should I be?
You definitely should learn economics. While learning you should be sceptical of what you are being told -- more than usual in the case of macro models.
Just treat it as some shady characters spinning you a tale :-D Use your brains and make frequent checks against observable reality.
Name three.
Contemporary Japan, and America; the Great Depression; business cycles in general.
(I threw in a fourth one for free because I love the 'name three' heuristic even if you chose a really bad topic to use it in.)
Lumifer said (1) the state macroeconomics as a whole is bad, (2) what you learn in a principles course is not how the world actually works, and (3) macro models have huge problems dealing with the real world. These are extreme claims, and I think I was justified in calling him on them.
To your examples -- the AD-AS model (or IS-LM in older textbooks) can be used to think about business cycles in general, and the liquidity trap in particular, which covers most of your examples. The Great Depression needs discussion of monetary policy (gold standard, Friedman-Schwartz, etc), and all of your examples need some discussion of financial crises, banking panics, and asset bubbles. Japan is not that mysterious once you consider demographics and per-capita growth rates.
A good principles class will spend quite a bit of time talking about each of your examples, and show how to think about them using the standard tools.
You demanded examples where macro does not work well in the real world. I named 4: Japan remains a mystery to macro, and 'Abenomics' hasn't helped eluicidate it; the US crash was unexpected and falsified the 'Great Moderation', casting doubt on the entire structure of macro that didn't predict it; the Great Depression is only partially understood even if a lot of people think Friedman cracked it; and business cycles remain mysterious with panics and bubbles being not explanations but excuses. The growing influence of the macro views of Scott Sumner, who was a marginal figure at best a few years ago, offers another practical bit of evidence that macro is far from a settled science when it comes to contemporary economies.
I'm sure it would. Doesn't mean it is right or that macro has a consensus view on each such as how to fix and prevent and predict them.
I demanded examples of models taught to undergrads that have "huge problems dealing with the real world." The same poster went on to say that these models are so dangerously wrong one must be intellectually inoculated against them!
You've given several examples where our knowledge is incomplete. I agree! And I hope that any economist would explicitly say that there's no settled explanation for the Great Depression, or the Great Recession, or Japan's Lost Decade. But that is quite different from saying that the models we DO teach have "huge problems dealing with the real world" and "are NOT how the world works". I think the basic models ARE effective tools for understanding how the world works, and a good teacher will explain both their uses and their limitations.
In brief, the fact that there are things we don't know does not mean that what we do know is wrong, and a good principles class should teach both what we know, and what we don't.
If the state of the art cutting edge economic research is that "there's no settled explanation" for Japan's Lost Decades (plural, since we're well into multiple decades, I think), then how on earth could the simple models taught to undergraduates not have "huge problems" dealing with these "real world" events?
I don't see how this follows.
Suppose we teach a theory that says things in set X can be caused by things in set Y={A,B,C}. Then I say "there's substantial argument about whether major event x in X was caused by A or by B."
This does not mean the theory has "huge problems" dealing with real world events! It just lacks the power to distinguish between causes from within the set Y.
In the same way, economists argue about the causes of things like the Great Depression, Lost Decade, and Great Recession, but they mostly agree about the sort of causes they need to consider, and they have a common framework to think about them in (or at worst a few competing frameworks).
Then it's not a theory capable of explaining the event at all. If all you can do is throw together a variety of heterogenous contradictory theories, you haven't explained an event.
I'm reminded of Wittgenstein, now, on family resemblances - of course one could define "a game" as an indefinitely long disjunction of possibilities "a game is anything which is either Backgammon OR chess OR go OR Halo OR tossing a ball OR soccer..." but having giving this disjunction, in what sense has one actually conveyed what a game is? Same thing here.
I believe that however we explain the Lost Decades, it will involve materialism and not souls. Do I have a perfectly satisfactory theory capable of explaining the Lost Decades? No, of course not.
Are you really claiming that a theory that restricts the possible causes of an event to three has not explained the event "at all"?
Under this definition, I agree that undergraduate macroeconomics cannot explain the real world. But surely this is a rather restrictive standard for "explanation"?
I would rather say that a theory that allows us to concentrate a lot of probability mass on Y upon observing an element in X, or to concentrate a lot of probability mass on X after observing an element in Y, is doing quite a bit of explanatory work!