Thursday, October 1, 2015

Robert Waldmann buries the lede in comments


Robert Waldmann has a couple of excellent comments on Brad DeLong's post that would be a great post unto itself [I've concatenated them]:
[Lucas, et al] don't just ignore Sonnenschein-Mantel-Debreu, they also assume away all the ways in which general equilibrium models differ from reality. Pretending Sonnenschein-Mantel-Debreu theorem was never proven is a bit different. I think it is the main reason why general equilibrium theorists have total contempt for new classical macro. 
To me the open question is why they had such immense influence. I didn't understand that at all in 1980 and I still don't. 
... it isn't just new classical macroeconomics. The same criticisms apply to new Keynesian DSGE models. Adding totally unexplained Calvo alarm clocks doesn't liberate the model from the implausible assumption that there is a representative agent. In fact, the current standard NK model (Eichenbaum, Christiano, Evans, Smets, Wouters) has to add implausible Calvo alarm clock conditional markets to reconcile the assumptions that there is a representative consumer and that there are different types of labor with variable relative wages.

The effort to reconcile DSGE with reality is based on doing whatever it takes to make a DSGE model behave like an old Keynesian model (that is fit the data as old Keynesian models do). Academic macroeconomists ignore the proposal to cut out the middle man who transforms assumptions we don't believe to implications which we know are valid from empirical research, because we are the middle men and the sensible short cut from what we know to what we know would achieve greater efficiency by eliminating our jobs.

Emphasis mine .... which also makes me think of Upton Sinclair:
It is difficult to get a man to understand something, when his salary depends upon his not understanding it!
The basic information equilibrium model explains the effect Calvo pricing has at the macro scale as an emergent entropic effect, and basically reproduces the IS-LM model when inflation is low ... both of these are in the draft paper.

8 comments:

  1. "a great post until itself"

    Schoolmarm comment: "a great post unto itself"

    You're welcome. :)

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    1. Bill, Lol... I had the same reaction, ... "unto" is the right word... a strange word that's not used much elsewhere AFAIK. (except as archaic "to" or even "until" according to 1st definition that popped up). I was going to say "onto" ... and realized that wasn't quite right. I guess I got distracted before getting back to figuring it out. Thanks!

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  2. too much is read into sonnenschein-mantel-debreu...just because unrestricted preferences cant be represented doesnt mean that empirical preferences cant be...and often they dont ignore it, they make a moral decision that says in the aggregate people should be homothetic with respect to risk or quasilinear in consumption etc...

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    1. I don't think it's being over-interpreted in this context. The issue is that individual preferences can't be aggregated in a way that guarantees preferences can be represented by real numbers (weak revealed preference doesn't hold).

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    2. And individual preferences can be represented by real numbers? Then why aren't they transitive?

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    3. The SMD theorem assumes well behaved preferences (real number valued utility functions) at the individual level. The theorem says that that can't guarantee well behaved aggregate preferences.

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  3. "buries the lede"... I had no idea "lede" was even a [valid spelling of a] word. Thanks.

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