Saturday, November 14, 2015

Frameworks!

Tyler Cowen writes down his own (in response to Scott Sumner) and then links to a couple more macroeconomic frameworks (Arnold Kling and Ryan Avent). It's good that we're hearing about these now as all of these people have been writing about economics for some time. Cowen's frameworks at least get vintages (Cowen Macro Framework 2015 has hints of apple and woodsmoke).

I started this blog with a framework (now a paper) but didn't really realize that macroeconomics doesn't actually have an accepted framework until later, writing about it here for example. I guess that's not really true: apparently macroeconomic conceptual frameworks are like fingerprints ... unique to each economist.

A conceptual framework is supposed to codify your starting point for understanding a problem. It is not supposed to be a specific model (we call that a model, which in his defense, Scott does) and it should not include specific effects. Importantly, your framework should not make major assumptions about key questions you plan to address with your framework.

The Platonic ideal of a framework is quantum field theory. It is not a single model and doesn't have any specific effects. It tells you what you should write down to start tackling a problem (a Lagrangian with your proposed particle content or symmetry principles, for example). Quantum field theory doesn't make assumptions about what a grand unified theory is or what forces exist in nature at what scales.

The information transfer framework is not a single model, and it doesn't have any specific macro effects. It tells you what you should write down to start tackling a problem (an information equilibrium or information transfer relationship, see the paper). It doesn't make assumptions about what a recession is nor whether monetary policy or fiscal policy is better (in fact, both can help under different circumstances).

All of the frameworks above fail all of these key tests.

Scott Sumner's framework

Sumner's framework is probably the best one, but it assumes monetary policy controls the economy. Sumner calls it a model, and that is a perfectly valid thing in a model. It also assumes sticky wages, making it more of a model.

Tyler Cowen's framework

Cowen assumes not only sticky wages, but a specific mechanism for sticky wages (morale and unions and 'irrational' behavior after unemployment). And this mechanism leads to a cause of 'nominal' recessions. Mostly Cowen's framework however appears to be a list of things that are poorly understood (employment as a matching problem, optimal monetary policy, real interest rates) -- more a research program than a macro framework.

Arnold Kling's framework

While there is a funny bit (see the PS), Kling also assumes the cause of unemployment (incorrect specialization). Additionally, he seems think that figuring out most of the issues involved in specialization (and therefore recessions) involves non-mathematical models. Maybe recessions can't be described by math but saying they aren't is a major assumption not just about recessions but about math.

Ryan Avent's framework

Avent defines an economy with too much demand (in the limit where AD >> AS) as one with high inflation and one with too little (in the limit AD << AS) as one with unemployment and deflation. This is interesting: it basically assumes the AD-AS model is a limit of any macro theory. But again, that is more of a specific model than a framework.

Avent assumes monetary policy is 'almost always' the way to produce too much demand which is supposed to the the policy goal (or at least err on the side of too much). He says "Don't subsidise debt" which is likely due to some kind of specific effect. We should probably subsidize debt a bit because people are risk averse relative to what a rational agent would be, but that also seems like something you should figure out with a framework -- not assume from the start.

Who else?

I bet many of you are asking: what about other economists? Well Paul Romer and Dani Rodrik seem to take the nihilistic approach to frameworks: there's no general framework. 

However, Romer does use intertemporal utility maximization in his famous paperPaul Krugman is part of the traditional school of intertemporal utility maximization as well, which is a framework! Turns out it's wrong as far as what it says about microeconomics (humans don't really have consistent preferences), but being right isn't a critical property of a framework (and utility may just be emergent). This framework has lots of models: some with sticky prices, some without. It covers both John Cochrane's model and Michael Woodford's model Noah Smith links to here. Stephen Williamson and David Andolfatto have a paper that starts with this framework as well.

I'd probably split economics into these two classes: those who use the intertemporal utility maximization framework and those who are just philosophizing. And by philosophizing, I mean implicit theorizing and/or making stuff up (or as I put it better here).

...

Update 11/15/2015

Nick Rowe jumps in with something that is also not a conceptual framework, but rather a vague model or a collection of priors. Among other things his framework for understanding macroeconomics -- where one of the big unsolved problems is what is a recession -- includes a specific definition and mechanism of a recession.

If I said I was a doctor studying Alzheimer's and my conceptual framework included a tenet that Alzheimer's disease was defined by amyloid plaque build-up (rather than, say, the stereotypical symptom of memory loss) and lo and behold I put up some micrographs of amyloid plaque build-up in a neuron and said that caused Alzheimer's ... exactly what is my conceptual framework helping me understand?

A macroeconomic framework should not postulate what a recession is. You should use the framework to figure out what a recession is.

...

PS: There is one rather funny one from Arnold Kling:
3. Arriving at sustainable patterns of specialization and trade requires two types of adjustment: static adjustment and dynamic adjustment.

And there are two types of people: people who group things into two groups and people who don't (I'm part of the former as you can see from the last paragraph above). Given static and dynamic are logical complements of each other, you're pretty much assured this is true. Things are either static or dynamic. But then Kling goes and screws up a logical tautology. Seriously what is static adjustment? Is it anything like static change? He explains them immediately afterwards (in 4 and 5), but I really wouldn't have guessed the result. I thought prose-y economic writing was supposed to exist because it made things easier to understand ... 

Anyway, Kling basically says static adjustment is amenable to mathematics and dynamic adjustment isn't (I'm guessing the reason it can't be explained with math is lack of imagination by Kling; it sounds like t√Ętonnement). That makes dynamic adjustment a bit like the colloquial definition of Artificial Intelligence: that which hasn't been programmed yet. 

8 comments:

  1. "Spittle-flecked Ire" ... I had no idea that you had another blog going. Or used to anyway... it looks like it's been a while.

    I know quantum field theory is the Platonic ideal of a framework (since you say so just above), but can you give an example of another for someone less well versed in physics?

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    1. Some examples:
      Statistical mechanics for thermodynamics
      Information theory for communications
      Game theory for things that are games
      Newton's laws for mechanics (minus gravity)
      Evolution for biology

      There are probably lots more ...

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  2. Looking at your examples, I think that the debatable subject of whether social sciences are nomothetic is relevant. Our sociology prof told us that the only universal law of society known (at that time) was, "Don't lie to the in group." I think that there is a debate in anthropology now whether it is even a science or not. In linguistics, Chomsky claimed to have discovered universals of grammar, but that was disputed. In psychology, Freud claimed to have discovered universal laws of human psychology ultimately based in neurology, but his theories have relatively few adherents today. Pavlov and the behaviorists did better, establishing laws of conditioning, but their scope is limited. The general view seems to be that there are laws in the social sciences, but not many, and much of interest does not seem to be law-like.

    I would have thought macroeconomics to be the most nomothetic of the social sciences, for the reason that, as it deals with large groups of people, their individual behaviors are mostly irrelevant. However, economists seem to be looking for laws in utility theory, despite theoretical problems and lack of empirical support. And yes, that is very 19th century.

    Anyway, if there is a generally accepted framework for macroeconomics, I suppose that it is utility theory. Or more likely, n-person game theory combined with utility theory.

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    Replies
    1. And that framework tells you what to write down to start tackling a problem:

      Incentives.

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    2. Raise the minimum wage? That gives employers the incentive to lay people off. So the result will be more unemployment.

      Government stimulus? That gives taxpayers the incentive to save in order to pay future taxes. Self-defeating.

      Lowering wages in a recession? That allows employers to lower prices, which gives customers the incentive to buy, thus fostering economic growth.

      Increase corporative taxes? That gives corporations the incentive to move elsewhere.

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    3. For some reason these comments weren't showing up.

      In any case, incentives are a micro foundation for a potential framework (which is utility maximization).

      I wrote a bit about incentives awhile ago:

      http://informationtransfereconomics.blogspot.com/2015/04/incentives-are-entropic-force.html

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    4. Incentives an entropic force? I think that plainly the identified incentives are not the same in the case of government stimulus (in a recession, else why?). That is, that the stimulus will open up possibilities, even if some people will save on balance. The examples with raising and lowering wages are questionable, I think, because raising the minimum wage will often open up more possibilities than are lost, especially at the local level, and lowering wages in a recession may destroy more opportunities than are gained by lowering prices.

      So I think that you have good comparisons of incentives vs. entropic forces. Also, you have entropic forces as alternative explanations (stories) to incentives when they agree, which is perhaps usually the case. :)

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    5. And may I add, the explanations with entropic forces are more parsimonious than the explanation with various incentives. :)

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