Monday, December 16, 2013

Microfoundations are not necessarily necessary

Nick Rowe has an interesting post about his desire for microfoundations in economics:


I have two issues with it:

1. If he wants to know why people do what they do he should study psychology.

2. The microfoundations he describes completely eliminates whole classes of models. His formulation would capture e.g. traffic models where traffic jams come from following distances and reaction times, propagating backwards through the vehicles on the road, but it would never capture things like the ideal gas law or any other theory where the underlying degrees of freedom become irrelevant (thermodynamics) or are replaced with composite degrees of freedom (quarks forming hadrons).

It bothers me particularly because it eliminates my theory where the trends are described by information theory (the deviations may be described by random fluctuations, human behavior or some combination of the two).

6 comments:

  1. IMHO, the fact that we personally are at the micro level when it comes to macroeconomics may have gotten in the way of progress in macroeconomics.

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    Replies
    1. Some more from me:

      http://informationtransfereconomics.blogspot.com/2013/04/the-philosophical-motivations.html

      Delete
  2. I agree that microfoundations have their drawbacks, but the are important in keeping macroeconomic models from being completely ad hoc. It is true that utility maximization is far from accurate when it comes to actual human behaviour, but at least it allows for unexpected results in models. If I were to simply write a macroeconomic model without microfoundations, I could make it produce whatever result I want simply by changing the equations around. (Take, for example, the "Sumerian Phillips curve" http://marketmonetarist.com/2012/06/01/the-sumnerian-phillips-curve/)

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    Replies
    1. I would agree but add there caveats:

      1. Microfoundations aren't the only way you prevent models from being ad hoc
      2. Ad hoc microfoundations don't make the aggregate model any less ad hoc
      3. Utility maximization isn't the only way to create microfoundations

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    2. That should be three, not there ... But should really be four:

      4. Utility maximization is ad hoc

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    3. That link is pretty funny.

      Of course Y - Y* = a(N - N*) ... if a = 1/P, then you have an identity PY ≈ N if PY* ≈ N* (which it does).

      Overall, that was my criticism here:

      http://informationtransfereconomics.blogspot.com/2015/01/is-this-market-monetarist-model.html

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