New Micro–foundations for Macroeconomics

Writing about web page http://www.worldeconomyandfinance.org/warwick2009/index.html

I have been reading around before the New Micro-foundations for Macroeconomics Conferenece at Warwick 10-11th JUly. And I found this criticism from Steve Keen on DSGE models:

The notion that a market economy is in equilibrium at all times is of course absurd: if it were true, prices, incomes–even the state of the weather–would always have to be “just right” at all times, and there would be no economic news at all, because the news would always be that “everything is still perfect”. Even neoclassical economists implicitly acknowledge this by the way they analyse the impact of tariffs for example, by showing to their students how, by increasing prices, tariffs drive the supply above the equilibrium level and drive the demand below it.

The reason neoclassical economists cling to the concept of equilibrium is that, for historical reasons, it has become a dominant belief within that school that one can only model the economy if it is assumed to be in equilibrium.

From the perspective of real sciences–and of course engineering–that is simply absurd. The economy is a dynamic system, and like all dynamic systems in the real world, it will be normally out of equilibrium. That is not a barrier to mathematically modelling such systems however–one simply has to use “differential equations” to do so. There are also many very sophisticated tools that have been developed to make this much easier today–largely systems engineering and control theorytechnology (such as Simulink, Vissim, etc.)–than it was centuries ago when differential equations were first developed.

Some neoclassicals are aware of this technology, but in my experience, it’s a tiny minority–and the majority of bog standard neoclassical economists aren’t even aware of differential equations (they understand differentiation, which is a more limited but foundational mathematical technique). They believe that if a process is in equilibrium over time, it can be modelled, but if it isn’t, it can’t. And even the “high priests” of economics, who should know better, stick with equilibrium modelling at almost all times.

Equilibrium has thus moved from being a technique used when economists knew no better and had no technology to handle out of equilibrium phenomena–back when Jevons, Walras and Marshall were developing what became neoclassical economics in the 19th century, and thought that comparative statics would be a transitional methodology prior to the development of truly dynamic analysis –into an “article of faith”. It is as if it is a denial of all that is good and fair about capitalism to argue that at any time, a market economy could be in disequilibrium without that being the fault of bungling governments or nasty trade unions and the like.

And so to this day, the pinnacle of neoclassical economic reasoning always involves “equilibrium”. Leading neoclassicals develop DSGE (”Dynamic Stochastic General Equilibrium”) models of the economy. I have no problem–far from it!–with models that are “Dynamic”, “Stochastic”, and “General”. Where I draw the line is “Equilibrium”. If their models were to be truly Dynamic, they should be “Disequilibrium” models–or models in which whether the system is in or out of equilibrium at any point in time is no hindrance to the modelling process.

Instead, with this fixation on equilibrium, they attempt to analyse all economic processes in a hypothetical free market economy as if it is always in equilibrium–and they do likewise to the Great Depression.

http://www.debtdeflation.com/blogs/2009/01/11/bernanke-an-expert-on-the-great-depression/

Paul Youdell : 07 Jul 2009 16:44 |  Tags: Conference Economics |  Comments (0) |  Close comments |  Report a problem

Lord Giddens

Writing about web page http://www.polity.co.uk/book.asp?ref=9780745646923

It was the 2nd Keynote lecture of the festival and today I had remembered to bring my coat (We may be suffering climate change but Ramphal in June this year with only 100 people is still chilly) and so I was ok temperature wise.

The talk started with a description of the three different views held on the issue. The first are Sceptics (40% of public, but only a few % of scientists). They believe there is no big issue: i.e. climate variation is due to natural causes and not man made. The second group are Orthodox and are exemplified by the IPCC. They are 100% certain climate change exists and believe in big effects by the middle of the 21st Century. The third are Radicals and they believe that the Orthodox position under-estimates the risks dramatically of substantial effects in the next decade or so. Lord Giddens regards the Sceptical position has not being defendable in light of the scientific evidence. So this means we know that in a business as usual environment that severe climate change is coming but not when. Hence can't judge how quickly change needs to be made. For me this was the high point of the talk, after which things started to get scary.

For me this leaves to the question "how should we optimally response under this uncertainty?". There are a range of different approaches to evaluating interpersonal outcomes under uncertainty. For example a Computer Scientist might suggest assuming a Worst Case Scenario, whilst Economics might suggest Expected Utility maximisation. And whilst Economists would propose many many different ways of evaluating the social welfare they would I think agree that we need to answer this normative question first before moving onto analysing the political mechanisms by which it might be obtained.

However Lord Giddens did not do this and instead started to talk about the difficulties of reaching world wide agreement on preventing/mitigating global climate change and how those issues might be dealt with. And for me that is not a satisfactory approach to take: this way at best you can only do qualitative analysis. But the audience which was principally from PAIS (Politics and International Studies), did not criticise this.

And in general there was little discussion of the role of economics. For example no one used the term externality. Or asked about how can private and social costs best be equated? Or showed an awareness of options like permit auctions or carbon taxes. Whilst I would not claim that economic mechanisms can solve climate change issues totally, they are part of the solution.So unless you understand that tool set and what they can achieve, you do not know what the remaining burden is on non-economic political mechanisms.

And that was what scared me: not the scale of the environmental difficulties or the complexity of the technical challenges, but instead the apparent failure to identify the capacity of economics to be part of the solution rather than part of the problem.

Paul Youdell : 17 Jun 2009 19:14 |  Tags: Giddens Lord Professor |  Comments (0) |  Close comments |  Report a problem

VC's headline Lecture at the Festival of Social Studies

Writing about web page http://www2.warwick.ac.uk/fac/soc/festival/events/tuesday/tardeabstract.pdf

It was brave. The speaker was Professor Nigel Thrift Vice-Chancellor of the University of Warwick and he was going to make a speech on the early French Sociologist http://en.wikipedia.org/wiki/Gabriel_Tarde.

However, as wikipedia makes clear (http://en.wikipedia.org/wiki/Vice-Chancellor) a Vice-Chancellor is a universities' Chief Executive. So it is not unreasonable to compare his choices of actions with those that would or should make during these times of economic crisis by the Chief Executive of any other large organisation. Would they follow up an announcement of a requirement to reduce spending in the next year by 5% with an academic speech?

I mean we have already got a good Sociology Department. (The sociology departmental website http://www2.warwick.ac.uk/fac/soc/sociology proudly proclaims that the Guardian rates Sociology at Warwick as 3rd in 2009 and 2nd in 2010). So could one of them not have given a speech on Sociology? That would have freed our leader up to concentrate on the big financial, structural and organisation issues. Yes the event provided an opportunity for the Vice-Chancellor to 'meet and greet' shop floor academics. But maybe the opportunity cost for that return was too high.

Whilst listening to the speech, I made pages of notes, but hesitate to repeat or comment on the academic content of the speech (The Abstract is here http://www2.warwick.ac.uk/fac/soc/festival/events/tuesday/tardeabstract.pdf): I am a trained Mathematician now studying Economics and the speaker was a Geographer studying a Sociologist. And the cultural divide was just too large. i.e. I fear that any comments I were to make would mis-represent rather represent, confuse rather enlighten, lead to misunderstanding rather than understanding.

However a number of members of the audience asked questions referring to the speech as abstract and asking how it could be made concrete. And I similarly found myself thinking of more practical issues. At the last reckoning, whilst the 18 2nd year Economics PhD students have all got funding, shockingly of the 11 1st year Economics PhD students 6 have no funding. So it has to be a concern how many of them will still be at Warwick next year.

Will this pattern continue and result in a lost generation of young researchers? And what effect will that loss of intellectual capital have on both teaching and research? So yes this brave attempt would have made some contribution to interdisciplinary research that could both be of social value and lead to increased income for the University. But maybe it would be better to not focus on an expansionary approach and instead ensure the core strengths of academic departments are maintained.

Paul Youdell : 16 Jun 2009 20:54 |  Tags: Speech Tarde Vc |  Comments (1) |  Close comments |  Report a problem

Festival of Social Science

Writing about web page http://www2.warwick.ac.uk/fac/soc/festival/posters/

I rushed to the Competition from the Economics Department after attending a PhD upgrade with trepidation not sure what I would find: Economists (at least at Warwick) just do not do 'posters'.  My poster experience previously had been limited to some produced by Msc Complexity students. And those were worryingly impressive: they had content, clarity, ideas and had references. And I was concerned that these posters by PhD students would be even better.

However when I walked into Ramphael I noticed (in order) that:

i) There were not any other visitors.

ii) There were not many entries (at that point there were only 14 entries but one further entry was added whilst I was there).

iii) The posters were small compared with the posters I had seen before: they were A3 compared with the Graduate School standard of A1. This resulted in them in general being hard to read. I understand this was for cost reasons and given the Credit Crunch certainly costs must be cut. However benefits must be considered as well as costs and I fear this was a false economy: making the audience strain to read the work is unlikely to result in favourable impressions. Being around academic posters should be an exciting dynamic multimedia experience and ideally comparable to being in an Art Gallery. But here the experience was more likely to result in eye strain than intellectual stimulation.

iv) Only three posters had (multiple) references and one further poster had a single reference. Complexity Science posters  are marked down if there are no references. And in that area I think Social Studies could learn, as without references work appears non-academic.

v) There were a couple of posters that for me stood out from the crowd. "Diplomacy as Practical Philosophy" by Intan Marzueani was the best presentation whilst "Women and Work in Chile" by Rossario Undurraga was the best  in terms of style and content combined . So expect both them to appear amongst the three prize winners tomorrow.

I would not want to appear totally negative. In fact, I do believe that posters could be an exciting method for young researchers both to sell their work and use the constraints of the medium and the need to reach an inter-disciplinary audience to get to the essence of their work. Further this is a new event and it is being run during a packed Festival. It is just that I feel the poster format has the potential to be so much better than this: for example it would be good if Exhibitors were given the chance to present their work.

The Poster Exhibition last until tomorrow evening and the prizes are given out after the VC's Keynote lecture:
KEYNOTE LECTURE - Nigel Thrift
'What Gabriel Tarde Can Still Teach Us’

Paul Youdell : 15 Jun 2009 16:56 |  Tags: Competition Festival Of Poster Science Social |  Comments (5) |  Close comments |  Report a problem

First Entry

Hi

This is Paul here a PhD student in the Economics Department. I have set this blog up so I can blog on the forth coming Festival of Social Studies.
http://www2.warwick.ac.uk/fac/soc/festival

Paul Youdell : 07 Jun 2009 18:48 |  Comments (0) |  Close comments |  Report a problem