25.10.08

GRIPE OF THE WEEK. Arnold Kling tells us what he thinks about academic macroeconomics.

My main beef with economists is that standard macroeconomics does such a poor job of describing what is going on. The textbooks models are pretty much useless. Where in the textbooks is "liquidity preference" a demand for Treasury securities? Where in the textbooks does it say that injecting capital into banks is a policy tool?

Graduate macro is even worse. Have the courses that use representative-agent models solving Euler equations been abolished? Have the professors teaching those courses been fired? Why not?

I have always thought that the issue of the relationship between financial markets and the "real economy" was really deep. I thought that it was a critical part of macroeconomic theory that was poorly developed. But the economics profession for the past thirty years instead focused on producing stochastic calculus porn to satisfy
young men's urge for mathematical masturbation.

He's not the first to make these claims. Deirdre McCloskey's comments about A-Prime, C-Prime and the Social Engineering Vice are similar. Before those, there was William Allen's "Midnight Economist" who once complained about "diddling elegance and doodling rigor" in research written solely for the purpose of attaining academic tenure (and, if one is skillful and well-connected, prestige appointments and Clark Medals).

The absence of a market test for scholarly research makes excursions into unreality, whether it be representative-agent models in which the agent is lender and borrower, or Lacanian readings of deservedly obscure female novelists, possible.

Bad economic ideas, however, cost people money. (Anybody remember Long Term Capital Management?) Although the academic ideas fall short, there are incentives for people to further improve the models so as to lose less money, or to make money. The academicians don't have the incentives to improve those models, but nobody's stopping mathematical-minded investment managers from doing their own work.

There's something similar behind a research project that I'm making painfully slow progress on. There are plenty of arguments for the optimality of a single-price policy and for the equivalence of rationing methods. These appear to rule out high occupancy toll lanes and self-selecting tariffs for amusement parks. But we have high occupancy toll lanes (the Illinois Tollway is considering some) and self-selecting tariffs at amusement parks. Demonstrating the incompleteness of the received economic models is a challenge.

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