Sunday, August 07, 2011

Quiggin Fortunate In His Enemies; Williamson Still A Fool

  • An attack by Michael Stutchbury in The Australian. (Even the title is a lie - social democrats are not on the "far left".)
  • John Quiggin responds.
  • Stephen Williamson reviews Zombie Economics. We learn "DSGE has no implications, and therefore can't be wrong. Indeed DSGE encompasses essentially all of modern macroeconomics."
  • John Quiggin tries to correct Williamson.
  • Noah Smith also tries.
  • Paul Krugman links to Smith and gently chides Williamson.
  • Stephen Williamson comically explains this is not pulling rank: "Zombie Economics reads like fringe economics (Austrians, Post-Keynesians, etc.). In fringe economics, the game is dismissing things you know little about, and offering little that is actually constructive."
  • Stephen Williamson provides an even worse elaboration, as if Krugman's point were that his synthetic Nobel makes him right.


BruceMcF said...

If Williams is right that DSGE has no implications, then Williams is wrong that it cannot be wrong.

A scientific model with no implications cannot be right.

Robert Rosen in _Anticipatory Systems_ dealt with the problem of models on narrower information as simulations of complex systems on broader information ~ as a best case, they necessarily diverge, and must be periodically reset.

So the Panic of 2008 reminds of of the principle limitation of DSGE models: as pure simulation models rather than as cause-and-effect scientific models, they can only tell us what is going to happen if nothing important is going to happen. Lacking any valid cause-and-effect model of what is causing the evolution of the time series in the model, they can never say, "but this cannot continue, because it is unsustainable".

And so while a number of scientific economists working from Minsky or from simple rental equivalent / rental ratios called the housing bubble and predicted its collapse, a DSGE model is doomed to emulate the marginal sucker buying into the bubble, and therefore incapable of predicting that the bubble will collapse.

Magpie said...

I'd say there is a much more straightforward way of looking at this statement:

"DSGE has no implications, and therefore can't be wrong. Indeed DSGE encompasses essentially all of modern macroeconomics."

Quiggin claims that EMH is not scientific, in a Popperian sense. By this he means that EMH has no testable empirical implications that can falsify it (on which I agree, but that' besides the point).

When Williamson says EMH has no implications at all, he is conceding Quiggin's point.

And he compounds it by extending it to DSGE.

This makes me wonder: does Williamson know what Popperian falsifiability means?

Mr MIT said...

Zombie Economics: A Review

John Quiggin in an Australian economist. He made his name in the early 1980s in an esoteric area called decision theory. The Econometrics Society made him a fellow on the basis of this work, a distinguished award. He writes a blog, which has many devoted followers. The book is primarily about macroeconomics, however, which is not his area. Asking Quiggin about macroeconomics is like going to a podiatrist for your headache: it's the wrong end of the body.

The chapter on Dynamic Stochastic General Equilibrium modeling (DSG modeling) is a good example of Quiggin's lack of expertise about modern macroeconomics. He states that one of the oddities about DSG modeling is the representative agent paradigm. This is an abstraction where the decision making of one representative consumer/worker is taken as a stand-in for the millions of people living in an actual economy. This abstraction was employed in a famous 1982 article by Kydland and Prescott. Finn I. Kydland and Edward C. Prescott justly won the Noble prize in 2004. The stand-in consumer was abandoned in 1994 in important work by the late and great economist S. Rao Aiyagari. Every graduate student in macroeconomics today knows the Aiyagari paradigm. This work is not mentioned in Quiggin. Nor is the celebrated work by Mortensen and Pissarides, done during the late 1980s and early 1990s, on modeling unemployment. Dale T. Mortensen and Christopher A. Pissarides won the 2011 Noble prize for Economics. There has been a flurry of work in macroeconomics embedding the Mortensen and Pissarides framework of unemployment into an Aiyagari/Kydland/Prescott style DSG model. An early example is the research by David Andolfatto in 1996. Interestingly, Noble Prize winner Paul R. Krugman's latest research with Gauti B. Eggertsson borrows from Aiyagari (they cite it) and is essentially a dynamic general equilibrium model, albeit with a very Keynesian flavor. Quiggin is really out of touch with modern economics.

The trouble with Quiggin's book is that to the non-economist his little bit of knowledge will sound authoritative. Like an undergraduate's essay, many of the bits and pieces are indeed correct. But, also like many undergraduate essays, it shows little understanding about modern macroeconomic, just a superficial dropping of names and theories. Beloved Albert Einstein, a hero for scientists, didn't like quantum mechanics and argued against it. Perhaps it was because of the escalation of the mathematics required to understand the quantum world. Some people say that Einstein wasn't good at math. The mathematics in his papers is easy for a modern economist or physicist to understand--look them up on the web. Time has advanced mathematical training among scientists. Anyway, this was one battle Einstein lost. When Keynesians displaced the classical economists in the 1940s, 1950s and 1960s the latter cried out about the mathematics (calculus and statistics) the former used. Keynesians, such as the Noble prize winners John R. Hicks, Lawrence R. Klein and Paul A. Samuelson, were at the forefront of technique in their day. And now it is the displaced Keynesian crying about the new math (dynamic programming, numerical analysis, stochastic processes) used by the neoclassical economists ushered in by the Kydland and Prescott revolution. Maybe the table will be reversed tomorrow. Who knows: if you could forecast this you could be a Noble Prize winner. This is the process of science: New ideas don't come easily and old ones are hard to displace. Professor Quiggin: You sound like an old man whining about the young Turks.

Magpie said...

Well, you've got to give this to Williamson: he has devoted followers.

Check the message above, and the one here:

Ian Wright said...

I think it's revealing that (some) economists think that DGSE models involve *difficult* mathematics. The mathematics is *boring* not difficult, but more importantly lacks any substantive notion of out-of-equilibrium dynamics (e.g., assumption of market-clearing prices in every "period").