Here he complains a lot about models that don't have people in them.
"There are two simple reasons why I like microfoundations:
"1. Because the economy is what people do. Understanding and explaining economies is understanding and explaining why people do what they do.
"There are two simple reasons why I like microfoundations:
"1. Because the economy is what people do. Understanding and explaining economies is understanding and explaining why people do what they do.
"I don't care how well your VAR fits the data, and how well it keeps working across lots of different policy regimes; it's still not an explanation of why people do what they do. It is not an economic explanation. It is instead just another interesting fact about the economy that needs to be explained. Why do people do those things that make your VAR fit the data?"
"Let me give you two recent examples where I became upset because of lack of microfoundations:
The standard New Keynesian model does not explain why people should expect other people should choose to spend enough to ensure the economy converges towards [the natural rate of] full-employment. It just assumes it, without explaining why. I want to know why people expect other people will choose to do this."
"The recent kerfuffles about higher nominal interest rates causing higher inflation. I want to know why higher nominal interest rates would cause people to choose to increase prices more quickly. I got no explanation why."
"Those are two very paradoxical examples, because they come from supposedly microfounded models, not VARs. Which is why I got upset. VARs don't even pretend to explain why people do things. I don't get upset at VARs. They are only VARs. I don't expect anything better from them."
"2. Because good policy means doing what people want. There are only two questions that matter for policy: Is this macro model like Prisoner's Dilemma? If so, in what ways, if any, could we change the game so it isn't like Prisoner's Dilemma? (Or maybe: Is this macro model like Stag Hunt? And if so, how could we flip it to the "hunt stag" equilibrium?). You can't ask those questions if you don't have people in the model."
"We don't care about GDP, for example. We could increase GDP by forcing all the old people out of retirement and making them work. But that maybe isn't what people want. If your model doesn't have people, who want things, we can't tell if a policy change would be good. Unless we don't care about what people want."
http://worthwhile.typepad.com/worthwhile_canadian_initi/2013/12/microfoundations-for-peoples-sake.html#more
I find this argument pretty seductive-which makes it all the more dangerous. After all, if it's just to get past the abstractions to what 'people really want'-who could in all good conscience argue with that? Only a pretty big jerk...
It's clever because it turns things around utterly. Those that complain about microfoundations usually complain that they're wholly abstract and tell us very little about people and what they want. In Nick's last comment don't we get a hint of this?
We can invent all sorts of reasons about the practical usefulness of microfoundations. But when it comes right down to it, none of them really matter to me. I want microfoundations for their own sake. I want people in the model. I want the model to explain to me why people do what they do, and if a policy change would be good for the people in the model, by helping them get what they want. Incredibly stylised one-dimensional people are much better than none at all.
What I notice is that all 'invented reasons' about the usefulness of microfoundations beg more questions than they answer. How do we know that incredibly stylized one-dimensional people are going to tell us more than simply leaving them out all together? After all, having a description of people that is very inaccurate may actually might give us a worse picture than not having them at all. Maybe the VARs could do better?
A big problem is that in macroeconomics this is often the wrong way to do things as thanks to emergent properties we often shouldn't ask how to explain it on the level of people. In the comments Nick agrees with me on this point but seems to think that it in no way problematizes his narrative.
Yet the biggest problem of all is that Nick doesn't take his own advice here and give us the people in this narrative. His real interest is SW's recent claims that have caused a great deal of head scratching.
http://diaryofarepublicanhater.blogspot.com/2013/12/we-are-all-new-monetarists-now.html
Yet here, like it or not. SW seems to be trying to do just what Nick wants-giving us a story with people in it:
"So, over the long run, there's a clear positive correlation between the nominal fed funds rate and the pce inflation rate. Irving Fisher taught us that, in credit markets, borrowers and lenders care about real rates of return. Thus, there should be an inflation premium built into the observed nominal interest rate - if the inflation rate is higher, the nominal interest rate should be higher. This just compensates lenders for the decline in purchasing power they experience between the time a loan is extended and when it is paid back. Indeed, some mainstream models, including New Keynesian models (which are basically neoclassical growth models with sticky prices and wages) have the feature that the long-run real interest rate is a constant, determined by the subjective rate of time preference of the people who live in the model."
"So, if we suppose that the real rate of interest is constant in the long run, we might fit a straight line to the points in the chart above (as I have done), and then think of the deviations from that straight line as short-run deviations from a "natural real rate of interest." One factor that may cause the real interest rate to fluctuate in the short run is monetary policy. In particular, some models of the short-run nonneutrality of money tell us, and central bankers certainly have told us for a long time, that in the short run monetary tightening - an increase in the nominal interest rate - makes the real rate of interest go up and the inflation rate go down. That's a feature of New Keynesian models, and it also comes out of other traditions. For example, segmented markets models exhibit a liquidity effect (real interest rate goes down in response to monetary stimulus in the short run), one example of which is this Alvarez/Atkeson/Kehoe model."
http://newmonetarism.blogspot.com/2013/12/phillips-curves-and-fisher-relations.html
I'm not saying to be happy with this just that it has happened I'm not sure that lacking microfoundations is the main issue. As Brad Delong says, the fact that every critic has a different explanation of what's wrong with SW's narrative doesn't necessarily make SW right.
http://delong.typepad.com/sdj/2013/12/monday-smackdown-watch-nick-rowes-smackdown-of-stephen-williamson-as-economicss-sokal-hoax.html
"Let me give you two recent examples where I became upset because of lack of microfoundations:
The standard New Keynesian model does not explain why people should expect other people should choose to spend enough to ensure the economy converges towards [the natural rate of] full-employment. It just assumes it, without explaining why. I want to know why people expect other people will choose to do this."
"The recent kerfuffles about higher nominal interest rates causing higher inflation. I want to know why higher nominal interest rates would cause people to choose to increase prices more quickly. I got no explanation why."
"Those are two very paradoxical examples, because they come from supposedly microfounded models, not VARs. Which is why I got upset. VARs don't even pretend to explain why people do things. I don't get upset at VARs. They are only VARs. I don't expect anything better from them."
"2. Because good policy means doing what people want. There are only two questions that matter for policy: Is this macro model like Prisoner's Dilemma? If so, in what ways, if any, could we change the game so it isn't like Prisoner's Dilemma? (Or maybe: Is this macro model like Stag Hunt? And if so, how could we flip it to the "hunt stag" equilibrium?). You can't ask those questions if you don't have people in the model."
"We don't care about GDP, for example. We could increase GDP by forcing all the old people out of retirement and making them work. But that maybe isn't what people want. If your model doesn't have people, who want things, we can't tell if a policy change would be good. Unless we don't care about what people want."
http://worthwhile.typepad.com/worthwhile_canadian_initi/2013/12/microfoundations-for-peoples-sake.html#more
I find this argument pretty seductive-which makes it all the more dangerous. After all, if it's just to get past the abstractions to what 'people really want'-who could in all good conscience argue with that? Only a pretty big jerk...
It's clever because it turns things around utterly. Those that complain about microfoundations usually complain that they're wholly abstract and tell us very little about people and what they want. In Nick's last comment don't we get a hint of this?
We can invent all sorts of reasons about the practical usefulness of microfoundations. But when it comes right down to it, none of them really matter to me. I want microfoundations for their own sake. I want people in the model. I want the model to explain to me why people do what they do, and if a policy change would be good for the people in the model, by helping them get what they want. Incredibly stylised one-dimensional people are much better than none at all.
What I notice is that all 'invented reasons' about the usefulness of microfoundations beg more questions than they answer. How do we know that incredibly stylized one-dimensional people are going to tell us more than simply leaving them out all together? After all, having a description of people that is very inaccurate may actually might give us a worse picture than not having them at all. Maybe the VARs could do better?
A big problem is that in macroeconomics this is often the wrong way to do things as thanks to emergent properties we often shouldn't ask how to explain it on the level of people. In the comments Nick agrees with me on this point but seems to think that it in no way problematizes his narrative.
Yet the biggest problem of all is that Nick doesn't take his own advice here and give us the people in this narrative. His real interest is SW's recent claims that have caused a great deal of head scratching.
http://diaryofarepublicanhater.blogspot.com/2013/12/we-are-all-new-monetarists-now.html
Yet here, like it or not. SW seems to be trying to do just what Nick wants-giving us a story with people in it:
"So, over the long run, there's a clear positive correlation between the nominal fed funds rate and the pce inflation rate. Irving Fisher taught us that, in credit markets, borrowers and lenders care about real rates of return. Thus, there should be an inflation premium built into the observed nominal interest rate - if the inflation rate is higher, the nominal interest rate should be higher. This just compensates lenders for the decline in purchasing power they experience between the time a loan is extended and when it is paid back. Indeed, some mainstream models, including New Keynesian models (which are basically neoclassical growth models with sticky prices and wages) have the feature that the long-run real interest rate is a constant, determined by the subjective rate of time preference of the people who live in the model."
"So, if we suppose that the real rate of interest is constant in the long run, we might fit a straight line to the points in the chart above (as I have done), and then think of the deviations from that straight line as short-run deviations from a "natural real rate of interest." One factor that may cause the real interest rate to fluctuate in the short run is monetary policy. In particular, some models of the short-run nonneutrality of money tell us, and central bankers certainly have told us for a long time, that in the short run monetary tightening - an increase in the nominal interest rate - makes the real rate of interest go up and the inflation rate go down. That's a feature of New Keynesian models, and it also comes out of other traditions. For example, segmented markets models exhibit a liquidity effect (real interest rate goes down in response to monetary stimulus in the short run), one example of which is this Alvarez/Atkeson/Kehoe model."
http://newmonetarism.blogspot.com/2013/12/phillips-curves-and-fisher-relations.html
I'm not saying to be happy with this just that it has happened I'm not sure that lacking microfoundations is the main issue. As Brad Delong says, the fact that every critic has a different explanation of what's wrong with SW's narrative doesn't necessarily make SW right.
http://delong.typepad.com/sdj/2013/12/monday-smackdown-watch-nick-rowes-smackdown-of-stephen-williamson-as-economicss-sokal-hoax.html
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