Matt Yglesias: From the Lucas Critique to the Yglesias Critique

     After finishing my piece on the Lucas counter-revolution-considering Simon Wren-Lewis' claim that it was not about stagflation but rather methodology based on the supposed failure of the old style Keynesian SEMs, I saw that Noah Smith had some very good updates on his piece that pointed out that one damning fact about DSGE is that it's not used by the finance industry and that the Fed still uses SEMs: 

      http://noahpinionblog.blogspot.jp/2014/01/the-most-damning-critique-of-dsge.html

      A update by Matt Yglesias I think is perfect-along with Krugman he's the King of Concision-he says so much with so few words. Here he nails this debate on methodology vs. ideology in a few paragraphs. 

      "I wrote in December about how "freshwater" macroeconomic models have failed the market test and are never used in private industry even though a model that actually did what these models purport to do would be extremely valuable. Noah Smith extends the point in two ways, one by rebutting academics' most common excuse for why the private sector shuns these models and the other by observing that it's actually all dynamic stochastic general equilibrium (DSGE) modeling that the private sector shuns, not just the freshwater variety."

      "It seems to me, though, that this is really just a problem for freshwater macro. Saltwater DSGE macro, as best as I can tell, is just a kind of highbrow trolling."

      "Freshwater macro is trying to derive a substantive conclusion (policy intervention to smooth the business cycle is counterproductive) from a methodological point. Saltwater DSGE is trying to show that you can get salty results from freshwater methods, so the freshwater program fails. But this is because it turns out that a competent practitioner can produce a DSGE model that proves anything at allabout the world. Brown University's Gauti Eggertsson is a specialist at this. Want a model in which people becoming harder-working is bad for the economy? He's got one. Or a model in which the way to end a depression is to deal crippling supply-shocks to the economy? He's got one. I'm not saying these models are wrong, it's just that a basic survey of the literature is going to teach you that smart modelers can model whatever they want. Your actual reasons for believing one model or the other would have to come from somewhere else. Sensible people see that as a matter of historical fact the New Deal gestalt succeeded in greatly increasing economic growth, so they're interested in investigating exactly what aspects of the New Deal had that result."

       "And that's, I think, what you see in the private sector's rejection of DSGE modeling. Even in the academic work, the models themselves aren't genuinely driving anyone's thinking so you might as well skip to whatever it is that's actually changing minds."

     http://www.slate.com/blogs/moneybox/2014/01/10/dsge_is_useless_in_the_private_sector.html

      I called this the "Yglesias Critique' in the tile because I think he nails a key problem with DSGE models. We can debate whether it was ideology or methodology but WL is right and it's about methodology then a DSGE model can prove anything if you are a clever modeler-so what's the need for them?

      Yglesias also touches on something that I've always suspected with Sumner as well-as much as he wants us to believe that it's not ideology that drives him. it's clearly that his reason for believing his Market Monetarist model comes for elsewhere than what he claims. 

      The Yglesias Critique can help us avoid a lot of empty claims and serve as a pretty good compass when navigating treacherous intellectual waters. In his UPDATE, Noah does identify one use the finanical industry has for DSGE models-signaling for job applicants. 

      "The anonymous denizens of EJMR discuss DSGE and the private sector. Interesting post:

Insider in a small, boutique private equity firm. We do not use DSGE models, but we do use DSGE models as a screening device, in the same spirit as graduate programs use real analysis. It turns out that we can get these guys cheaper than MBAs, and they have similar levels of firepower.

     "So DSGE does function as a kind of signaling - the ability to make DSGE models is valuable to companies even if the models themselves aren't, because they indicate general intelligence, computer skills, creativity, and/or work ethic. That makes sense."