Sunday, July 3, 2011

Great post on Feynman and Economics

Here. It touches on the microfoundations and methdological individualism fetish that bothers me so much too. It's very easy for microfoundational thinking to lead people astray. For example, the microeconomic convention that unemployment is a "labor surplus" can lead to bad macroeconomic presuppositions. The microeconomic use of money as a numeraire medium of exchange (and nothing else) also creates bad macroeconomic habits.

17 comments:

  1. It is hard for me to imagine Feynman saying that people who are skeptical that global warming is a drastic and dire future occurrence are traitors to the planet.

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  2. Admit it Daniel, if you and I each had Feynman for an hour, he would come out agreeing with me...

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  3. Does anyone really believe that macroeconomics is irreducible to microeconomics? That's a tough sell.

    At the very least, we can be methodological reductionists without being metaphysical reductionists. That is, a reduction from macro- to microeconomics is valuable when possible, and so we should always search for such reductions when possible.

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  4. The article Daniel links to makes a mess of Feynmann's ideas. By profession I'm an Antenna designer, which means physics is something that comes close to my job.

    Feynmann's greatest achievement in physics was quantum electrodynamics. That was an attempt to unite quantum mechanics with classical electromagnetics. He took two theories that operated on different levels and found a way to reconcile them. This is quite similar to looking for a way to reconcile microeconomic and macroeconomic theories. It isn't a rejection of the idea that a unification can be done, it's the opposite an attempt to actually do it. It was an incomplete attempt, as every unified theory in physics has been since Newton. Every attempt to unite microeconomics and macroeconomics is likely to be just as incomplete in the near future, that doesn't mean we shouldn't explore them.

    Any analogy between classical electromagnetics and macroeconomics is very imprecise. Both rely on aggregation of mass behaviour, but macroeconomics suffers heavily from the identification problem. Historical episodes must be studied, direct experiments can't be done. Classical electromagnetics isn't like that experimentations is relatively easy.

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  5. Nice comment Current. Yeah I think everybody who looks at Feynman says, "He would agree with me, that the people I'm arguing with are idiots." (That's why I posted my tongue-in-cheek comment.)

    The best was that I read Philip Johnson (the anti-evolution lawyer) who said Richard Feynman would never have fallen for the weak arguments put forth by the Darwinists. Riiiiight.

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  6. Current (and this speaks to other comments as well) -

    I hope nobody mistakes me for saying "microfoundations are bad" or "nobody should try to unite quantum and classical mechanics and Fenyman would have hated that". I'm not sure why one would think I was saying that sort of thing, but I wasn't.

    What I'm saying is this - if classical mechanic and quantum mechanics don't (at first glance) make sense together you don't say "well forget classical mechanics - it must just be wrong". That's precisely the attitude of a lot of people that push methodological individualism or microfoundations.

    My problem is with people who dismiss a lot of macro without cause because they are obsessed with microfoundations. Viable microfoundations are great and we should work towards identifying them. But we do macroeconomics exclusively by building up from microfoundations any more than we should "do relativity" by building up from quantum mechanics. Of course we look at relativity and at quantum mechanics and try to understand how both are apparently true.

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  7. "That's precisely the attitude of a lot of people that push methodological individualism or microfoundations."

    I don't think it really is. Most of what I've read that relates to microfoundations attempts to justify modified forms of old macroeconomic theories. Some of those theories are ones that had some microfoundational underpinning from the start. It may be true that few of these attempt to build on *Keynesian* macroeconomics in a way that's true to Keynesian ideas, but that's a different issue.

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  8. I think you should define what you mean by microfoundations in macroeconomics. I think you and I would have very different definitions, which I think is why I'm having a hard time understanding your point.
    For example, your labor market surplus post doesn't make sense to me. Everyone I know who thinks about unemployment seriously does so in a search and matching framework. In that world, unemployment really is those who are looking for a job but can't find one. Also, these models are "microfounded" in the sense modern macroeconomics thinks about the term.
    You should probably elaborate on your money comment as well. What's using money as a numeriare have anything to do with microfoundations. There are plenty of microfounded models where money plays more than that role (the entire money search literature for example).

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  9. Current -
    A lot of the microfoundations work has been done with Keynesian models, so this doesn't really have anything to do with that.

    Andrew -
    Right, I would point to search theory as profitable microfoundational work. My concern is more with people who take, for example, relatively acyclical aggregate wages and think they're doing good microfoundations when they infer from that that wage stickiness is a major determinant of business cycles. Or people who say things like "the money has to come from somewhere" and try to infer perfect crowding out as a necessary consequence of government spending.

    re: "Everyone I know who thinks about unemployment seriously does so in a search and matching framework"

    Well right. People who "think seriously" are pretty much by definition not the problem!

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  10. I think analogizing the big debates in economics to the big debates in physics probably breaks down pretty quick.

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  11. "A lot of the microfoundations work has been done with Keynesian models, so this doesn't really have anything to do with that."

    Yes I know. Even those who don't agree with Keynes incorporate many of the ideas he used, though mostly ideas that weren't original with him it should be said.

    "My concern is more with people who take, for example, relatively acyclical aggregate wages and think they're doing good microfoundations when they infer from that that wage stickiness is a major determinant of business cycles."

    Both of your comments here point to dissatisfaction with how people treat the capital markets in favour of a liquidity-preference approach. I share some of this dissatisfaction and I'm in the process of writing about that at present. But, I don't think this is really an argument about ignoring macroeconomics. Rather it's about having a different theory about the determination of interest rates and specifically how microeconomic forces determine them.

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  12. I posted something more here, but it's disappeared into Daniel's spam filter.

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  13. Current -
    What does liquidity preference have to do with real wage cyclicality?

    I mean - in a broader sense I know how it could be related, but my critique of how people (Vedder and Galloway, etc.) use apparent real wage acyclicality has nothing to do with liquidity preference.

    re: "But, I don't think this is really an argument about ignoring macroeconomics."

    No, I don't think that would be ignoring macroeconomics either even if that was going on.

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  14. Fair enough, I don't know about Vedder & Galloway and what they have said about sticky wages.

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  15. Daniel, could you just state what you mean by microfoundations? And what your alternative is.

    Your examples don't really have anything to do with how much macroeconomic models should worry about individual behaviour. Your criticisms are against particular theories and not against the value of microfoundations. I don't see how taking the Lucas critique seriously compels you believe the theories in your examples.

    Also, I don't really get your comment about serious people. You make statements about a "methodological individualism fetish" that seems to address a practice of macroeconomics that bothers you, yet you are only worried about those who don't think seriously about this? Macroeconomists almost uniformly believe in the value of microfounded models, why doesn't this apply to them?

    Maybe I'm just confused about what you are saying, blog comments are not always the clearest medium :)

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  16. Microfounded macroeconomic models are obviously important. If you've come to the conclusion that I don't think these are valuable, you've misinterpreted me. I don't think it should make or break a macroeconomic model, though, particularly at a time like this when a lot of prior microfoundational work on wage rigidity - for example - doesn't seem to fit things as well as a less microfounded Old Keynesian model. The point isn't "microfounded wage rigidity and search is wrong". The point is "let's not throw out good non-microfounded work simply because it doesn't have as strong microfoundations!".

    Perhaps my mistake is also in talking about microfoundations and talking about people who go on about methodological individualism in the same post, too.

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