Tuesday, July 3, 2012

Thoughts from Thoma

Excellent thoughts from Mark Thoma:

"Physicists are used to thinking about inanimate objects that do not react to policies or experiments that might affect them. To take a simple but illustrative example, suppose you tell your TV that you are about to throw a brick through the screen. Even after being warned, the TV will just sit there and be destroyed as the brick is hurled its way. But if you tell humans you are about to throw a brick at them, and the threat has some credibility, they will take action to avoid harm. People, unlike the objects physicists are used to working with, won’t just stand there and let the brick hit them in the head. This introduces additional complexity that is not present in the models that physicists rely upon – modeling humans is much harder than modeling brainless physical processes.

Old fashion economic models were much like the models that physicists use. That is, expectations were modeled in a way that did not allow people to move out of the way of the brick even if they knew it was coming. They were just like the TV. For example, policies that stimulated the economy by lowering real wages could not be offset and undermined by workers demanding wage increases. Because of this, policy was maximally effective.

In modern macroeconomic models expectations are modeled in a more reasonable way, and agents are able to take action to avoid the harmful byproducts of macroeconomic policy. In present day Classical models, agents are sufficiently nimble to avoid harm as they dance effortlessly out of the way when the brick is tossed. In these models, policy doesn’t matter at all. In New Keynesian models agents fully anticipate policies, but frictions prevent them from fully avoiding harm. It’s similar to one of those bad dreams where you know the monster is coming, but your feet just won’t move fast enough to get out of the way. In New Keynesian models, sluggishness allows the brick to deliver a glancing, but not fatal blow – that is, policy is effective, but not as effective as when agents do not move at all."


  1. The problem is that economics continues to get some things right whilst at all times preserving its core. Earnest defences like this will convince some people from outside the profession (and economists themselves) but they do not gloss over the real problems.

  2. I also like the idea of telling your TV you are going to throw a brick at it.

  3. Daniel Kuehn: What's up with you and the physicists as of late? Are you finally starting to take the econophysics project more seriously?

    In any case, Mark Thoma is correct only in one sense - specifically, regarding the limited nature of Newtonian physics. The econophysics project allows for complexity because it distinguishes between microphenomena and macrophenomena and is able to connect them through statistical mechanics. The physics used in the econophysics project isn't your grandfather's physics. It's cutting-edge, late twentieth century to early twenty-first century physics, taken from condensed matter and statistical mechanics.

    The econophysicists also reject Subjective Expected Utility theory, and allow for non-linearities - and SEU theory is something that hasn't quite been abandoned by the mainstream orthodoxy. Unless the economics profession does some serious re-thinking and takes the econophysics project more seriously, things might not bode so well in the long run for the mainstream orthodoxy.

  4. Personally, I'm very frightened by all the boding in these comments :)

  5. Wait a minute... Keynesians lecturing free-market economists on how you can't model human beings the same way you model inanimate manner... Head...going...to...explode...

    In all seriousness Daniel, this must be how you feel when an Austrian tells you something that was in the *General Theory*.

    1. I want to be careful not to make assumptions because I'm missing your point here... what's the concern, that he's not accurately representing the way economic behavior is modeled? He doesn't seem to be saying anything at all about "free market economists", and I think he does a fairly good job doing a layman's explanation of the evolution of modeling expectations.

      My personal interest here is the physics comparison and the problems that arise when you assume that modeling a physical system introduces the same problems as modeling a human system.

    2. Actually you're right, I skimmed it too fast. I thought he was saying:

      "Classical economists model people like the brick, but Keynesians recognize that people adapt to new policies."

      But I went to blog this, and read him more carefully, and saw that that's not at all what he was saying.

      Anyway, it still is true that Austrian critics of Keynesianism were making these kinds of points even before Lucas did.

    3. re: "Anyway, it still is true that Austrian critics of Keynesianism were making these kinds of points even before Lucas did."

      Which I've always been baffled by, since expectations have played such a central role to Keynesianism from the very beginning. It's true the modeling sophistication wasn't always there, but then it wasn't there with Austrian modeling either (to the extent that that existed). It was always there in discussion of the issues by both Keynesians and Austrians.

      I think a lot of people fight unnecessarily when the other side doesn't talk about an issue exactly how they usually talk about it. So I try to be an ecumenist to the extent that I can.

    4. btw Bob - you might be interested in these two posts touching on the Lucas critique - one with my take on it and another with Keynesian precedent for it.



    5. Both Keynes and Phillips made that criticism before Lucas did.

    6. Yep - Keynes, Phillips, and Lucas are all brilliant guys.

      The advantage Lucas has, unlearningecon, is that he made the point in the language of modern economic modeling which has been tremendously useful. Keynes and Phillips made it - Lucas made it stick.

      I think it's a mistake not to give Lucas credit for that, but I agree it's also a mistake to pretend that Keynesians were neanderthals before the Austrians and Lucas came around.

      You would probably be interested in my second link especially unlearningecon.


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