Wednesday, March 6, 2013

A mainstream AU economist on heterodox economics

I had an interesting conversation last night that I thought some people on here might enjoy.

My gender macro class meets the same time as my macro class, but since I needed both for degree requirements I (and one other PhD student) am taking the gender class as an independent study - doing the reading, assignments, and watching recorded lectures. Yesterday, though, I had to lead the gender class so I skipped my macro course to attend.

However, I did catch my macro professor on the bus on the way home - he asked how my lecture went and what kind of material we covered in the gender class. I told him, of course, that the modeling is mostly heterodox/Kaleckian/structuralist type stuff. Of course he was aware of that because several people in the department do that work - but he didn't personally know what any of it was about (he's a newly minted PhD from Brown - excellent professor - you'd think he'd been teaching for years).

So - with some trepidation - I gave a summary of heterodox approaches to this mainstream economist. I said the framework is very much like Old Keynesian models but the interesting dynamics come in insofar as it includes mark-ups and imperfect competition (anticipating ubiquitous Dixit-Stiglitz in modern macro), and especially that it tackles distributional questions by modeling different classes with different behavioral assumptions. This is why it's of interest to feminist economists (aside from the common lefty/fringe appeal of course) - because it's very easy to incorporate distributional classes that feminists are concerned about - men and women.

"Old Keynesian - so like IS-LM you mean?", he asked

Trepidatiously again I responded "yes, essentially - but the real interesting stuff is in the distributional issues".

"So it is very ad hoc?", he asked.

"Yeah, I'd say so - consumption propensities are assumed, etc."

Uh oh - I thought I lost him. But I was wrong.

He sighed and made a point he had made in class before about mainstream models (one that I appreciated very much when he made it in class). He said, look - the old Keynesians were ad hoc. Solow (this is a growth class) just assumed the savings rate and that was unsatisfactory for obvious reasons. But when you move on to Cass and Koopmans although we always say they "endogenize savings" they really don't do much different. Solow assumes savings, Cass and Koopmans assume more fundamental parameters. A change to either has the same effect on the outcome. You're just adding some Greek and a few more equations. The same goes for Romer's work and for Aghion and Howitt. Solow assumed a rate of technological change. These guys endogenized that but they're still assuming a set of underlying parameters (not to mention an underlying functional form). When you keep digging down the fundamental determinants of these things are still ad hoc - they're still exogenous.

Now, obviously we like structural models because they tell us more about economic behavior than less structural models.

But his point was that if the more ad hoc assumptions match up well with more structural versions and we're feeding reasonable information into the more ad hoc models he sees no reason why they can't be good guides to thinking about the economy - particularly if they add other interesting things like the distributional dynamics.

He said something like "If the foundations are good I don't see why they are any worse than the more structural models"

"Unless you want to get published in the AER" I responded.

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