DEBATE BEGINS ON ROMER'S CRITIQUE
A RESPONSE FROM "STUMBLING AND MUMBLING" BLOG TO PAUL ROMER'S CRITIQUE HERE
(September 15, 2016)
RESPONSE from STUMBLING AND MUMBLING HERE
Chris Dillow is the author of Stumbling and Mumbling Blog. He bills himself as an “An extremist, not a fanatic” (he also knows his finance economics).
"Some mainstream economists have recently attacked DSGE models. Olivier Blanchard says (pdf) there are “many reasons to dislike” them. And Paul Romer says (pdf) they’ve caused “intellectual regress” into a “post real” doctrine which attributes economic fluctuations to imaginary causes.
I want to ask a question which is implicit in Romer’s paper: is the problem here (assuming it be such) specifically with economists, or rather with academia in general?
I ask for three reasons.
First, macroeconomic analysis outside universities does not use DSGE models. Neither economic writers nor investment bank economists use them: they might often be wrong, but not I suspect because of this. And the role such models play in central banking is mixed. Yes, the Bank of England has one, but the Fed’s main model isn’t a DSGE one. And I’m not sure how far DSGE models influence policy-making. Month-to-month policy changes rely more upon judgement and interpretation of high-frequency data than pure modelling. And the main policy innovation of recent years – QE – didn’t emerge from DSGE thinking. As Ben Bernanke said, “The problem with QE is it works in practice, but it doesn’t work in theory.”
Secondly, Romer says there are “striking parallels” between what he calls “post-real macroeconomists” and string theorists in physics: groupthink and a tendency to interpret evidence optimistically. This suggests there might be a problem common to some academics rather than just economists.
Thirdly, whenever we see intelligent people doing things that look silly, we must ask the economists’ questions: what are the incentives and constraints here? Might it be that incentives in academia sometimes generate a bias towards the habits Romer deplores? For example, whilst peer review helps maintain high standards it might also encourage fashion and groupthink: methods and results that please referees are the way to get published. This generates an incentive to do what Kuhn called normal science rather than work that challenges the paradigm. And perhaps a little distance from the “real world” leads to excessive weight upon theoretical elegance and too much tolerance of reliance upon unobservables. …"