Wednesday, January 12, 2011

Market failure in academic economics?

The two quotes below (first one by Paul Krugman and second by Laurence Meyer) claim that subdisciplines in Economics veer off into absurdity and silliness because you get fads: If you want to publish in peer-reviewed, well-esteemed journals, then you need to use this or that modelling approach even if it has nothing to do with reality.

The thing that gnaws at me when I read this, though, is the worry that this is one group of economists annoyed that "their" fad is not the one controlling the top journals. The claim here is pretty strong: It's not that you're accepted into top journals in spite of your absurdity, the claim is that you're accepted ONLY IF you embed your work in the currently popular absurdity. Silliness is a necessary condition for being published.

Seems to me this kind of situation presupposes a clearly crippled "scientific" culture: Unless there were accepted and widespread strategies for downplaying, ignoring or lying about the fact that your model has little or nothing to do with reality - then the problem discussed by these authors would be limited to small, limited bubbles of absurdity that were widely ridiculed in the broader economics community.

Amplify’d from
By the early 1980s it was already common knowledge among people I hung out with that the only way to get non-crazy macroeconomics published was to wrap sensible assumptions about output and employment in something else, something that involved rational expectations and intertemporal stuff and made the paper respectable. And yes, that was conscious knowledge, which shaped the kinds of papers we wrote. So you could do exchange rate models that actually had realistic assumptions about prices and employment, but put the focus on rational expectations in the currency market, so that people really didn’t notice. Or you could model optimal investment choices, with the underlying framework fairly Keynesian, but hidden in the background. And so on.

the real business cycle or neoclassical models. It’s what’s taught in graduate schools. It’s the only kind of paper that can be published in journals. It is called “modern macroeconomics.”

The question is, what’s it good for? Well, it’s good for getting articles published in journals. It’s a good way to apply very sophisticated computational skills. But the question is, do those models have anything to do with reality? Models are always a caricature—but is this a caricature that’s so silly that you wouldn’t want to get close to it if you were a policymaker?


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