Thursday, December 5, 2013
Brad DeLong -- sensible thoughts on "microfoundations"
The one thing about modern macroeconomics that I find really hard to comprehend is that theorists seem to jump through hoops to get models with a certain kind of mathematical consistency in them, even though this guarantees that the models make very little contact with reality (and real data). In fact, it guarantees that these theories are based on sweeping assumptions that we know not to be true in the real world. I've written about this mystery before. A theory having "microfoundations" -- which macro theories are supposed to have to be considered respectable -- is thereby a theory that we know is not consistent with what we know about real human behavior and economic reality. Economists, it seems, only allow themselves to believe in things they know NOT to be true!! How wonderful and counter-intuitive! (I can see why the field must be appealing.)
Imagine if the engineers building and managing modern GPS and other global navigation systems were, for bizarre historical reasons, constrained to go on using a map of the globe essentially like that pictured above: The Square and Stationary Earth of Professor Orlando Ferguson.
Brad DeLong has an interesting comment on this topic today.