More on microfoundations

Last month I wrote a long-ish post describing the history of the “microfounded” approaches to macroeconomics. For a while I was updating that post with links to recent blog posts as the debate continued, but I stopped after the list grew too long.

Now Simon Wren-Lewis has written two more posts that I think are worth highlighting because they come from someone who is generally supportive of the microfoundations approach (I’ve found his defense of the general approach quite helpful), but who still has some specific critiques. The end of his latest post puts these critiques in context:

One way of reading these two posts is a way of exploring Krugman’s Mistaking Beauty for Truth essay. I know the reactions of colleagues, and bloggers, to this piece have been quite extreme: some endorsing it totally, while others taking strong exception to its perceived targets. My own reaction is very similar to Karl Smith here. I regard what has happened as a result of the scramble for austerity in 2010 to be in part a failure of academic macroeconomics. It would be easy to suggest that this was only the result of unfortunate technical errors, or political interference, and that otherwise the way we do macro is basically fine. I think Krugman was right to suggest otherwise. Given the conservative tendency in any group, an essay that said maybe there might just be an underlying problem here would have been ignored. The discipline needed a wake-up call from someone with authority who knew what they were talking about. Identifying exactly what those problems are, and what to do about them, seems to me an important endeavour that has only just begun.

Here are his two posts:

  1. The street light problem: “I do think microfoundations methodology is progressive. The concern is that, as a project, it may tend to progress in directions of least resistance rather than in the areas that really matter – until perhaps a crisis occurs.”
  2. Ideological bias: “In RBC [Real Business Cycle] models, all changes in unemployment are voluntary. If unemployment is rising, it is because more workers are choosing leisure rather than work. As a result, high unemployment in a recession is not a problem at all…. If anyone is reading this who is not familiar with macroeconomics, you might guess that this rather counterintuitive theory is some very marginal and long forgotten macroeconomic idea. You would be very wrong.”

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04 2012

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