We’ve heard it before: Beware of PhD economists. Don’t ask them too many questions; just let them talk. Let them talk about that one thing they spent 6 years writing a dissertation about, and only that thing. Don’t try to argue, don’t try to think. They’ve already done that. They know it. You know it. Just let them do what they’re supposed to do. After all, PhD economists are the people whom we rely on to create macroeconomic policy and teach us about macroeconomics.
Maybe that was a little harsh. But the flaw in macroeconomics comes with the self referential, inward-looking distractions that are the beliefs of macroeconomists, especially those of the New Classical and New Keynesian schools, and especially in reference to the Efficient Markets Hypothesis. The parameters of this hypothesis claim trading that spans all possible outcomes in which budget constraints are always satisfied by assumption, keeping in mind that default, bankruptcy and insolvency are impossible. Because of this, questions of illiquidity and insolvency can’t be asked OR answered. They don’t even exist! Right? Wrong. The hypothesis also includes the assumption that there is some power in the universe that makes sure nothing unexpected happens with long term price expectations. The basis of this hypothesis alone is a major “empirical fatality” of the 2008 financial crisis.
So what does this have to do with DSGE models? Consider the way in which macroeconomists view the EMH—a model that is so doctored to display perfect, unrealistic conditions in an imperfect, realistic world. What do we think they did with DSGE models? In the words of William Buiter: “They took these non-linear stochastic dynamic general equilibrium models into the basement and beat them with a rubber hose until they behaved.”
The problem with macroeconomics is the lack of a powerful desire to understand how the economy works, in good times and in bad. Macroeconomists have a stronger desire to fiddle with their unrealistic models and try to convince people that yes, that really is how the economy works, and no, there is no other way.
To lighten the mood, here’s a picture of my dog in the bathtub:
Mankiw throws some New Keynesian perspective into our analysis of RBC models. Good explanation of Walrasian Equilibrium and Classical Dichotomy.
Also, look at how CUTE my dog is. I love her. So fluffy.
The conceptual framework of modern education is misleading and unhelpful to students. It now seems more prominent than ever, the idea of “being good at school”. It has taken over the lives of students since we entered into the system. We’ve been spoon fed by our teachers and professors. Page limits, word counts, exact specifications. We’re taught how to do things “the right way”. We crumble when we are simply told to “do”. The simple task of reading a document and writing a reflection ignites a wave of anxiety among students. Where’s the rubric? How long should it be? What should I write about? What should me thoughts be? We are so used to being provided with the answers to all of these questions, so used to being told exactly what to do and how to do it. We have lost our ability to think, learn and create.
The classes in which I have learned the most are the ones where I am left to my own devices. These types of courses give me the opportunity to think critically, to conquer the moment of panic that accompanies vague assignment descriptions. When I am left to think, I am also given the opportunity to fail, which I think is incredibly important for my formation as a student and as a person. The problem with the conceptual framework of modern education is that students are rarely given an opportunity to fail. Teachers are afraid to let their students fail, and students are afraid to fail. Students don’t work to create or to learn, they work for the A. They work to avoid failure. They study the ins and outs of grading for each professor, memorize their favorite writing styles, and fill their work with fluff. We complete assignments by checking off items on a checklist, not by using our brain power. What kind of learning is that? We aren’t learning from each other, we’re learning through a manual. We sit, absorb, and regurgitate.
So what can be done to fix the conceptual framework of modern education? Let the students fail. Give students the opportunity to think wildly, create fervently, and learn constantly.
While I believe that expectations are important to include in economic analysis, the belief that people and the economy are rational in tandem is fundamentally flawed. The mathematization of people’s decision making processes is flawed. The mathematization of economics is flawed. The equality between the two: flawed. I know what you’re thinking: If we don’t mathematize economics, what are we to do? How can we forecast? Where is the basis of our science? Honestly, I’m not sure. But I do know this: sometimes, people are rational. Take our class for example. All of us (with one exception) made generally rational claims about future inflation. Claims based on past inflation rates, the current economic climate: rational. But what even qualifies as a rational expectation? Is it a prediction that aligns with some complicated, all-assuming, idealistic model? Is it a prediction that matches the actual inflation, even if you just picked your guess out of a hat? How then, are we supposed to be rational agents if the quantifiers for our rationality are flawed? The economy will do as it will. Recessions happen. We will not always see them coming.