Going Global

One thing that we should consider as we revise each of our sections (I made this point earlier today but I think this is a better example) – how do the purposes of macro theory intersect, and what are the consequences of failure in one area?

This article I think makes an interesting point in that direction (there’s a paywall but you can get past it using incognito mode on Chrome). It argues that the way economists teach comparative advantage and trade theory is misleading because it misses the distributional effects of trade agreements. We’re often taught comparative advantage using very simplistic assumptions – the Ricardian model of free trade assumes that workers and factors can easily switch between two different goods.

In reality, the economy is more complex. Comparative advantage may mean that the economy as a whole is better off (the economic pie may get bigger) but the losers of trade may end up with a smaller slice of the pie than they had before trade. BUT because people had been taught that trade makes everyone better off, programs like trade adjustment assistance quietly failed the workers losing their jobs to trade.

The point here isn’t that our models have failed to explain who wins and loses from trade. They seem to be doing a pretty good job of it; in the U.S., low skilled workers lose and higher skilled workers win from globalization. The problem is that the way we use these models to teach students about trade results in bad policy-making because those in charge simply conclude that “because trade results in a bigger overall economic pie, the distributional effects are less important.”

Some of the problem here might stem from conflation of welfare/efficiency and total utility. The economic pie may be at its biggest without redistribution (when it is at its most efficient) but redistribution may be better for total utility (which is admittedly hard to measure). Redistribution may cause the overall economic pie to shrink due to dead-weight loss,  but more people are better off because the marginal utility of $1 to someone making $30k a year is greater than the marginal utility of $1 to someone making $100k over the same time.

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At a Glance

Advances in technological firms have opened the opened a large sum of Americans to a vast amount of information. Since the 90s the labor force participation rate has been steadily decreasing. In 2013 “According to BLS projections, 15.1 million men will have left the labor force by 2022, resulting in a labor force of 86.9 million men. Similarly, 11.8 million women are projected to have left the workforce by 2022.” This combined with atomization advancements in manufacturing and food processing due leads me to believe that the labor force participation rate is due to continue to decrease continually and at one point far ahead exponentially. Recently a peer asked me to evaluate a paper that captures the ways in which we gauge economic success. More importantly there are various comparisons of GDP to the social progress index, human development index, OECD better life index, World Happiness report index and finally the sustainable development goal index. There are other ways to evaluate social success whether it by happiness or social progress while the best-fit lines of GDP positively correlate with quality of life in the Euro-zone. Correlation ≠ causation and it is up for debate

.Sustainable development might more achievable if one doesn’t promote a life of pure consumerism. This combined with the lower labor force participation rates leads me to believe that there will be many changes and advancements in  sustainability, societal success and industry. I believe that macroeconomics as a whole is not broken and that DSGE failure is only another adjustment in focus in the lens that examines success.

 

 Toossi, Mitra . “Labor force projections to 2022: the labor force participation rate continues to fall.” BLS.gov, December 2013. https://www.bls.gov/opub/mlr/2013/article/pdf/labor-force-projections-to-2022-the-labor-force-participation-rate-continues-to-fall.pdf.

https://www.bls.gov/opub/mlr/2013/article/pdf/labor-force-projections-to-2022-the-labor-force-participation-rate-continues-to-fall.pdf

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DSGE Critiques PP

Hello class,

Today Christian and I are presenting the critiques of DSGE models, mainly post 2008 global financial crisis! I have attached a link to view the presentation below if you would like to review it and develop questions beforehand. The predominent economists who provided discourse on the topic include Robert Solow, Anton Korinek, Noah Smith, Roger Farmer, Camilo Tovar, Paul Romer, and Paul Krugman.

The critiques that stood out to us include:

  • Failing the “Market Test”
  • Unrealistic Assumptions and Parameters
  • Lack of Financial Sector
  • Determination of Causality/Correlation
  • Aggregated Microeconomics

The both of will expand on these point more so in class. We encourage you all to ask questions and provide feedback. Several of the critiques will have overlapping ideas but we will provide context in class today on why we decided to put them into separate categories.

https://docs.google.com/presentation/d/1HfNhkIU3iwYVvHqDcV6yJ_gKQjKyAlhmGgaKn9S4gvU/edit?invite=CK7o3fwL&ts=58f91f3d#slide=id.p

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DSGE and Why It’s “Broken” – Paper Scrap

DSGE

Dynamic Stochastic General Equilibrium, or DSGE model has been the most dominant recent macroeconomic model in the recent economic history. The name Dynamic Stochastic General Equilibrium does tell some interesting characteristic that the model possesses. “Dynamic” being the simplest part of the model just suggests that the model over goes a progress of constant change. The term “Stochastic” is defined as a correspondence to a particular type of manageable unpredictability built into the model that demonstrates events like oil shocks and/or technological changes. The model attempts to assume it can predict these shock mathematically and the events that the model cannot predict are simply uninsured and ruled out of the results. “General” means that the model incorporates almost all of the markets of our macroeconomic economy. The “Equilibrium” part of the model’s name shows that the model accepts that demand and supply balance out quickly and accurately, as well as these markets are assumed to have competition that is untouched by surpluses, shortages as well as involuntary unemployment.

The model that we talk about per say are not broken or failing but the main issue is that, the model is not dynamic enough for such large macroeconomy that we have today. The economy is always changing and there will be shocks that models will not be able to highlight or incorporate. As dynamic the economy is, to make an accurate model the model needs to be dynamic as well. The models that have been famous and are currently in place might work for a period of time but will always fail in the end due to their unchanging nature.

 

 

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Updating Older Schools of Thought – Paper Scrap

Neo-Classical Economics

Neo-Classical Economics is a form macroeconomic thought that was based on incorporation of rational expectation theory in the through 60s and 70s. This means that the macro economy is made of many individuals who make the best decisions that they possibly can and will drive the economy. This economic model is highlighted by a type of monetarism that considers the demand management system by any type of government is absolutely ineffective even in the short run, and this makes people and support tax cuts. The theory suggests that participants in this economic model will try their best to reach highest utility possible while firms produce and maximize their profits. Firms will produce until marginal revenue will be equal to marginal cost. Neo-Classical economic theory will view all markets perfectly competitive.

 

New Keynesian Economics

New Keynesian Economics is an economic theory that takes in consideration the Micro foundations that Lucas found to be so important when trying to illustrate the Macro economy. This included the acceptance of rational expectations assumptions, which means that people will act only in the most beneficial way that makes since to them while knowing most of the information that is attainable to them. The theory also accepts that firms will not participate in perfect competition but will participate in monopolistic competition. In markets, New Keynesians believe that wages and prices will be “sticky”: market failures and involuntary unemployment is potentially possible while the government intervention attempts to keep the economy in equilibrium.

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What do we mean when we say that Macroeconomics is broken?

Hi friends (but mostly Nikita and Alli because this might be something we want to consider),

First, please excuse the stream of consciousness (I promise I tried to keep this organized).

Second, when I refer to modern macro as being “broken” I’m referring to it being broken with regards to its ability to predict/explain behavior and to inform policy decisions, not its ability to teach principles/intermediate students.

Anyway, I did some thinking (gasp) after last class and I think I have an important question with which we need to grapple when we try to define “broken.” That is, I think we need to draw a distinction between two different types of “broken”-ness.

Popperian Broken means that mainstream macro models were unable to explain or predict important phenomena (i.e. the Great Recession). A hard science example of this might be like how existing theories of biology/aerodynamics can’t explain why a bumble bee is able to fly or how physics can’t understand what glass is. They’re important questions, but it’s probably safe to say that we don’t need to radically overhaul these disciplines to understand them, we probably just need to make some revisions.

I think that Popperian Brokenness means macro as a discipline isn’t truly *broken*, but rather that it just needs some polishing. So far, we’ve really only pointed out ways that macro suffers from Popperian Brokenness – DSGE models are oversimplified, don’t have a financial sector, etc. All of these could probably be fixed by adding more and more equations into the models as computing power gets stronger and none of them necessarily imply that we need to overhaul our understanding of macro.

Kuhnian Broken means that mainstream macro models are paradigmatically wrong and macroeconomists are headed in completely the wrong direction. The hard science equivalent of this would be the geocentric models of the universe – our explanations are totally wrong.

I’m still trying to establish a threshold for considering macro to be Kuhnian Broken. The best I can come up with would be a fundamental upending of the micro-founded assumptions of modern macro models – i.e. that consumers don’t seek to maximize utility, firms don’t try to maximize profits, etc. I’m also not sure whether information failures (people act rationally based on incomplete information) count as Kuhnian or Popperian Brokenness, but I think that it depends in part on whether those information failures can be solved by adding equations.

Of course, I also realize that these two probably aren’t mutually exclusive – Popperian Brokenness can be a symptom of Kuhnian Brokenness. Retrograde planets could be considered Popperian Broken but they ended up proving that the geocentric model of the universe was Kuhnian Broken. That said, this still raises the question of how we would know whether macro suffers from Kuhnian Brokenness or just a few instances of Popperian Brokenness, which seems tricky. Loathe as I am to concede Alli’s point that economics is a soft-science, she has a point that it’s hard to make a definitive argument in macroeconomics. Astronomers can point a telescope into space and say “this planet is here” to disprove the geocentric model of the universe (OK maybe not that simple, but I only took 100-level astronomy). Economists rarely have access to good experimental data, especially in the study of macroeconomics. Instead we have to interpret regression results using often imperfect variables and proxies.

I thought Alli made a pretty insightful counter-point to this whole discussion yesterday. She said that in order for macro to be “broken” it had to have worked at some point – Classical Economics worked until the Depression, Keynesian models worked until Stagflation in the 1970s, etc. This point would imply that Popperian Brokenness is the only type of broken that we should consider because if we found that macro was Kuhnian Broken (and that macro never really worked), then that would just mean that macroeconomics is a pseudo-science and was never worth pursuing in the first place.

Finally, I realize that this whole meta-rant might have been better suited for the very beginning of the class, but this just now came to me in a semi-coherent form. Looking forward to hearing others’ thoughts on this

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Classical and Keynesians – Paper Scrap

Unfortunately my descriptions of different economic thoughts that we have discussed this semester won’t make the final paper, but here they are for your viewing pleaser!

 

Classical Economics

The first class of economics which had kicked off the main study of economics was the classical view of the economy. There was no differentiation between Macroeconomic or Microeconomic theory, but they did use evidence of microeconomic theory that we know of today and had applied it to macro economy to predict it. One of the most important conditions of the Classical Economic theory is that there is always perfect information in the market. There are zero transaction costs, all transactions are voluntary ,and there is an infinite number of buyers and sellers. These factors made the classical focus more on the supply side of the equilibrium. This was due to the classical economic thought that was developed by Jean Baptiste Say which had assumed: supply creates its own demand which had made an assumption that there will be no hoarding in the economy due to all income is either spent or saved (that it is invested). Another thing to add is that if there is excess supply then there will be excess demand, everything is evened out and there will never be excess supply in the economy. This assumption; Walras’ Law, if one good is more desirable it will rise in price, while less desirable goods will fall in price and aggregate supply side will never change.

 

Keynesian Economics

The basic idea behind the Keynesian economic model is economic theory of total spending in the economy and its effects on output and inflation. This theory and idea was brought up by John Keynes who was a British economist. He stumbled upon his believes by attempting to identify the factors behind the Great Depression. He had concluded that increased government expenditures as well as lower taxes will stimulate demand and influence the economy out of the Depression. This had led to a belief that optimal economic performance may one day be accomplished. This demand side theory of “Keynesian economics” suggest that ideal and efficient performance by the economy may be achieved and economic decline and detraction may be prevented by economic intervention by the government which would create policies to influence the aggregate demand.

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ECON488 – Global Posts 2017-04-17 13:53:53

https://drive.google.com/drive/folders/0B0QOnO2TyKAlZGZSX2FJUjlhU3M?usp=sharing

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Another Critique for DSGE Models

I found this simplified critique of DSGE models (Policy Brief), written by Olivier Blanchard that was published in August of last year. I think he outlines several key flaws in the microeconomic foundations of the DSGE models in a streamlined manner. It is a short article, restating some of what we have found in class, but I think it can be useful as a guideline.

 

https://piie.com/system/files/documents/pb16-11.pdf

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Update: Critiques of DSGE Models

Hello class, Christian and I are writing our portion of the paper on the critiques of DSGE models. We have chosen the most prominent critiques and have looked at the points of discourse from well-known economists, such as Robert Solow, Anton Korinek, Noah Smith, Roger Farmer, Camilo Tovar, and Paul Krugman.

The structure of the paper will be introducing the critiques and then expand on what economists/academics have elaborated on them.

If you all have come across interesting and/or notable critiques from your own research please email me at tzotos@mail.umw.edu or Christian at cpotter@mail.umw.edu. We both would appreciate any input you all would have to offer!

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