I am actually embarrassingly impatient when I hear people talking like that – so I’m not sure I’ll be able to discuss its merits objectively 😛

So what you are saying is that the existence of multiple personality disorder and the possibility of demonic possession invalidates the entire field of economics. Gotcha.

You must be asking Andrew – because there I’m useless at trying to explain these sorts of things.

“idea of the “rational man” is far too simplistic”

When people criticize the “rational man” I think it is a good idea to realise exactly what the rational man is – and what issues there can be with him.

Rational man is simply a dude that makes choices to maximise his “happiness”. When he makes a choice, these choices are based on his information, beliefs, expectations, and the cost of making that choice. Now the only counter to “rational man” is someone that doesn’t make choices. If we truly believed people don’t make decisions, and outcomes are arbitrarily figured out some other way we shouldn’t use rational man.

As I believe people do make decisions – I support the general idea of rational man.

Now, things go a bit hairy when economists go to USE rational man. Often we will assume that our rational man assumes that other agents are rational, has perfect information, and has the capability to make a decision so quickly that processing the information is costless. These assumptions are far too strong – and they lead us to make some silly conclusions.

These auxiliary assumptions about our “rational man” need to be analysed in more detail – and hell there is a lot of work out there actually looking at these details. As a result, it is an issue we have to keep in mind when using our economic models to make predictions.

However, the idea of reducing society to the actions of individual agents, agents that are “rational” insofar as they make decision in their own interest, still makes sense.

“economic theory is too often at odds with empirical research”

Other theories are often at odds with empirical research.

There are two things here. 1) Our mode of analysis informs the data – so it is hard to actually conclusively test anything. 2) There are unaddressable, and unmeasured, auxiliary issues when we look at the relationship between variables – as a result the empirical success of a hypothesis is not really the be all and end all.

“That the economists reliance on “all other things held constant” means their conclusions are almost certainly wrong”

I don’t like it when people use this argument – because it shows that they have missed to point of economic analysis. In economics we are more often than not trying to DESCRIBE the relationship between factors – not predict or prescribe (at least as a starting point).

The fact is that other things are never constant – and if we could find out the fundamental relationship between every economic variable we would be happy to just run it through. But we can’t do that. By not assuming ceteris paribus we would not be able to describe or explain the interaction of two variables – as someone could always say it is the “other” variable in our relationship that is causing the result.

Now – it is possible that our ceteris paribus assumption might include the REAL causal variable of an event, in which case it would be good to instead include that variable. In that case the criticism should be what economists put into their models – not the use of CP clauses.

Overall – I find that people who usually criticise economics don’t actually know what the assumptions they are criticising mean. I often hear people telling me we need “more microeconomics” and then talking about “currency cylces” as an example of this 😛 I also hear people criticise rational man “because he doesn’t care about other people” – something that illustrates a huge misunderstanding about the difference between “self-interested” and “selfish”.

There are plenty of good ways to attack what economists sometimes do – but attacking these general assumptions is normally folly. Unless you believe that methodological individualism is false …

As long as you believe that society can be reduced to the actions of individual agents, the general framework of economics is fine.

These are arguments/accusations I am seeing a lot more these days as a way of disparaging economic thought. And while I do address them, my argument is usually too clumsy to succeed convincingly.

Would you be able to apply your powers of succinticity to the questions so I can take your answers, paste it where the arguments spring up and shut them down with less effort?

Excellent comment. Would you mind if I put it up as a guest post – as I think it deserves a bit more attention than a comment would give it.

I think it is useful to distinguish between the problems with contemporay monetary economics, and the problems with macroeconomics. The wider field of macroeconomics has made reasonable progress in the last twenty years, with some considerable advances in understanding learning and co-ordination. In particulr, the use of matching models has been a worthy advance: this is an area where macro- extends micro-, as it shows the conditions where the interaction of agents each facing microeconomic incentives can lead to quite different aggregate outcomes. This, of course, is or should be the distinguishing feature of macroeconomics: it is the study of the aggregate outcomes that result from the interaction of agents who are different. Modelling the microeconomic incentives facing these agents is only the first part of the story; doing the aggregation, and examining the potential for multiple equilibrium is the other part. Indeed, one of the main criticisms of contemporary macroeconomics is not that it neglects microfoundations, but that it completely over-simplifies the aggregation issue by focussing on representative agent models. For example, the incoherence of much of the debate about saving in New Zealand stems from this neglect of aggregation; there seems to be almost no recognition of Modigliani’s famous point that an economy comprises a mixture of young saving households and elderly dissaving households, and that very little interesting information can be learnt by only examining aggregate saving rates.

The other major problem with macroeconomics has been its obsession with poorly identified time series analysis – Larry Summers was basically correct two decades ago in saying no one has learnt anything from time series applied to macroeconomic data. However, even here there has been some progress, as there is a growing stream of macro papers based on properly identified structural equations or event studies.

Monetary economics has faced a different problem, although it too has suffered from the use of representative agent models and far too much time series. (The use of bayesian techniques as a substitute for proper identification is merely the craziest outcome of this tendency.) Here the problem is the over-use of a class of models which, while technically clever, have not yet been developed to a point where they can ask the relevant questions. DSGE models may be the future (perish the thought), but for the last few years they have had a structure that has basically neglected the internal workings of the monetary and financial sectors, and thus been structurally unable to address any of the issues that currently afflict us. Monetary economists seem to have fallen in love with their tools, and in doing so they have ignored issues about which their tools have nothing to say. (They have sat round making better spades rather than digging holes.) This wouldn’t have mattered so much if monetary economics were big enough to encompass a wider range of viewpoints, but in the last fifteen years many traditional approaches to monetary economics (the literature emphasising internally generated credit crises, associated with Bagehot, Marshall,keynes, Von Mises etc) have been largely ignored, possibly because of the progress in DSGE models absorbed most of the energy.

My favourite analogy on this point is that the problem of monetary policy is similar to driving a car from New York to Chicago at a constant speed. Recently the emphasis has all been about the driver: the use of the brakes, accelerator, and steering wheel to negotiate around external shocks and hindrances to maintain a constant speed. This has lead to the cult of the clever central banker, optimally changing interest rates in response to external shocks. Yet in earlier days, the key issue was choosing to drive at a speed that ensured the engine didn’t overheat, and much of the focus of central banking was on the equivalent of mechanical engineering rather than driving: making sure there was the right amount of water in the radiator, that the red light warning of overheating wasn’t blinking, etc etc. The relative neglect of the earlier literature on credit crises, and the recent emphasis by central bankers on their role in stabilising the economy to external (non-monetary) shocks (rather than shocks that are caused by the operation of the monetary and financial systems) looks like it will be a costly error.

Monetary economics hasn’t been a total desert, however: economists like Hyun Song Shin and Goodhart have done some really interesting work on internal financial market stability in the last few years, work that is now coming to the fore.

Perhaps in your studies of sociology, you could study the herd mentality of monetary economists…..

Andrew