Wednesday, July 22, 2009

Economic Problems

MARIO RIZZO has a very interesting and thought provoking post about problems in macroeconomics:
"Second, what is the root of the difficulty in which macroeconomics finds itself?

I think it is the inability to reconcile a reasonable treatment of radical uncertainty with the strictures of out-of-control formalism. We have come a long way from Alfred Marshall’s idea that one does the mathematics and then burns it. In a 1906 letter to A.L. Bowley (of the Edgeworth-Bowley box fame) Marshall says:

“But I know I had a growing feeling in the later years of my work at the subject that a good mathematical theorem dealing with economic hypotheses was very unlikely to be good economics: and I went more and more on the rules – (1) Use mathematics as a shorthand language, rather than an engine of inquiry. (2) Keep to them till you have done. (3) Translate into English. (4) Then illustrate by examples that are important in real life. (5) Burn the mathematics. (6) If you can’t succeed in (4), burn (3). This last I did often.”

Clearly, the adherents of DSGE did not follow points (4) through (6). "
DSGE is shorthand for the dominant macro model today. I had never heard of this idea of Marshall before, but it seems to me one worthy of much reflection. It also seems to me that most micro economists today also miss the significance of radical uncertainty for the questions and issues they study.

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