Thursday, August 06, 2009

Talk About A Pathetic Defense

Robert Lucas, one of the key architects of the extremely useless and misleading "New Classical" macroeconomics model here tries to defend the New Classical model despite its obvious failures.

"The Economist’s briefing also cited as an example of macroeconomic failure the “reassuring” simulations that Frederic Mishkin, then a governor of the Federal Reserve, presented in the summer of 2007. The charge is that the Fed’s FRB/US forecasting model failed to predict the events of September 2008. Yet the simulations were not presented as assurance that no crisis would occur, but as a forecast of what could be expected conditional on a crisis not occurring."

Get that? The forecast was not really meant to be a forecast even though it was presented as a forecast and requested for the purpose of forecasting, but simply a description of what would happen if it happened.....

Well, just about anything can be posed as happening if it happens, including theoretically absurd things like pigs flying by flapping their ears, cats going vegetarian or all prices being fully flexible. Indeed, the whole "New Classical" macroeconomic model is really nothing but a mixture of a few sensible theories with many really absurd assumptions (like full price flexibility) formulated for the purpose of making the model mathematical.

The bottom line is that New Classical models have no real world applicability or relevance. And since the New Classical models are often presented as the only alternative to [New] Keynesian models, they are doing a lot of harm by making the harmful Keynesian models appear relatively more credible.


Anonymous Anonymous said...

It always amazes me that no only do they make obviously false simplifications and modifications to the actual economy, but they always seem to leave out the most important things. Probably because the real economy isn't 'tractable' to the kind of policy-wonkery they want to engage in.

9:01 AM  
Blogger Lord Keynes said...

A fascinating blog, with astute analysis.
I think you are right that the neoclassical model is fundamentally flawed.
However, the Austrian school is itself also severely flawed, and holds incorrect ideas like Say's Law. The Austrian belief that we need to return to the Gold Standard is as absurd as some of the flaws in neoclassical economics.

9:57 AM  
Blogger stefankarlsson said...

Say's law is not incorrect, though the straw man version of it presented by Keynes was incorrect. But that was an error by Keynes (in interpreting the theory), not Say.

4:31 PM  

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