Friday, April 13, 2012

On N Smith on Lucas

Smith politely criticized Lucas.  I am very rude in comments.

Let no one mistake this comment as other than an attack on Lucas as an economist.  In "Econometric Policy Evaluation: A Critique" Lucas made no claim of originality.  He wasn't just being modest.  The paper starts with a literature review in which Lucas quoted many papers which made the point.  Someone who was there (Larry Summers) noted that when the paper was presented, the general view was that everyone knew that.

Lucas has made an extremely influential contribution to the study of the history of thought -- he has somehow convinced people that before Lucas macro economics was dominated by idiots (such as Sameulson, Solow and Marshack -- I mean really is it plausible ?).

You kids jump from the Lucas critique to DSGE.  Back in the day, there was a period of fascination with the Lucas supply function.  It is now agreed that this was a totally silly idea, not just wrong but silly.

The Lucas growth model is due to Uzawa.

Lucas did some interesting work on General equilibrium with multiple agents based on Lawrence Weiss's demonstration that results with the Lucas supply function depend on the assumption of symmetric information.  No huge deal but a contribution.

The DSGE model was presented by Arrow and Debreu in the early 50s.  The original contributions of Keydland and Prescott were two.  The first was to make critical totally implausible assumptions such that there is a representative consumer -- this makes a huge difference (as was well known as a topic in first year graduate micro).  It is totally implausible.  The implications are totally false.  It is not an advance.  The second is to claim that a very simple DSGE model with parameters supported by long term trends or micro data gives implications similar to the data.  This is, as have notetd in this blog, a totally incorrect claim.  This was not an advance either.

You mention in passing that DSGE models might give useful policy guidance.  You know and hint that this is just because "might" makes right.  So *might* astrology.

In contrast, the theory of phlogiston fit facts and made it possible to predict thre results of experiments.  I see no basis for a comparison of the scientific status of research on phlogiston and DSGE macro.  Nor was it a dead end -- Lavoisier's experiments sure seem to be attempts to measure the amount of Phlogiston in mercury.  The model was strongly rejected by the data as the measured amount was negative.  Science advanced as it does when models are tested and rejected -- provided they aren't assumed to be useful approximations even if predictions based on the models aren't confirmed.

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