June 14, 2016

Wrong question, wrong answer

Comment on Stephen Williamson on ‘Econ theory as signaling?’


Noah Smith starts his post with the circumspect question: “Assuming ... DSGE models really don’t work, why do so many macroeconomists spend so much time on them?”

Note, that he does not straightforwardly assert: “DSGE does not satisfy the scientific criteria of material and formal consistency.”

Stephen Williamson takes this clear signal of spinelessness as an invitation and shifts the issue rhetorically away from the crucial point by starting the second-guessing meta-communication game: “When I read that, here’s what I think you’re thinking. ‘Don’t work’ means useless.”

Noah Smith is now trapped in a very inconvenient corner and he gets the knockout: “Now, most of what I do would fall under ‘DSGE,’ if I take the term literally. I’m somewhat outside the mainstream, but I’ve bought into the idea that formal modeling is useful, optimization is useful, RE is useful. So, I think you’re telling me that what I know is useless, and what I do is useless. And I get paid to do what I do, which is full time research in macro, giving policy advice, etc. By implication, it seems you’re saying that you could do my job as well or better than I can. Is that correct?”

No! For heavens sake, no! Everybody knows that Noah Smith never wanted to say that he could do Stephen Williamson’s job better.

So, let us now get out of this ridiculous little game and put things straight.

(i) DSGE is provable false according to the scientific criteria of material and formal consistency.

(ii) What the proponents of DSGE including Stephen Williamson offer as knowledge is NOT knowledge=episteme but opinion=doxa. “In order to tell the politicians and practitioners something about causes and best means, the economist needs the true theory or else he has not much more to offer than educated common sense or his personal opinion.” (Stigum, 1991, p. 30). DSGE is NOT the true economic theory. Just the contrary: DSGE is axiomatically false.

(iii) Because they do not have the true theory economic policy advice of the proponents of DSGE has NO scientific foundation but is at the same level as poultry entrails reading.

(iv) Right policy depends on true theory. Therefore, to say what the proponents of DSGE do is useless is an euphemism. As a matter of fact, they got price theory, profit theory, and employment theory wrong and therefore ultimately bear the intellectual responsibility for the social devastations of unemployment. DSGE is NOT a “healthy scientific activity” but a scientific failure.

What Noah Smith and Stephen Williamson are unmistakably signaling is: economists are not useless but a menace to their fellow citizens.

Egmont Kakarot-Handtke

Stigum, B. P. (1991). Toward a Formal Science of Economics: The Axiomatic Method in Economics and Econometrics. Cambridge, MA: MIT Press.

Immediately preceding: 'Economics is locked in idiocy: How could this happen?'