Paul Romer on The Trouble with Macroeconomics

Paul Romer (of endogenous growth fame) has a new, scathing critique of macroeconomics.

For more than three decades, macroeconomics has gone backwards. The treatment of identification now is no more credible than in the early 1970s but escapes challenge because it is so much more opaque. Macroeconomic theorists dismiss mere facts by feigning an obtuse ignorance about such simple assertions as “tight monetary policy can cause a recession.” Their models attribute fluctuations in aggregate variables to imaginary causal forces that are not influenced by the action that any person takes. A parallel with string theory from physics hints at a general failure mode of science that is triggered when respect for highly regarded leaders evolves into a deference to authority that displaces objective fact from its position as the ultimate determinant of scientific truth.

Notice the Kuhnian finish: “a deference to authority that displaces objective fact from its position as the ultimate determinant of scientific truth.” This is one of the key features of Sterman & Wittenberg’s model of Path Dependence, Competition, and Succession in the Dynamics of Scientific Revolution:

The focal point of the model is a construct called “confidence.” Confidence captures the basic beliefs of practitioners regarding the epistemological status of their paradigm—is it seen as a provisional model or revealed truth? Encompassing logical, cultural, and emotional factors, confidence influences how anomalies are perceived, how practitioners allocate research effort to different activities (puzzle solving versus anomaly resolution, for example), and recruitment to and defection from the paradigm. …. Confidence rises when puzzle-solving progress is high and when anomalies are low. The impact of anomalies and progress is mediated by the level of confidence itself. Extreme levels of confidence hinder rapid changes in confidence because practitioners, utterly certain of the truth, dismiss any evidence contrary to their beliefs. ….

The external factors affecting confidence encompass the way in which practitioners in one paradigm view the accomplishments and claims of other paradigms against which they may be competing. We distinguish between the dominant paradigm, defined as the school of thought that has set the norms of inquiry and commands the allegiance of the most practitioners, and alternative paradigms, the upstart contenders. The confidence of practitioners in a new paradigm tends to increase if its anomalies are less than those of the dominant paradigm, or if it has greater explanatory power, as measured by cumulative solved puzzles. Confidence tends to decrease if the dominant paradigm has fewer anomalies or more solved puzzles. Practitioners in alternative paradigms assess their paradigms against one another as well as against the dominant paradigm. Confidence in an alternative paradigm tends to decrease (increase) if it has more (fewer) anomalies or fewer (more) solved puzzles than the most successful of its competitors.

In spite of its serious content, Romer’s paper is really quite fun, particularly if you get a little Schadenfreude from watching Real Business Cycles and Dynamic Stochastic General Equilibrium take a beating:

To allow for the possibility that monetary policy could matter, empirical DSGE models put sticky-price lipstick on this RBC pig.

But let me not indulge too much in hubris. Every field is subject to the same dynamics, and could benefit from Romer’s closing advice.

A norm that places an authority above criticism helps people cooperate as members of a belief field that pursues political, moral, or religious objectives. As Jonathan Haidt (2012) observes, this type of norm had survival value because it helped members of one group mount a coordinated defense when they were attacked by another group. It is supported by two innate moral senses, one that encourages us to defer to authority, another which compels self-sacrifice to defend the purity of the sacred.

Science, and all the other research fields spawned by the enlightenment, survive by “turning the dial to zero” on these innate moral senses. Members cultivate the conviction that nothing is sacred and that authority should always be challenged. In this sense, Voltaire is more important to the intellectual foundation of the research fields of the enlightenment than Descartes or Newton.

Get the rest from Romer’s blog.

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