Mark Thoma Went to the Wrong Conference

Mark Thoma went to the Lindau Nobel Laureates meetings and wonders why he did not learn anything new. No offense to these people, many of whom I admire and have learned a great deal from, but this is the geriatric set, mostly. One should not expect to be enlightened about the causes and consequences of the financial crisis by showing up at Lindau. For enlightenment, Mark should have gone to the SED meetings in July, to see what the sharpest young economists in the world are doing. I'm sure Ed Prescott would agree.



Let's deal with some of Mark's specific complaints about what he thinks practicing macroeconomists have been up to:

Macroeconomic models have not fared well in recent years – the models didn’t predict the financial crisis...

I'm so sick of hearing that one I could scream. The economic agents living in a model in which a financial crisis can occur know that there is a possibility that this event can happen. But they cannot predict it, otherwise there would be an unexploited profit opportunity. Similarly, a real human being could not have used such a model to predict the financial crisis. Economists may have been unaware of some of the things that were going on in financial markets that contributed to the crisis, and some of that was not their fault, as some of those things involved obfuscation by the financial market participants involved. Failure to predict the financial crisis does not in itself condemn all existing macroeconomic theory.

How can some of the best economists in the profession come to such different conclusions? A big part of the problem is that macroeconomists have not settled on a single model of the economy, and the various models often deliver very different, contradictory advice on how to solve economic problems.

Mark obviously finds disagreement disagreeable, but that's what makes life interesting. If we all agreed, we could pack up, go home, and watch TV. There will never be a "single model" that solves all macroeconomic problems, nor should there be. We use different models for different problems, and all of those models are going to be wrong on some dimension. Intelligent economists are going to disagree about the details of what goes into the models. Science marches on.



Finally, here's an extra bit from Mark's blog post

I have little faith that the older generation will ever acknowledge the models they spent their lives building are fundamentally flawed.

Of course, every model is flawed in some sense, i.e. it is going to be wrong on some dimensions. A model is necessarily an abstraction - a simplification that helps us to organize our thinking about the world. It cannot do its job unless it leaves stuff out, and it therefore can't be right about everything.



The idea that we are surrounded by "fundamentally flawed" models is so gloomy. Look on the positive side, Mark, and recognize what the important contributions are, and how economists have built on those contributions in the last 40 years. Pay attention to the good work that young economists are doing right now, under your nose, if you care to look.