Structure, Lucas Critique critiquing, etc.

There has been some blog conversation about microfoundations, the Lucas critique, etc., recently, so I thought I would add my two cents. Noah Smith wonders how you are supposed to tell when your model satisfies the Lucas critique, and when it doesn't. Good question. Here's a quote from an economist who has been a strong supporter of the Lucas Critique:

The sentence “My model is structural” as now used seems to me to be equivalent to “My model is good” or “My model is better than your model.”

We're trying to construct models that are useful for analyzing the effects of policies. But if that's our intention, then those models should give us the right answers. What's structural? That depends on the model, and the policy, and we know that the model can't be perfect. Our ability to estimate - or calibrate - parameters is limited, and we have to leave some things out, otherwise we have something that is too complicated to understand. So we have to accept that any economic model is going to be imperfect in its predictions about policy. This is not going to be like using Physics to put people on the moon.

But what's the big deal? Noah seems endlessly perturbed that economics is not like the natural sciences. There are no litmus tests that allow us to throw out bad theories so we can be done with them. But that makes economics fun. We have to be creative about using the available empirical evidence to reinforce our arguments. We have to be much more creative on the theoretical side than is the case in the natural sciences. We get to have interesting fights in public. Who could ask for more?

Here's another issue. Noah seems to think that the Lucas critique is a convenient bludgeon, designed for use by the right wing:

This is just one more judgment call in macro. Which means one more place where personal and political bias can creep in. In the comments on my earlier post, someone wrote: "I think of the Lucas Critique as a gun that only fires left." What that means is that in practice, the Lucas Critique is generally brought up as an objection to models in which the central bank can stabilize output. Or in other words, consensus has a well-known hard-money bias.

On the up side, this is certainly milder than some things I hear. Some people out there think that the entire post-1970 research program in macroeconomics is a right-wing bludgeon. As I point out in this post, the Lucas critique was as much a problem for the money demand function as for the Phillips curve, and the quantity theorists certainly were (are) not lefties. As well, I'm sure that Paul Krugman would be all in favor of structuralism if there existed a watertight theory of nominal wage and price rigidity. Then we would be spared stuff like this:

But what if you have an observed fact about the world — say, downward wage rigidity — that you can’t easily derive from first principles, but seems to be robust in practice? You might think that the right response is to operate on the provisional assumption that this relationship will continue to hold, rather than simply assume it away because it isn’t properly microfounded — and you’d be right, in my view.

Krugman understands that if he said that at a serious economics conference, or wrote it in a paper submitted to a serious economics journal, that he would probably be given a hard time - and that would be right, in my view. This is part of what we do to sift ideas. The theory has to be convincing.

But the perception that Lucas critique arguments are more often used against arguments favoring government intervention than against those which do not is probably correct. Economic arguments that justify no government intervention are often easy to construct and understand. Justifying intervention is hard. Try to actually define what an externality is, or to construct a Keynesian model with all the proper working parts. Those things are difficult.