Friday, January 3, 2014

Economics is the art of subdivision

The Microfoundations Wars Continue Uneasy Money:
Paraphrasing, I would say that Yates defines merit as a useful insight or prediction into the way the world works. Fair enough. He then defines microfounded models as those models that tell an explicit story about what the agents populating the model are trying to do and the resulting outcomes of their efforts. This strikes me as a definition that includes more than just microfounded models, but let that pass, at least for the moment. Then comes the key point. These models “are the ONLY models that have anything genuinely economic to say about anything.” A breathtaking claim.

This is a difficult subject. Imagine you want to model what people do in my town of Fresno. How much detail does the economist need about me, Matt Young, before it finds some common characteristic in all Fresnans?  Not much, it seems to macroeconomists.  Not  enough say the microeconomists. How much am I individually different then the typical Fresnan?

The debate is wrongly stated among economists, because there is some component composition in all methods of economics. The whole point of the model is to find a form of a micro model that sufficiently mimics the macro data. In other words, if they say anything useful then they have a micro/macro boundary. But of course, the holy grail is for the economist to find simple rules when the micro components are singletons, us individuals; and the macro data is over a single economy. If they can do that then they get like three or four Nobel prizes.

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