This is the damage which Robert Lucas has done to macroeconomics:
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.
This is _the_ great fallacy introduced into economics by Robert Lucas (whether he still embraces it or not). The fallacy is so massive and significant that it arguably wipes out the significance of any other contribution Lucas might have made to economic science.
One of the properties of false price signals in an essentially complex network of millions of systematically related relative prices across time it that these false prices have the capacity to fool and mislead people systematically and structurally in an manner that isn’t immediately revealed, but can make itself felt — and unavoidably so — after the passage of an economically significant length of time.
What Stephen Williamson is giving us is excuse making for a research program (whatever other achievements it may claim) which has utterly failed at the one task that is non-optional: as a causal / explanatory enterprise.
UPDATE: Even more perversely, Stephen Williamson claims there is “no evidence” for “market failure” during a recession or depression.
Paul Krugman has written a post that encapsulates his thinking on macroeconomics – how he thinks other people do it, and how he thinks it should be done. His post is a comment on Barro’s WSJ article that I discussed here. Let’s take this apart. First paragraph:
As Glasner says, there’s something deeply weird about asking “where’s the market failure?” in the face of massive unemployment, huge unused capacity, an economy producing less than it did three and a half years ago despite population growth and advancing technology. Of course there’s some kind of market failure, which means that there’s nothing at all odd about asserting that better policy can yield free lunches.
We cannot observe a market failure. To deduce that a market failure exists, one needs a model. Given that we cannot observe market failure by looking at the state of the economy, we also can’t say what a “better policy” is. Again, for that we need a model.
We cannot observe a market failure? Take a drive, Stephen, outside of Bakersfield, CA or South of Olympia, WA or on the road to Joseph, OR or south of Corvallis, OR, and what you will see is mile after mile after mile of mothballed lumber hauling rail cars, given non-economic status by the artificial boom and inevitable bust of the 2002-2011 period. Or watch the nearly completely houses bulldozed in Victorville, CA in the wake of the housing boom & bust. And banks are still bulldozing homes all across the country.
But attempting to get Williamson to admit there are “market failures” in our midst is much like getting a philosopher teaching Descartes to admit there really is a white board in the room. Both are entranced by a perverse philosophical picture of “knowledge” and neither one of them wish to talk sense.
UPDATE: More than twenty-five percent of construction workers in America are unemployed in the post-boom phase, and construction unemployment by region systematically tracks the geography of the housing & commercial construction boom. You can see systematic patterns in the data — or you can get in a car and go look at the neighborhoods with “house for sale” signs everywhere, or you can get out of our car and go to the neighborhoods with huge numbers of unemployed construction workers and you can shake their hand and talk to them about it. All phenomena just as real as the philosophy professor’s white board …
UPDATE: The pathology of Stephen Williamson in a nutshell: “I tend not to think about the problem of people forecasting in different ways, as things are hard enough already and I want to focus on other things.”