In macro, most of the equations that went into the model seemed to just be assumed. In physics, each equation could be – and presumably had been – tested and verified as holding more-or-less true in the real world. In macro, no one knew if real-world budget constraints really were the things we wrote down. Or the production function. No one knew if this “utility” we assumed people maximized corresponded to what people really maximize in real life. We just assumed a bunch of equations and wrote them down. Then we threw them all together, got some kind of answer or result, and compared the result to some subset of real-world stuff that we had decided we were going to “explain”. Often, that comparison was desultory or token, as in the case of “moment matching”.
In other words, the math was no longer real. It was all made up. You could no longer trust the textbook. When the textbook told you that “Households maximize the expected value of their discounted lifetime utility of consumption”, that was not a Newton’s Law that had been proven approximately true with centuries of physics experiments. It was not even a game theory solution concept that had been proven approximately sometimes true with decades of economics experiments. Instead, it was just some random thing that someone made up and wrote down because A) it was tractable to work with, and B) it sounded plausible enough so that most other economists who looked at it tended not to make too much of a fuss.
I think that this is a well-expressed criticism, which Paul Krugman sidesteps in his response. I understand Krugman’s point to be that it is possible when expressing ideas verbally to say something that would be incoherent or self-contradictory if you were to try to express it in mathematical terms.
However, let us reflect on Smith’s point. Macroeconomic equations are not proven and tested. They are instead tentative and speculative. And macroeconomists have not been able to avoid allowing math to disguise this tentative, speculative quality of theory. Indeed, in the very same post in which Krugman defends math, he writes,
The basics of what happens at the zero lower bound aren’t complicated, but people who haven’t worked through small mathematical models — of both the IS-LM and New Keynesian type — generally get all tied up in verbal and conceptual knots.
In fact, it is pretty to easy to understand the liquidity-trap argument without mathematical models. However, the idea embedded in IS-LM models that there is only one interest rate is controversial (in fact, it is downright false). The idea that the Federal Reserve runs out of things to buy when the Fed Funds rate is zero is controversial. The idea that an interest rate that is “close to zero” is the same as an interest rate that is zero is controversial. Yet Krugman appears to be so persuaded by his math that he cannot seem to come to terms with anyone who disagrees with his view that the liquidity trap is an important characterization of the current U.S. economy.
I think that Noah Smith has expressed clearly and profoundly that macroeconomists who dress up like physicists are being tragically foolish. I think it is one of the best blog posts that I have ever read.
The idea of freeing macro from its pseudo-physics pretensions came up in Jag Bhalla’s post that I mentioned the other day. Perhaps it is something “in the air” right now. I hope so.