John Q

In response to some comments, I’ve written a little bit about the representative agent assumption in Dynamic Stochastic General Equilibrium Models. I argue that, given the underlying DSGE assumptions, you won’t get very much extra by including heterogeneous agents.

But, I intend to say in the “Where next” section, it seems likely that heterogeneous and boundedly rational individuals, interacting in imperfect and incomplete markets will generate ’emergent’ macro outcomes that are not obvious from the micro foundations. Of course, this is going to be a prospectus for a theory, not the theory itself.

In the meantime, comments on my snippet would be much appreciated.

Update Looking at the responses, I think just about everyone has missed the point, which suggests that maybe I didn’t make it very well.

I’m not saying that heterogeneity doesn’t matter, but that introducing (tractable) heterogeneity into a DSGE model isn’t likely to yield radically different predictions about macroeconomic outcomes. If that’s correct, then if you think DSGE models work well (for some evaluative procedure), you can be relaxed about using representative agents. And if you don’t think DSGE models work well, the representative agent assumption isn’t the problem, or at least it isn’t the only problem.

Since my statement of the situation didn’t help much, I’ll present it as a question instead. Can anyone point me to a DSGE-style model that derives strongly non-classical results from the introduction of heterogeneity? Or, failing that, does anyone have a convincing argument that such results should emerge?

I’m aware of course that, in general, anything can happen with aggregation across heterogeneous agents, so I’m not much interested in arguments for agnosticism starting from that point. End update

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Another section from my book-in-progress. The book-so-far can be viewed here.
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My still-in-progress book (outline here) will have a chapter on privatisation. That reminded me of some thoughts on school privatisation and for-profit education that I thought might be of interest here. The near-total failure of the for-profit education ventures that proliferated in the 1990s is striking and to some extent mysterious. In part, I suspect that the whole enterprise (at least as regards school education) was based on a misdiagnosis of the problems of the public school system, focusing on organizational factors, rather than the more intractable effects of steadily growing inequality. The limited success of the charter schools movement would point in that direction. But I argue below (from a piece I wrote for Campus Review in Australia a couple of years ago) that there are more fundamental problems with the for-profit approach. Your thoughts appreciated.

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I missed out on the book title contest a while back, so here’s my entry. As regards earnestness, i’m riffing off Andrew Gelman, via Kieran, who observes “”pissing off conservatives” is boring and earnest?”

The main point, though, is that the fuss over the global cooling chapter in Levitt and Dubner’s new book is the first occasion, I think, where the refutation of specific errors has taken a back seat (partly because, in this case, it’s so easy) to an attack on contrarianism, as such. The general point is that contrarianism is a cheap way of allowing ideological hacks to think of themselves as fearless, independent thinkers, while never challenging (in fact reinforcing) the status quo. Here’s Krugman and Joe Romm, for example

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From the NYT on the remarkable profitability of Goldman Sachs

A big reason for Goldman Sachs’s blowout profits this year has been the willingness of its traders to take big risks — they have put more money on the line while other banks that suffered last year have reined in such moves. Executives say there are big strategic gaps opening up between banks on Wall Street that are taking on more risks, and those that are treading a safer path.

Hmm. I’d be willing to take big risks if I knew the Fed and the US Treasury were standing by, ready to pick up all my losing bets. In the circumstances, the guys at GS doubtless stand amazed at their own moderation in creaming off a mere $20 billion for the year.

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More bookblogging! It’s all economics here at CT these days, but normal programming will doubtless resume soon.

Most of what I’ve written in the book so far has been pretty easy. I’ve never believed the Efficient Markets Hypothesis or New Classical Macro and it’s easy enough to point out how the occurrence of a massive financial crisis leading to a prolonged macroeconomic crisis discredits them both.

I’m coming now to one of the most challenging section of my book, where I look at why the New Keynesian program (with which I have a lot of sympathy) and ask why New Keynesians (most obviously Ben Bernanke) didn’t, for the most part, see the crisis coming or offer much in response that would have been new to Keynes himself. Within the broad Keynesian camp, the people who foresaw some sort of crisis were the old-fashioned types, most notably Nouriel Roubini (and much less notably, me) who were concerned about trade imbalances, inadequate savings, and hypertrophic growth of the financial sector. Even this group didn’t foresee the way the crisis would actually develop, but that, I think is asking too much – every crisis is different.

My answer, broadly speaking is that the New Keynesians had plenty of useful insights but that the conventions of micro-based macroeconomics prevented them from forming the basis of a progressive research program.

Comments will be appreciated even more than usual. I really want to get this right, or as close as possible
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Over the fold, yet more from my book-in-progress, Zombie Economics: Undead ideas that threaten the world economy. This is from the Beginnings section of the Chapter on Micro-based Macro, and covers the breakdown of the Phillips curve and the rise of New Classical and Rational Expectations macro. This (along with the bits to come on DGSE models) is probably the section on which my own background is weakest, so feel free to point out my errors.

I’ve now posted drafts of the first three chapters (+Intro) at my wikidot site, so you can get some context. In particular, before commenting on omissions, take a quick look to see that the point hasn’t been covered elsewhere.

Micro-based macro is here

I’ve got a lot out of comments and discussion so far, and I hope some of this is reflected in what you are reading.

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Another installment of my slowly-emerging book on Zombie Economics: Undead ideas that threaten the world economy. This is from the Beginnings section of the Chapter on Micro-based Macro. I’ve now posted drafts of the first three chapters (+Intro) at my wikidot site, so you can get some context. In particular, before commenting on omissions, take a quick look to see that the point hasn’t been covered elsewhere.

Micro-based macro is here

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The conservative political parties in Australia are in total chaos trying to come up with a response to the Rudd government’s (not very impressive, but better than nothing) proposals for an Emissions Trading Scheme. The fundamental problem is that the majority of them, along with virtually all of the conservative commentariat share the delusional view that the whole body of climate science is a hoax, got up by a coalition of grant-grubbing scientists and environmentalists bent on world domination. But within this majority, a substantial group are sufficiently in touch with reality to realise that 80 per cent of the Australian population disagrees with them, and will hand them a thrashing at the next election.

So, they have a problem. They’ve used their near-majority in the Senate to block the ETS legislation, but now its coming up again. On a second rejection the government can dissolve both houses of Parliament and call an election which would almost certainly produce a crushing defeat. But, for a number of technical reasons, the government doesn’t want to go this way and might just be willing to do a deal. The party leader, Malcolm Turnbull (the most able they have by far, but not known for sound judgement) is desperate to do such a deal and has put his leadership on the line. But the hardline delusionists are, so far, unwilling to go along. All in all, there’s plenty of pain to go around, and the government has been happy to watch the Opposition wallow, arguably at the price of a less effective response to climate change.

There’s a bit of a puzzle to me here. In the US and UK, as in Australia, the conservative commentariat is solidly delusionist. In the US, Republican politicians, activists and voters are similarly deluded, so there is no coherence problem. But in the UK, it seems as if Conservative politicians ought to be facing a difficult choice between going with the majority of their supporters (sane, on this issue at least) and the commentariat (delusional). But as far as I can see, the Conservatives are at least as good as Labor on this issue, yet they don’t seem to cop any flak from the Telegraph, Spectator, Times etc, all of which push a solidly delusionist line. I’d be interested in observations from those closer to the action.

* On top, from an equally valid perspective, but I’ll let the northern hemisphere majority have their comforting conventions on this one.

I finally read Gillian Tett’s Fools Gold, an account of the development of the derivatives industry centered on credit default swaps (CDS) and collateralised deposit obligation (CDOs) that collapsed so spectacularly last year. The discussion is excellent, but still, I think, too charitable to these instruments and their creators. Tett’s main source is the group at JP Morgan who pioneered many of these derivatives and, largely, got out before the crash. Their line, unsurprisingly, is that the problem was not with the concept as they developed, but its abuse by latecomers.

But a close reading of Tett’s account yields a different story. These innovations were defective from day one.

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I’ve been moving slowly on the book for the last few weeks, but I have taken one positive step to encourage further discussion. In response to suggestions from readers, I’ve started a wiki site imaginatively named Zombiecon where my plan is to post draft chapters. The Efficient Markets Hypothesis is already up. In part, the idea is to provide a reference to avoid some of the problems that arise from blogging a section at a time. But, if someone wants to create one or more talk pages on the site itself, that would be great. I’m not really sure joint editing in the mode of Wikipedia, but if you have suggested minor changes, go ahead and make them – I may revert or partially adopt them.

Another “Internets makes you stupid story” from the Brisbane Courier-Mail (irony detector overload alert !!).

The original source is something called the Levitt Institute and the Courier-Mail story is a pretty fair summary of the Levitt Institute report, which is here (PDF). I’ll leave the deconstruction as an exercise for readers, with a bonus mark for the question “Which basic concept of classical hypothesis testing is ignored in this study of ‘ability to detect erroneous information'”

Here’s a post with a couple of links arguing the opposite.

UpdateSucked in! It turns out the whole thing is in fact a hoax by Andrew Denton’s new show.. Sad to say, with the irony detector already blown, it’s hard to tell the difference between genuine and fake stupid.

I was at a conference on uncertainty and climate change in Berkeley last week, and gave the wrap-up panel discussion with Geoffrey Heal. We’d discussed a wide range of uncertainties and ambiguities, from future emissions scenarios to model uncertainty to perception and communication issues, and we were asked to comment on how, with so much uncertainty, economists can make useful recommendations.
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I’m starting now on what will I think be the hardest and most controversial chapter of my book – the argument that the search for a macroeconomic theory founded on (roughly) neoclassical micro, which has been the main direction of macro research for 40 years or so, was a wrong turning, forcing us to retrace our steps and look for another route. As always, comments and criticisms accepted with gratitude.

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