Comments on: Macro Wars: Solow vs. Lucas

By: jazzbumpa

jazzbumpa — Wed, 10 Mar 2010 16:45:26 +0000

Actually, it’s worse than Tux says. Not only do the freshwater guys actively deny reality, they get to craft real world policy, based on their fantasy-land ideas.

In the natural sciences we have, for example, the ideal gas law. It is very simple and elegant. But we also understand that in the real world, no actual gas follows the idea gas law; and we do not use it to explain the properties of water vapor. Nor to we try to force-fit water vapor – or even helium – into the model.

Cheers!
JzB

By: Badtux

Badtux — Tue, 09 Mar 2010 23:47:56 +0000

dWj, the question isn’t whether Saltwater models perfectly explain the economy, the question is whether Saltwater economists claim their models perfectly explain the economy — and they don’t make such a claim. What they *do* claim is that their models match the observed real-world data better than the Freshwater models. The Freshwater folks, missing the point entirely, claim that their models are prettier and all that reality stuff that the Saltwater models match better is overrated. WTF?!

In the end, what we have are two groups of people with models of F-15 fighter jets arguing with each other over whose plastic model of an F-15 fighter jet can beat the other guy. The Freshwater guy says, “Look! My F-15 fighter jet model has AIM-54 Phoenix missiles and can blow your F-15 armed with AMRAAM’s out of the sky at distances the AMRAAM can’t reach!” And the Saltwater guy says, “Idiot! F-15′s can’t carry AIM-54′s!” “Can too!” “Can not!” “Can too!” “Moron!” “Sore loser!” “Idiot!” “Ignorant jerk!” Yada yada yada.

But what we’re talking about, in the end, are MODELS. They’re not 100% accurate. You can’t take one of those F-15 fighter jet models apart and see the details of the circuit boards in the radar. It won’t actually fly. It’s just a model. That’s what the Freshwater guys seem to be forgetting — that yeah, their model is pretty, but that’s *ALL* it is, is a model, and if their model is armed with Phoenix missiles which in fact a F-15 can’t carry, it doesn’t matter how *pretty* it looks with Phoenix missiles — it’s still *wrong*.

- Badtux the Modeling Penguin

By: dWj

dWj — Fri, 05 Mar 2010 23:38:25 +0000

No Saltwater model perfectly explains the economy, either. Each school is capable of offering insights — and all such insights should be taken with the requisite caveats. I don’t think real business cycle theory is a good description of business cycles, but I think the observation that a model like that can produce fluctuations — and, in particular, that all of those fluctuations in that model are in a meaningful sense optimal — should at least check our confidence in supposing fluctuations are necessarily nonoptimal.

The best models are those that are as simple as possible while still capturing the essentials of the point being illustrated. It is useful to look at those phenomena that frictionless rational expectations models do reproduce; it may be that, to the extent that we find such phenomena in the real world, that they are produced by frictions or irrationality, but it’s useful to know when those are actually required as explanations and when they aren’t, and, in particular, when something else is more salient. I think simply ignoring either school shuts you off from some insights into the way the economy actually works.