Knowing and Making

Everyone is looking for new macroeconomic models these days. Paul Krugman's recent article has been a prompt for a reopening of intense discussion on the matter. It seems that there are two major classes of proposal emerging: those based on cognitive/behavioural insights, and those which incorporate financial firms as part of the model instead of just assuming they transparently pass demand and money around the economy. Financial models include " New Models for a New Challenge ", Cecchetti, Disyatat and Kohler's proposal (via Mark Thoma - though a number of the comments on his posting point back towards the behavioural option). Another is Kobayashi's , which I may have mentioned before. I've explored the behavioural models more in past columns but I hadn't noticed this conference in Australia which looks to have had some interesting presentations. Krugman hints at behavioural explanations in his commentary but has not yet suggested a model incorporating ...

Some of these articles have been lingering in my spare browser tabs for weeks, so it's time to link to them and explore a few thoughts that they have stimulated. Chris Dillow asks if economics is like Feynman's onion . It's a good analogy. People, much more than physical particles, are complex. This isn't to say we can't build models of how they behave: we can and should. And while there are lots of people decrying the state of economics (having been given permission to do so again this week by The Economist ), those who think model-building is a bankrupt approach are wrong. Model-building is the essential activity of economics and perhaps its greatest contribution to the social sciences. Indeed this is why it is to similar with physics: the best physicists know, as Feynman did, that they are not looking for an ultimate answer and even if they found one, they wouldn't know it. All we can ever seek is a model that describes the world well, and keep testing it...

Who's to blame for the financial crisis and the recession? This idea of 'who's to blame' is an omnipresent theme of the last six months. A quick search for " to blame for the crisis " or " to blame for the recession " makes hilarious reading. Here are the first few candidates that show up: Over-enthusiastic community organisers Testosterone Economists Deregulation A flawed response to China Business schools (along with 'misguided government programs, "only think for today" financially illiterate consumers, conflicted credit agencies, laughed at (and purposefully weakened) regulators, lobbyist groups running Congress, and many of our best and brightest in the corporate world') Barney Frank and Christopher Dodd The media The government The Internet Owners of imported cars David Bowie The Federal Reserve The free market Subprime borrowers Subprime lenders The head of programming of HGTV Religion What is the appropriate response to thi...