Warning from a Nobel Laureate that we should place facts above blind loyalty.
In 2016, Paul Romer, a 2018 Nobel Laureate for Economics, gave a lecture, in which he fretted that his beloved field of economics was being transformed a ‘research field’, with a goal of seeking objective truth, to a ‘belief field’, like politics and religion, in which authorities dictate subordinate’s efforts.
In his 2016 speech titled “Trouble with Macroeconomics”, Romer insist that economist should hold themselves to high levels of scientific inquiry, to place the pursuit of truth above personal loyalty, and amid all the mathematical formulas, literary quotes and academic jargon, Romer made it clear that he was talking about forces as elemental as peer pressure and as rudimentary as declining to question authority figures.
Romer said “When the person who says something that seems wrong is a revered leader of a group … there is a price associated with open disagreement,”.
Romer argued that he himself didn’t need to hew to conventional wisdom because he no longer needed to publish in journal to keep his career afloat.
He added, “This price is lower for me because I’m no longer an academic, I care little about whether I ever publish again in leading economics journals or receive any professional honor because neither will be of much help to me in achieving my goals. The trouble is not so much that macroeconomist say things that are inconsistent with the facts, the real trouble is that other economist do not care that the macroeconomists do not care about the facts.”
Now let us study his claim even further based on his paper titled , The Trouble with Macroecnomics,
Among the key points he presented in his paper are
- the modern economics are over-reliant on models that “now use incredible identifying assumptions to reach bewildering conclusion.”
- These model incorporate “imaginary shocks, instead of actions that people take” into equations as determinants of the economics conditions.
- the obvious lack of specific numbers in favor of guesses, projections and biases , “facts with unknown truth value” which skews the presentation of the predicted economic outcomes.
- therefore, as a result, macroeconomics allegiance to mathematical theory at the expense of scientific evidence is moving the social science toward failure and irrelevance.
- further implication would include academic collusion not competition for the truth in research development and an expected loyalty and deference to senior economists, which of course in turn will obstruct advances in scholarship that may differ from institutional norms.
Simplified summary of the paper,
- some macroeconomist questions the efficacy of monetary policy, instead favoring modern economics models which “now use incredible identifying assumptions to reach bewildering conclusion. “
- However, the objective evidence indicates that monetary policy does indeed have an impact. Example, during Federal Reserve Chairman Paul Vocker’s term in the 1980s, inflation levels and trends changes dramatically as a result of targeted Fed actions.
- the assertion that monetary policy is highly irrelevant to economic fundamental derives from the real business cycle (RBC) model which incorporates “imaginary shocks, instead of actions that people take” into the equations as determinant of economics conditions.
- these variables, as interpreted by the economic community are comparable to traffic jams, a spontaneous event which can’t be contributed to individual actions of the drivers.
- therefore, the RBC model assumes that the 2 US recessions of the 1980s were the results of exogenous and unpredictable shocks rather than the Fed’s targeted rational measures to bring down inflation.
- as more and more ‘imaginary forcing variables’ such as the ‘troll who makes the random changes to ..wages” or the ‘gremlin who makes random changes to the price of output’ – make their way into economist complex calculations, which further their results from scientific reality.
- the obvious lack of specific numbers in favor of guesses, projections and biases skews the presentation of predicted economics outcomes. In addition, an economist dealing with more elaborate models and formulas has a ‘scaling problem’ that requires the use of more and more ‘facts with unknown truth value’
- as a result, macroeconomist allegiance to mathematical theory at the expense of scientific evidence is moving the social science onto failure and irrelevance.
Now, let’s examine the points
In any line of works which involves numbers, theory, and data based decision makings, we need to make sure we get our assumptions right, and if possible, we must try to minimize these assumption in order to get the closest possible decision which in touch with reality.
The concept of ‘imaginary forcing balance’ really doesn’t suit well with me, everything must have a proper sensible explanations. It’s a rule of nature that everything has a check and balance, for example, in the calculation of crude oil prices, yes, there’s a model of supply and demands, but on top of the supply and demand, there’s also market sentiment which affects the value of crude oil prices.
Yes, the market sentiment is not something that we can reasonable give numbers to, but the supply and demand outlook is the one that give the sparks which turned into market sentiments. Hence, if we can properly quantify the market demands and supply outlook, we could actually make projections for the crude oil prices with relative accuracy.
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