Published on Real-World Economics Review Blog, by Merijn Knibbe, October 17, 2011.
Real Noble prices are awarded to people who discovered new facts, or methods to discover new facts, or to the people who published these discoveries. Do the ‘look alike’ Nobles for Christopher Sims and Tom Sargent pass this test? … //
… It’s cute. But it’s not science. The downward sloping demand curve (and all this ‘maximizing households’ stuff has really been invented to ‘prove’ the downward sloping demand curve for the entire sector households without having to invoke the National Accounts constraint of total production and income) necessarily follows from the budget constraint. Households are forced to act in certain ways, by limits to money, income and production. They don’t choose to act this way, at a macro level.The options are limited. And once you spend – your other options get even more limited. But ‘Freshwater’ economists invented tons of theories to get around this simple truth… Now, use Ockham’s razor blade.
And while we can’t measure the pivotal variable in Sargent’s kind of economics, social utility, as the concept is inconsistent (Arrow’s impossibility theorem) and ill-defined (try to find a definition of “one Bentham of Utility”), budget constraints to the contrary can be estimated. And we do this, all the time. The National Accounts people routinely estimate total production, which is the constraint for total income of households… And indeed, when people think this constraint is lifted because they think mortgages are essentially free goods, which can be paid for by future increases of house prices, things indeed go a wire. The constraints hits with a vengeance. You get Euro trouble and sub-prime trouble, and the like. Remember: according to Sargent’s rational expectations economics people won’t get such ideas (Ricardian equivalence applied to private credit)- but they did.
In a sense, Keynesian economics is budget constraint economics. People can’t, in the long run, spend more than their income. They might try – but they can’t. Keynesian economics is deeply rooted in the scientific concepts of the National Accounts (and no, these accounts do not estimate prosperity – they estimate what people and companies and governments actually do with their money and they show the current account constraints and the government deficit constraints and the income constraints might be interesting). Rational Expectations economics, to the contrary, is not deeply rooted in scientific concepts. It’s rooted in the a world of make-believe, its foundation is the inconsistent and poorly defined concept of ‘social utility’. In more modern ‘freshwater’ models like those of Frank Smets, the National Income constraint is indeed introduced, again. And sometimes, the models do not contain one representative household, but two. But these households are still optimising ‘utility’. But if households are optimizing at all, it’s not neo-classical utility which they are optimizing. No more fairy tales, please.
Here, an example of scientific economics: Benford’s Law and the Decreasing Reliability of Accounting Data, on Economist’s View, by Jialan Wang, Oct. 12, 2011.