We are not making progress on the microfoundations of business cycles

Tyler Cowen recently made this comment:

It is oddly fashionable in the economics blogosphere to insist that microfoundations do not matter or are not a worthy matter of study.  Papers like this show that in fact they matter a great deal.

My own view is that microfoundations could be useful, but we are not making progress in that area, despite herculean efforts by hundreds of researchers that are much smarter than I am.

I recall back in the 1970s that Robert Lucas would tell us that we were making great progress in establishing the microfoundations of a new and much more scientifically rigorous macroeconomics.  We now know his optimism was misplaced.  Indeed we even knew this in 2007, before the Great Recession ruthlessly exposed the empty pretentions of modern macroeconomics.

The second sentence in the quotation above refers to a new paper by Christiano, Eichenbaum and Trabandt. Tyler provides the abstract:

We develop and estimate a general equilibrium model that accounts for key business cycle properties of macroeconomic aggregates, including labor market variables. In sharp contrast to leading New Keynesian models, wages are not subject to exogenous nominal rigidities. Instead we derive wage inertia from our specification of how firms and workers interact when negotiating wages. Our model outperforms the standard Diamond-Mortensen-Pissarides model both statistically and in terms of the plausibility of the estimated structural parameter values. Our model also outperforms an estimated sticky wage model.

That sounds really hopeful, doesn’t it? Perhaps it’s a great paper. But over the past 35 years I’ve read about 147 other similar abstracts that sound equally hopeful.  My problem with this sort of literature is that it is not progressive. It ignores most other previous “successful” studies.  Some would argue that this means economics is a not a “science.”  When I read that, it just makes me think that the writer doesn’t have a good definition of ‘science.’  But I sympathize with the negativity, if not the epistemology.  There is something wrong with a field where we have one explanation after another, and each new one ignores most of the existing literature.

So if I’m so smart what do I suggest?  I don’t have a good answer.  One solution would be to accept the other 147 papers on the microfoundations of wage and price stickiness as being “true” (in a Rortian sense that truth is what my t-statistics let me get away with) and then build on those.  Thus Eichenbaum, Christiano and Trabandt could have said; “we already have 147 good models of wage inertia, we propose to add a 148th explanation to the ever growing “standard mega-model.””  Much like physicists add new particles to the standard model each time they are discovered.  Unfortunately the macro mega-model would be far less elegant than the physics mega-model.  Indeed journal referees would probably laugh if someone tried to do what I suggested, even if it could be done.  And the math involved in integrating all these disparate approaches may prove to be an insurmountable obstacle.

I am also skeptical of Tyler’s claim that the paper shows that microfoundations matter a “great deal.” Consider the following comment by Tyler:

In this model money has a positive effect on output and employment, but only by lowering real interest rates and inducing more consumer spending.  It does not in general appear to be a large effect, but there is a real positive effect.  You will note that the underlying parameters of the labor matching model are defined in real terms.

If this were how money actually impacts output and employment, then I’d be inclined to agree with Tyler, the microfoundations in their paper would matter a great deal. But in fact the most powerful monetary shocks tend to have very little impact on real interest rates, and sometimes even move them in a perverse direction.  Monetary policy works by changing NGDP against a backdrop of highly inertial nominal wages:

Y = f(W/NGDP)

We observe that nominal wages are highly inertial, even in the face of sudden NGDP shocks caused by monetary policy, but don’t quite know why they are so inertial.  I actually agree with Tyler that macroeconomics might be improved a bit if we understood why nominal wages were so inertial, but I simply don’t see much progress in that area.  Or perhaps I should say I see too much progress; 148 theories that have been “proven true,” with no understanding of how to fit them together into a coherent and useful mega-model.

That doesn’t mean that we can’t do good macro-policy.  We have drugs that effectively treat mental illness, despite not knowing what’s going on at the neural level.  We have good monetary policies for dealing with wage inertia, such as NGDPLT, even though we don’t know what causes wage stickiness.  If we did know the cause we might be able to develop slightly better monetary rules, but I doubt the implications would completely overturn our current understanding of monetary policy.  A good monetary policy is likely to look roughly like NGDP targeting, almost regardless of what causes nominal wage inertia.

PS.  Perhaps I should add a bit to my dismissal of the debate over what is a “science.”  One obvious problem is that it’s never clear whether what is being debated is the nature of economics, or the definition of ‘science.’  That alone makes it a really stupid discussion, roughly equivalent to arguing whether sandals are shoes.  Even worse, the debate often proceeds with the implicit assumption that being designated a “science” is some sort of honor, like winning a Nobel Prize. Now you are a science! This shows a profound naivete about the nature of human beings’ attempts to better understand the world around them.  The works of Plato, Shakespeare, Freud, Isaac Newton, Edward Gibbon, Adam Smith, and Dante are all very different from each other.  And yet all of them help us to better understand the world we live in. To argue that one or another is superior by virtue of being or not being a “science” is utter nonsense.


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37 Responses to “We are not making progress on the microfoundations of business cycles”

  1. Gravatar of Benoit Essiambre Benoit Essiambre
    4. October 2013 at 05:43

    Before debating the issues of models and science one should always read Yudkowsky’s excellent essay: A Technical Explanation of Technical Explanation ( http://yudkowsky.net/rational/technical/ )I think he reads this blog because I’ve seen him reference it on facebook.

  2. Gravatar of John Hall John Hall
    4. October 2013 at 06:01

    Couldn’t agree with your PS more.

  3. Gravatar of Dan S Dan S
    4. October 2013 at 06:05

    Or maybe the best explanation is not model-based but is best approached empirically. Bryan Caplan recently blogged about Bewley’s “Why Wages Don’t Fall During a Recession.”

    http://www.amazon.com/Wages-Dont-Fall-during-Recession/dp/0674009436

    http://econlog.econlib.org/archives/2013/09/what_bewley_lea.html

  4. Gravatar of TravisV TravisV
    4. October 2013 at 06:35

    Yikes!

    Is Krugman right about this?????

    My bet now is that we actually do go over the line for a day or two. And what ends the immediate crisis is not Republican action but a decision by Obama to declare himself not bound by the debt ceiling. He can’t even hint at this possibility until the thing actually happens, because he has to keep the focus on the Republicans, and he has to make them demonstrate their utter irresponsibility before he can take any extraordinary action.

    But maybe I’m wrong; maybe Obama’s lawyers have concluded that there’s really nothing he can do. If so, God help us all.”

    http://krugman.blogs.nytimes.com/2013/10/03/aggressive-blunderers/?_r=0

  5. Gravatar of Tom Brown Tom Brown
    4. October 2013 at 07:20

    Scott, I see you bring up Freud. Do you believe (like I do) in a mechanical universe? I believe we are machines, and we will eventually figure out precisely how our brains work. Perhaps we’re to dumb to understand, but we’ll build other machines that can understand. At that point Freud’s contributions to understanding will probably mostly evaporate. In the long run I wouldn’t stick with Freud… I’d go with the people mapping out the neurons: the people looking at it like a machine in a systematic way.

  6. Gravatar of Wonks Anonymous Wonks Anonymous
    4. October 2013 at 07:49

    “The works of Plato, Shakespeare, Freud, Isaac Newton, Edward Gibbons, Adam Smith, and Dante are all very different from each other. And yet all of them help us to better understand the world we live in. To argue that one or another is superior by virtue of being or not being a “science” is utter nonsense.”
    You’ve got some outright fiction there, along with an example like Freud which was purportedly scientific but fell short into bogosity. This sort of equivalizing is the sort of thing Asimov denounced in the relativity of wrong.

  7. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    4. October 2013 at 07:50

    ‘But in fact the most powerful monetary shocks tend to have very little impact on real interest rates, and sometimes even move them in a perverse direction.’

    I agree.

  8. Gravatar of jknarr jknarr
    4. October 2013 at 07:55

    Trav, what’s remarkable about the shutdown is how much small-government types are going to be blamed.

    It’s quite a trick: handing the fiscal debt bag to those who were most opposed to its creation. Brilliance. That’s all I can say. Sheer, unadulterated brilliance!

    Also, Patterson says that the Fed won’t cooperate with the Treasury: there is such a thing as Treasury currency, and it’s already on the Fed’s balance sheet. Why, then, are we treating the Fed and Treasury as one balance sheet entity?

    “As a straightforward matter the Federal Reserve wouldn’t give Treasury a trillion dollars for that coin. We looked carefully at it, but for both practical and legal reasons, the legal reason being the law obviously wasn’t meant for anything like this and the practical reason being that the Federal Reserve would need to cooperate and wouldn’t, it wouldn’t work.”

    http://www.washingtonpost.com/blogs/wonkblog/wp/2013/10/03/why-we-wont-mint-the-coin-why-we-cant-just-pay-off-bonds-and-other-scary-debt-ceiling-facts/

  9. Gravatar of ssumner ssumner
    4. October 2013 at 08:27

    Benoit, Yes, he’s excellent.

    Tom, I don’t have any view on the ultimate nature of reality, except that I doubt we currently understand it, if there is something to be understood.

    We will probably know much more about the brain in the future. Regarding Freud, see my next reply.

    Wonks, You need to reread what I said, I never claimed Freud was anything other than mostly bogus. I agree that his theories of psychology have not held up well. I’m no fan of Freud. But he certainly does have a few interesting and provocative ideas, in works such as “Civilization and its Discontents.”

    I picked him as an example of someone often regarded as being in the grey area between science and non-science.

    Yikes, I misspelled Gibbon.

  10. Gravatar of mpowell mpowell
    4. October 2013 at 09:11

    The issue here is that if you have a great micro theory that matches a lot of previous business cycles and also a macro theory that you are comfortable with and you have a new situation where the models produce disagreement on the right course of action for the fed, which are you going to go with? Picking the micro model does not make sense to me, because it is only verified based on reference to empirical observation. So stick with the macro model that is designed more directly on empirical observation. In physics we can actually run experiments which rigorously test the fundamental assumptions of our models. There really is no equivalent for microeconomics.

  11. Gravatar of Gary Gary
    4. October 2013 at 09:24

    After reading posts like this, I get the feeling that Lucas might have been writing papers like this for his former pupils:

    http://www.scribd.com/doc/77085319/Lucas

  12. Gravatar of Tom Brown Tom Brown
    4. October 2013 at 10:02

    Scott, I won’t belabor the point, but in terms of understanding how this world works, science always comes out on top. The evidence is all around us: semiconductors, aircraft, medicine. Shakespeare is entertaining, but there’s no progress there. Science is simply the best method available for eliminating bullshit explanations. And it all comes from a basic faith (backed up by countless successes) that this truly is a mechanical universe.

  13. Gravatar of Benjamin Cole Benjamin Cole
    4. October 2013 at 12:07

    My skepticism of most economic “models” is on par with the reservations I have with “climate science”—that is the models always seem to verify the political agendas of the modelers (left- or right-wing). I guess economics is up there with climate science.

  14. Gravatar of Noah Smith Noah Smith
    4. October 2013 at 13:25

    Excellent post.

  15. Gravatar of Jim Glass Jim Glass
    4. October 2013 at 14:02

    I’m going to post a kind word here for Freud — as apart from the Freudians, who are at least as distinct from him as the Keynesians and Post-Keynesians are from JMK.

    Freud got two *very big* things right, which are now so universally taken for granted that no credit for them ever goes to him.

    1) The fundamental concept that unconscious forces are a major, if not the dominating, influence on our daily lives and actions. This was truly revolutionary at the time. Heck, when I was (briefly) a psych major in the 1970s it was hotly denied in many well-educated circles. Only in the last 20 years has the extent of the truth of the fact become scientifically well proven, and begun to be fully appreciated — 100 years later.

    Today people mock the (in a century of hindsight) ridiculous details he proposed about how the unconscious system worked — but the idea that the system itself exists and is subject to scientific study was the big breakthrough.

    (Look at the first maps of North America, circa the 1500s. The details are absurd. The fact that North America is suddenly *on* the map, enabling it to be explored and the details to be worked out, is what matters. Freud put unconscious activity on the map.)

    The noted economic historian Marc Blaug wrote about JMK’s General Theory that few books are stuffed as full as subsequently-proven howlingly wrong predictions and speculations (secular stagnation, etc), but that it has retained its influence not in spite of them but because it created a new conceptual view of the economy that made it possible/much easier for them and many more to be imagined and considered.

    Those who today take unconscious forces as “of course” for granted and mock Freud for being wrong about how they work bring to my mind how a short while back Krugman mocked Friedman and monetarism for being so wrong in his Keynesian point of view, while being oblivious to (as per DeLong) how much of his New Keynsianism *is* Friedman-monetarism.

    2) Sigmund was a medical doctor and believed that mental illnesses had physiological causes. He said such causes were beyond the grasp of the physical science of his day, but that he believed they ultimately would be discovered and make his mode of treatment obsolete. He said his methods were ameliorative and would do, in some cases but not others, as an art at least as such as a science, until the physical roots of mental disease were discovered and became treatable.

    He was entirely right about that, spot on. But for the professional Freudians, this was of course totally against their interests so they deep-sixed the notion PDQ and built a whole different world for themselves. Everybody remembers them, nobody remembers him on this point.

    (Not unlike how JMK’s own deep personal aversion to deficit spending has been totally forgotten to the world as he’s been turned into the holy patron saint of massive deficits by subsequent Keynesians).

    And personally I also appreciate Siggy because…

    3) He was a lot better than 21st Century psychologists at naming things. “Ego”, “Id” and “Superego” are so much more catchy and fun to talk about than “System 1” and “System 2”.

  16. Gravatar of Lorenzo from Oz Lorenzo from Oz
    4. October 2013 at 14:05

    Kurt Lewin, Field theory in social science; selected theoretical papers, (1951) “There is nothing so practical as a good theory”.

    We know why debt is sticky–it is a previously negotiated contract for a transaction extended forward in time. Past agreement binds current and future action.
    We know why most prices are not sticky–they are immediate exchanges, whose current price has no cross-time implications from past or for future exchanges.
    Those that are sticky generally involve continuing contracts (they are “debt-like”), are rule-constrained or process-constrained.

    “Spot” labour prices generally are not sticky, as current price has no cross-time implications from past or for future exchanges.

    “Employed” labour prices generally are sticky because they do involve exchanges across time. The question becomes understanding how their cross-time nature constrains wages: but it is a good idea to start with the right question. Including understanding that the archetypal sticky price is not wages, it is debt.

  17. Gravatar of Matt Waters Matt Waters
    4. October 2013 at 15:54

    I was first going to comment with a long, thorough reasoning of why sticky wages happen in the real world, but I still need to think through it some more.

    What I will post is something that dawned on me some time ago: what a world with money would look like if everything happened only in real terms like classical economics expects. In other words, there are NO nominal effects, for either inflation or deflation.

    To have such a world where all agreements stayed constant in real terms, you would need all this:

    1. Wages to immediately adjust to different currency values, not a one year or more lag. Certainly not the extremely slooow adjustment on negative nominal movements seen in the real world.

    2. Less obviously, debt service agreements would all be variable interest, including the possibility of negative interest. In classical economics, a debt agreement has a certain real value given for a real value returned later. The only way to keep these real values constant if deflation happens unexpectedly is for the lender to actually give money to the borrower or at least not expect the entire nominal principal back (i.e. negative interest).

    3. Same thing goes for savings, in banks or under mattresses. If holding cash always has 0% interest rate vs. the negative rates now on debt, how does an economy with sporadic deflation not become a lottery where whoever happens to hold cash in deflation vs. inflation wins? The most extreme solution would be a zero-reserve, zero-currency system. Every payment is done with an actual asset for asset transfer. Currency is just a unit of account.

    #3 makes me wonder. At the most absurd logical conclusion, does classical economics say that currencies aren’t necessary because people will instantaneously find assets with the same value to exchange if needed? In the real world, currency is crucial for “medium of exchange” as well, which in turn makes it need to be a “store of value.” It can’t lose value suddenly in the interim time between transactions. The store of value part makes the stochastic probability of deflation in a year akin to a lottery. Who will happen to hold cash in deflation? Nobody knows. It’s basically like, uh, dealing with bitcoin.

    This lottery aspect of unexpected deflation does not predict unemployment, should wages not be sticky. It predicts an inefficiency or perhaps lower living standards due to more overhead with trying to hedge currency risk, but labor markets are still supposed to clear like oil markets. They simply do not if wages need to go down nominally. I have some theories for why that is, but #2 and #3 above show how silly the idea that everything happens in real terms is.

  18. Gravatar of Tom Brown Tom Brown
    4. October 2013 at 16:12

    Jim, nice defense of Freud. I didn’t mean to pick on him… but a couple of hundred years from now I’ll be willing to bet his ideas are as irrelevant as the ancient Greeks’ ideas about elements or cosmology are today. Like Einstein or Newton, Freud may have have some flashes of brilliance… but Einstein and Newton had the advantage of a gang of ruthless bullshit detectors ready, able, and highly motivated to expose their insights as false: the insight wasn’t the science… the repeated attempts to discredit them were: systematically culling the herd of bad ideas.

    In my view, without science we’re left only with slow and painful natural selection. Science is really the only useful thing of enduring value that the human race has ever come up with… all the rest is subsistence and entertainment… at best!

  19. Gravatar of ssumner ssumner
    4. October 2013 at 16:21

    mpowell, Good point.

    Gary, Given how poorly the field has done in the 20 years since he wrote that, I’d guess Lucas would agree with me today.

    Tom, I don’t see how the question of whether this is a mechanical universe has any role at all in this debate. Assuming it is “mechanical,” that doesn’t change anything I said here.

    If you don’t think that society’s realization that slavery is immoral is “progress,” then I doubt we’ll ever agree on this issue.

    I have no idea what you mean by Shakespeare being merely “entertainment.” Are you saying that people don’t learn important things from reading Shakespeare?

    Ben, I think climate science is ahead of us in that respect, both liberal and conservative scientists think global warming is real.

    Jim, Again, I wasn’t taking a position of Freud, but good comment.

    Lorenzo, Sticky wages are important for unemployment, sticky debt is important for financial crises.

    Matt, Yes, we are far from a world where everything adjusts in real time.

  20. Gravatar of Steve Steve
    4. October 2013 at 16:51

    Lorenzo makes good points as usual.

    The ultimate “sticky” wage is a union contract or a (professional) employment contract. These are locked in stone for many years.

    The ultimate “flexible” or “spot” wage is, well, probably prostitution. Although I suppose all black market wages are flexible.

    Self employed and small business wages are also fairly flexible, because people small business eats what they kill. And self-employed don’t fire themselves in an economic downturn.

    Larger businesses have highly sticky wages, because the wages are generally associated with some form of rank, title, or seniority. These wages can’t be cut without an implicit or explicit demotion. And, in some cases, legal risk of constructive firing.

    Businesses that are highly cyclical often make their wages more flexible by adding bonus or profit sharing components to the compensation pool. This helps with nominal shocks, but only if the nominal shock is contained within typically cyclical businesses.

    Workers in businesses that are not cyclical tend to attach excessive meaning to the percentage wage adjustment.

  21. Gravatar of Steve Steve
    4. October 2013 at 17:04

    It’s pretty clear what is required to be a “science”. You have to make TESTABLE hypotheses, and they need to be tested out-of-sample.

    In practice, most sciences that are easily testable also tend to be well settled, precisely because they are easy to test.

    The interesting sciences are the ones that are hard to test, because the tests are difficult or expensive to create.

    As Ben noted in a different context, economics and climate science are difficult sciences because the hypotheses are difficult to test. I suppose particle physics fits the bill, too, due to the expense of testing.

    In previous centuries, the spherical earth hypothesis, planetary motions, and atomic chemistry were all difficult to test.

    When confronts with difficult-to-test hypotheses, the proper scientific approach is to break the problem into small pieces that can be tested, and then make appropriately narrow and conditional forecasts based on the observations.

    Economists run afoul of science when they try to extend narrow observations into grand theories, often for political or professional gain. In doing so, they ignore third-variables as well as the possibility that human behavior itself changes when made people are made aware of their own cognitive biases.

    Economics would be better served by less ambitious predictions, but that is difficult to achieve due to agency conflicts.

    Climate science would also be better served by focusing on testable hypotheses, like measuring and predicting radiation fluxes and the overall hydrologic cycle, rather than 2100 scenarios that won’t be testable until 2100. But climate science also has agency conflicts.

  22. Gravatar of Tom Brown Tom Brown
    4. October 2013 at 17:11

    Benjamin, I’m not too worried about political biases in science: sure it exists, but scientists live to humiliate other scientists and expose each others’ ideas as hokum and woo. Nothing gives them greater joy! … a brand new baby hypothesis is born, and immediately there’s a mob of ruthless scientists fighting tooth and nail to be the one to club it to death first… and to toss the mutilated carcass into the rubbish pit forever. There’s extra points for destroying popular hypothesis, previously accepted theories, and prominent scientists! The more people there are left shocked and crying the better! (Imagine the warm glow in the heart of the 1st scientist to disprove Einstein… should that ever happen!). Reality (mechanical as always: and regardless its “politics”) makes a perfect cudgel for bludgeoning false ideas to death. That’s the beauty of the process. 😀

  23. Gravatar of ssumner ssumner
    4. October 2013 at 17:36

    Steve, You said;

    It’s pretty clear what is required to be a “science”. You have to make TESTABLE hypotheses, and they need to be tested out-of-sample.”

    That’s not correct. It’s not clear at all what the term ‘science’ means. There are many definitions, some broad enough to include fields like history, others very narrow.

  24. Gravatar of Tom Brown Tom Brown
    4. October 2013 at 18:02

    Scott, I truly believe that morality will prove flexible in the long term: ultimately it’ll be used to justify one side against the next in the struggle over resources which characterizes life.

    Sure, we can learn stuff from Shakespeare… but nothing that qualifies as lasting progress except maybe on a personal subjective level… which is as transitory as a snowflake. It won’t help us figure out the mechanics of the brain. Plus, fashions change: in one millennia and out the next. You think many life forms will still be reading Shakespeare 100,000 years from now? They will still be using Pythagoras & the scientific method though.

  25. Gravatar of Steve Steve
    4. October 2013 at 18:12

    “It’s not clear at all what the term ‘science’ means. ”

    I suppose you could argue that from a linguistic or etymological perspective, but the scientific method is clear.

    I would expect more argument over the term “testable”, as there is considerable latitude to interpret things like fossil discovery or economic natural experiments as “tests”.

  26. Gravatar of Steve Steve
    4. October 2013 at 18:39

    Those glasses are soooo scientific. (You look like a huge nerd)

    Your biology paper is good science. (You made a hypothesis, collected data, and verified the hypothesis.)

    Larry Summers is a brilliant economic scientist. (He wants money and power.)

    The debate isn’t over the meaning of the word science. The debate is over the meaning of different words that are spelled the same. Linguistic problem.

  27. Gravatar of John John
    4. October 2013 at 18:51

    The multiplication of entities is the signature of a failing paradigm. The best example being the ever more complicated orbits of the geocentric model of the solar system.

    Anyone with an unbiased eye can see that in studying economics, there are too many factors at work for the standard scientific method to useful. That doesn’t mean that it isn’t science; just that it won’t have the neat predictive power of something simpler like physics. Meteorology is a science but they’ll never have the ability to predict the weather five months in advance just like economics will never be able to predict the business cycle.

    In this regard econ is even more complicated due to rational expectations. If economists could predict the business cycle, rational actors would adjust so that the prediction didn’t come true.

  28. Gravatar of A.W. Carus A.W. Carus
    4. October 2013 at 21:32

    No, Rorty did not say “truth is what my t-statistics let me get away with.” (I doubt Rorty knew what a t-statistic is.) He said “truth is what my audience lets me get away with.” That is not what you think. You actually think you might be right while everyone else is wrong; by your own account that’s one reason you started blogging. You actually think there are some objective data out there that in principle we can all agree on (whatever the ultimate “reality” may or may not be). You actually think there is something to convince people of beyond just the convincing itself. For Rorty that’s all impossible by definition.

    One of the main reasons people read this blog (low-sample unscientific survey) is that you’re one of the few people in the public sphere who actually thinks for himself. Rorty is beneath you. Just say no.

  29. Gravatar of Benjamin Cole Benjamin Cole
    4. October 2013 at 23:32

    Tom Brown/Scott Sumner:
    My understanding is that there is plenty of disagreement on manmade global warming, and that disagreement breaks down along generally political lines…much like economics (though we in the MM movement have figured out how to be detestable to both wings!).

  30. Gravatar of Lorenzo from Oz Lorenzo from Oz
    5. October 2013 at 00:06

    Scott: yes, I agree. But my point was if you are trying to understand price stickiness, then start with the archetypal sticky price.

    Following on from Steve’s comment, the salient point about labour its heterogeneity. That fact tends to dominate employer behaviour. But the labour market itself is heterogeneous. Any decent micro-foundations are going to have to examine labour market “clusters” or “modalities”, not tell some general wage story that simply does not exist. After all, part of what happens over cycles is shifts in the importance of those various clusters/modalities.

  31. Gravatar of ssumner ssumner
    5. October 2013 at 04:10

    Tom, You said;

    “You think many life forms will still be reading Shakespeare 100,000 years from now? They will still be using Pythagoras & the scientific method though.”

    Yes I do think they’ll be reading Shakespeare, but the second part of your statement is a complete non-sequitor. They don’t (often) read Pythagoras today.

    BTW, the distinction between subjective and objective is itself not a scientific concept.

    Steve, The debate is very much over the meaning of science. I’ve seen definitions that would include history, and definitions that would exclude history.

    A.W., I don’t believe the concept “objective” is useful.

    And I was joking in my Rorty comment, I know what he said.

    You said;

    “Rorty is beneath you.”

    I’m afraid it’s just the opposite, he’s far above me.

    Ben, There is a lot of disagreement about global warming, but not among scientists. They almost all agree it is happening.

    Lorenzo, But the sticky “prices” you refer to are not prices at all. Think about a 30 year nominal bond issued by GE. The price of that bond is not at all sticky. But the future debt obligations for GE are sticky. However they are not prices.

  32. Gravatar of Tom Brown Tom Brown
    5. October 2013 at 12:22

    Scott, I wrote “use Pythagoras” … not read him! I’ve never read him, but I use his theorem or related theorems on a daily basis! As in the mathematical principal of orthogonality which arises from it which forms the basis of many optimization methods and filtering techniques. All that stuff is useful and represents progress. We build on the shoulders of what came before. Not true so much with art… fashions change. That’s about all you can say. The artists follow along behind (some of them) and use the results of new technology and science. And then sometimes they go backwards towards more primitive styles. Fashions change. Science progresses. I’m an amateur artist myself… I like art… but the experience is 100% subjective.

    I just think that even if Shakespeare is still available 100k years from now… there’ll be SO many other things recorded between now and then, that he won’t deserve more than a second or two of anybody’s time. Maybe the true golden age of literature lies 50k years in our future… and everything up till now will get a collective footnote at best. Only the rare specialist will know much about his works… and who knows… fashions change… perhaps Honey-boo-boo will be considered 10x the artist he is by then. Lol 😀 .. there’s NO accounting for taste!!… it’s subjective, and thus in the long run meaningless. (besides, I’m convinced that we’ll move from carbon based to silica based or gallium based life forms… and they might consider carbon based life forms to be a primitive and dangerous disease that needs to be exterminated… and I’d have to agree! I root for the Terminator… he’s clearly superior… it’s sad that the sub-optimal life forms win in that tale). The robots might not give two hoots about Shakespeare, but they’re certain to use the results of Pythagoras.

  33. Gravatar of Tom Brown Tom Brown
    5. October 2013 at 13:11

    Benjamin,

    Science and scientists are sometimes spectacularly wrong! No argument there. My point was that scientists LOVE to prove each other wrong… and regardless their politics if they find a way to humiliate another scientist they’ll do it in a heartbeat! Plus even though they are proven wrong time and again… the magnitude of their wrongness tends to be decreasing over time in terms of real world implications: i.e. since science is really the only way man has come up with to make any kind of progress… the results of science tend to be better and better approximations as time progresses. Not true of any other field. Quantum Mechanics can be experimentally verified with 15 digits of precision. When we prove it wrong (if we ever do), it may not show up until the 25 digit. Just like Newton is still a reasonably approximation even though Einstein (or more specifically the experimental scientists checking Einstein) proved Newtonian Mechanics is all rubbish. But it can still be useful rubbish in everyday situations!

    Thus my philosophy is go with the consensus opinion… unless you’re a expert in the field and have good reason not to believe it. Doing otherwise is foolish. Don’t fight the scientific consensus… that’s like trying to fight the Fed (only less likely to succeed). The scientific consensus on climate change is pretty clear! If they’re wrong the magnitude of their wrongness will most likely be small. The opposing side is likely still more wrong.

    Go with the scientific consensus if you want to maximize your chances of going with a winner. The opposing bet is almost certainly a losing proposition. I like winners so science is for me (where are the psychic powered cell phones? Lol).

  34. Gravatar of Geoff Geoff
    5. October 2013 at 16:02

    “We observe that nominal wages are highly inertial, even in the face of sudden NGDP shocks caused by monetary policy, but don’t quite know why they are so inertial.”

    Bullshit. Inflation itself is the primary reason why wage incomes are rigid downward. When most people are born into an inflationary system, they come to expect as a natural order of things the phenomena of rising prices. They also connect higher standard of living with rising nominal incomes, when in fact rising standards of living come with higher real income, not nominal income. The former is of course primarily responsible for the latter, for if people were born into a free market monetary system, and their families and colleagues experienced gradually falling nominal wage rates, but increasing real incomes due to productivity, then they would of course by and large cease connecting rising standards of living with rising nominal wages.

    Monetarism seems to require turning a bling eye to the undesirable EFFECTS of their own advocacy.

  35. Gravatar of Lorenzo from Oz Lorenzo from Oz
    6. October 2013 at 03:18

    When I think debt, I tend to think of mortgages and credit card charges than bonds. Constraining obligations rather than prices; I like that distinction.

  36. Gravatar of ssumner ssumner
    6. October 2013 at 05:31

    Tom, You said;

    “Scott, I wrote “use Pythagoras” … not read him!”

    That’s my point, you “use” Shakespeare every day, even if you don’t read him.

    You said;

    “We build on the shoulders of what came before. Not true so much with art… fashions change. That’s about all you can say.”

    I’m afraid this is wrong, and there is certainly a lot more that can can say. And art does build on what came before. But I do believe you attitude is common among science-types who know little about art. (Not saying you know little, but you are acting like you know little.)

    You said;

    “like art… but the experience is 100% subjective.”

    This is clearly not true. Art education changes people’s minds about what is good and bad art in exactly the same way that science education changes peoples mind about what is good and bad science.

  37. Gravatar of Kenny Kenny
    17. October 2013 at 09:46

    I second Dan’s mention of Bryan Caplan’s post -http://econlog.econlib.org/archives/2013/09/why_dont_wages.html

    Basically, it’s a coordination problem. No individual company or manager wants to suffer lower morale relative to everyone else because they cut pay or offered too-low wages.

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