David Andolfatto is in a very different place than I am. He writes,
what part of the above manifesto do you not like? The idea that people respond to incentives? Fine, go ahead and toss that assumption away. What do you replace it with? People behave like robots? Fine, go ahead and build your theory. What else? Are you going to argue against having to describe the exact nature of government policy? Do you want to do away with consistency requirements, like the respect for resource feasibility. Sure, go ahead.
Pointer from Mark Thoma. Elsewhere, Mark points to interesting comments by Noah Smith.
Some of the parts of mainstream macro that I do not like:
1) that there is a single representative agent who is the consumer and owner of the one firm.
2) that this representative agent never has to use trial and error to figure out what might be a profitable business, much less what might be a profitable pattern of trade involving many businesses.
3) that this representative agent cannot hold more than one expectation about the future. Instead, there is the very anti-Hayekian notion of “rational expectations” which assumes away local information.
4) that “money” and “the price level” are objective, precisely determinate quantities, rather than part of a consensual hallucination.
5) that you can wave your hands and talk about “financial friction” in models in which financial intermediaries are redundant.
And those are just off the top of my head.
Arnold,
There are legitimate criticisms one could make against modern macro, but you miss the mark on all counts.
(1) There are plenty of heterogeneous DGE models out there. We’re talking 2015 here, not 1980.
(2) There are plenty of DGE models with “trial and error” properties, as when a firm invests in R&D and the outcome is uncertain.
(3) While a representative agent can only hold one expectation, this is not true of heterogeneous agent models. See the recent work of John Geanokoplos of Yale, for example.
(4) I have no idea what you’re talking about here.
(5) The Diamond and Dybvig (1983) bank is *not* redundant; in that model, maturity transformation is essential AND under some cases results in multiple equilibria (with bank runs).
Are you and I reading the same literature? Your criticisms just do not apply to modern macro (perhaps they did apply to macro 30 years ago).