krebscycle

Robert Lucas won the Nobel Prize for Economics and is widely cited as an authority. One of his more important papers from the 1990s  discuses tax policy and uses a mathematical model of the economy to supposedly show that taxing capital gains is a bad idea. The mathematical model is a variation of the “discounted utility” (DU)  proposed in 1937 by Samuelson who, at the time, expressed some reservations. Some testing has been done:

Virtually every assumption underlying the DU model has been tested and found to be descriptively invalid in at least some situations. [Frederick]

So here is Lucas, 60 years later, using the same model.

The idea is that we are going to model the whole economy over all time as a single number which is the sum of every infinitely small instant of enjoyment (“utility”) that a single “representative” household extracts from both consuming a single “representative” product and from leisure time. This “representative household” is immortal, but its enjoyment of consuming and hanging out in future shrinks exponentially over time depending on ρ (that “subjective rate of discount”) which is a constant value that is based on absolutely nothing  -just pulled from the air. One choice of ρ means the household  places no value on its members eating even a crust of bread in 10 years, another  postpones that moment for 100 years. There is no room in this model for “I’m not hungry right now” or “I’d prefer more leisure when I retire”  or “I want my great grandchildren not to starve to death”. Nobody in the Household enjoys working, even a little. There is no patriotism, no caring about the poor or the natural world, or beauty, or even civil order. For Lucas, taxes are only an expense, they don’t produce positives like firemen or sidewalks or education or the Internet or national defense or vaccinations against smallpox. And for Lucas, the representative household is  also an investor with inherited wealth and unbounded income from investment. When you get down to it,  Lucas is representing the economy as the Koch brothers – and his model validates their creepy values and politics as good for them.

Despite Samuelson’s manifest reservations about the normative and descriptive validity of the formulation he had proposed, the DU model was accepted almost instantly, not only as a valid normative standard for public policies (e.g., in cost-benefit analyses), but as a descriptively accurate representation of actual behavior. [Frederick]

It’s not just that the Koch brothers ugly politics  is accepted   “as a valid normative standard for public policies (e.g., in cost-benefit analyses)” but that Economists claim this nonsense is science. Here is how Lucas characterizes his work:

 I hope as well that my story will serve as illustration of the way in which the search for theory at a more fundamental level can revolutionalize our thinking about important practical questions, and hence of the way in which progress at the most purely technical, abstract end of economics serves as the fuel for what Alfred Marshall called our “engine for the discovery of truth.”

Even “liberal” economists buy into this. All over the economics literature we see respectful references to “the Lucas critique”  and to “rigorous microfoundations” – which is essentially a program to base all of economics on the kind of model Lucas uses. Because it is assumed, on the basis of nothing, that individual preferences of individual agents determines how large scale economic relations develop.

The usual  defense of this nonsense is that physics 101 is full of formulas that don’t take things like friction into account, and besides, um, quantum mechanics. But, dear Lord, that’s just general purpose misdirection that could be applied to anything at all. You could try to defend numerology with exactly the same argument. Or we often hear that it’s just an approximation. But like much in Economics, microfoundations is not an approximation, it is an ideological proposition. Microfoundations is  Margret Thatcher’s proposition that there is no such thing as society, just individuals. That is a moral assertion, not an approximation. Actually it is an immoral assertion. Mainstream economics has taken the values of rapacious sociopaths  as foundational principles, and then keeps endorsing  stupid, misery inducing policies that satisfy the short-sighted greed of those with too much.

Here’s Paul Krugman – about as far from Lucas as one can get in respectable Economics. After complaining that there has been a decades long “de facto blockade of the journals against anything without rational-actor microfoundations” (something that in itself is an indictment of the entire profession), Krugman writes:

I would agree that being willing to use models with hyperrational, forward-looking agents was a natural step even for Keynesians. The Faustian bargain, however, was the willingness to accept the proposition that only models that were microfounded in that particular sense would be considered acceptable. It’s one thing to accept that models with an Euler condition at their core can sometimes be useful; it’s quite different to restrict your discourse to models with that characteristic, while ruling out everything else.

When, exactly, can these kinds of models be useful? Shouldn’t the eagerness of “Keynesian” economists to latch on to such mythology give pause? Make one fear their judgment and standards are irreparably deficient and they never understood Keynes in the first place? Keynes even said that he had to work very hard to extract himself from the conceptual errors of Marshall’s economics, the same errors that Krugman tells us were so alluring to “Keynesians”.

Here’s Simon Wren-Lewis

I doubt that most New Keynesian modellers adopted the microfoundations perspective against their better judgement. Instead I suspect most saw the power of the microfoundations approach (in analysing consumption, in particular), recognised the dangers in ad hoc theorising about dynamics (as in the traditional Phillips curve), and thought there was no contest

This is a remarkable passage because he is making a favorable contrast between Microfoundations (remember that “subjective discount rate”) and something else he calls ad-hoc? Was that other stuff even less grounded in scientific research than what Lucas describes? But even “left” economists have internalized the microfoundations ideology. Here’s Mike Begg, writing in Jacobin to insist that the value of money is:

determined by countless price-setting decisions by mainly private firms, reacting strategically to the structure of costs and demand they face, in competition with other firms.

That’s a claim of neoclassical economic faith, not an actual fact. But if you believe this stuff you will perhaps unconsciously incorporate right wing ideology into your economic analysis. This is why, for example, Christine Romer dismisses industrial/manufacturing policy and Robert Reich opposed the auto-rescue. If you believe, as a matter of faith or axiom, that economics emerges from the interaction of individual optimizing agents, then you carry the Koch brothers politics into your work intentionally or not.