If you read the macro literature, you see that almost every famous, respected paper is chock full of these sort of equations that don’t match reality. This paper predicts that everyone will hold the same amount of cash. This paper predicts that people buy financial assets that only pay off if people are able to change the wage that they ask to receive. These and many other mathematical statements don’t remotely correspond to observable reality, nor do they have any evidence in support of them. Yet they are thrown into big multi-equation models, and those models are then judged only on how well they fit the aggregate data (which usually isn’t very well). 

That whole approach would never fly in engineering. Engineering is something you expect to work. But macroeconomists often treat their models as simply ways, in the words of David Andolfatto, vice president of the Federal Reserve Bank of St. Louis, to “organize our thinking” about the world. In other words, macroeconomists use math to make their thoughts concrete, to persuade others, and to check the internal consistency of their (sometimes preposterous) ideas, but not to actually predict things in the real world. 

Back to Romer’s complaint. He singles out Lucas, Prescott and a few others for having tenuous or sloppy links between mathematical elements and the real world. But from what I can see, such tenuous and sloppy links are the rule in macro fields. Romer says that I am “jaded” for saying that, and that it was bad apples like Lucas and Prescott who soured me on macroeconomic theory. Well, he’s right that I’m jaded, and he’s right that it was learning about models by Prescott that I first became jaded. Romer, you got me. 

But when I looked beyond those models, to older or newer models, I found what seemed to be only a difference in degree, not in kind. Macroeconomic theory is chock full of mathiness. It’s not just Lucas and Prescott, it’s the whole scientific culture of the field. 

Romer says that in the new, debased culture of macroeconomics, “empirical work is science; theory is entertainment.” Maybe that is close to the rational way to think about things. Now that information technology is providing economics with a flood of new data, the percentage of theory papers in top journals is falling. Maybe economists are starting to see mathiness for what it is, and discount it accordingly.

Vir: Noah Smith, BloombergView