Saturday, September 23, 2017

A Brief History of Microfoundations (plus afterthoughts)

Google the origin of microfoundations

Romain Plassard:
Robert W. Clower’s article “A Reconsideration of the Microfoundations of Monetary Theory” (1967) deeply influenced the course of modern monetary economics.

One particularly influential call for microfoundations was Robert Lucas, Jr.'s critique of traditional macroeconometric forecasting models.

Barney and Felin:
However, there is little consensus on what microfoundations are and what they are not.

J.E King (PDF):
It is widely believed by both mainstream and heterodox economists that macroeconomic theory must be based on microfoundations (MIFs). I argue that this belief is unfounded and potentially dangerous.



Economic forecasting has always seemed odd to me. Different than my way of foretelling the economy.

Lucas I think said that when you change the rules, peoples' behavior will change, yadda yadda, and so you have to have microfoundations. Okay. And lately there is "behavioral" economics, I guess to account for the "peoples' behavior will change" part, and to relax the microfoundations.

I just look at monetary balances. Debt per dollar. Private debt relative to public debt. Things like that. If the ratios get out of whack, the economy gets out of whack. This has nothing to do with human behavior or changing it. Monetary balances over time.

If debt-per-dollar is too high, we have to lower it. My prediction is: After we lower it, the economy will improve. My prediction tells you what needs to be done.

Lucas says you have to do forecasting right or your prediction will be wrong. Behavioralists say yeah but doing it right is not the way Lucas said.

My opinion, these guys don't even know what needs to be done.

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