Houdini's Straightjacket

Consider the escape artist.  He dons handcuffs, a straightjacket, leg irons, a blindfold, and a skin-tight leotard made entirely of SuperGlue (tm).  His assistants seal him inside a steamer trunk, weld the locks shut, and sink the whole mess to the bottom of a shark-infested lagoon.  Then, in dazzling display of skill, grit, and showmanship, he frees himself and emerges, alive, unharmed, and not at all eaten by sharks.  Crowd goes wild.

Now, escape artistry may be a fine form of entertainment, but it probably wouldn't be anyone's first choice as a model for the conduct of social science.  Yet, bizarrely, it has become the prevailing paradigm in macroeconomics.

How so?

Consider the macroeconomist.  She constructs a rigorously micro-founded model, grounded purely in representative agents solving intertemporal dynamic optimization problems in a context of strict rational expectations.  Then, in a dazzling display of mathematical sophistication, theoretical acuity, and showmanship (some things never change), she derives results and policy implications that are exactly what the IS-LM model has been telling us all along.  Crowd -- such as it is -- goes wild.

And let's be clear:  not even the most enthusiastic players of the macroeconomics game imagine that representative agents or rational expectations are, in any sense, empirical realities.  They are conventions, "rules of the game."  That is, they are arbitrary difficulties we impose on ourselves in order to demonstrate our superior cleverness in being able to escape them.

They are, in a word, Houdini's straightjacket.

Of course, this would all be good, clean fun, except for one thing:  Harry Houdini drowned in a straightjacket. (1)

Similarly, even defenders of "modern" DSGE models, including those of the New Keynesian (NK) variety, seem to agree that their modelling approach made arriving at sound policy recommendations unnecessarily difficult.  For example, George Evans at the University of Oregon writes:

[T]he profession as a whole seemed to many of us slow to appreciate the implications of the NK model for policy during and following the financial crisis ... because many macro economists using NK models in 2007-8 did not fully appreciate the Keynesian mechanisms present in the model.

Now, if after thirty years of study economists failed to "fully appreciate the Keynesian mechanisms present in the model," one might wonder exactly what such models have to recommend themselves.  What is the advantage of an intellectually demanding and mathematically complex modelling approach that makes it harder to actually get the job done?

The answer, I suspect, is that "intellectually demanding and mathematically complex" has become an end in itself -- that modern macro has become an arena within which to show off technical virtuosity for its own sake.  And the harder we make it look, the tighter the straightjacket, the cleverer we appear when (after long, painful struggle) we finally emerge.

Which is fine as long as the goal is entertainment.  But if the goal is, you know, looking after the economic welfare of seven billion human beings, the whole enterprise begins to look more than a little bit self-indulgent.


(1) Well, in the movies.  In real life, he died in a hospital of peritonitis.  Dammit.  But why let the facts get in the way of a perfectly good analogy?