Re: New Keynesianism, etc. <JNDF%LMUACAD.BITNET@vaxf.Colorado.EDU>

["Alan G. Isaac" <AISAAC@xxxxxxxxxxxx>]

I would make an even stronger claim: the _ad hoc_ is indispensible to
good theory. I suppose it would be helpful to clarify just what we
mean by 'ad hoc', and it does appear that that usage has become very
idiosyncratic. But the core meaning, I presume, remains 'introduced
for the special purpose at hand' (or some such).

In the mainstream literature, macro models without "micro-foundations"
are called ad hoc. The idea apparently is that the behavioral equations
reflect the specific goals of the modeling exercise rather than being
more "fundamentally" based. Of course, this is hypocrisy in the extreme:
as Kirman has repeatedly emphasized, no macro behavioral consistency
follows from neo-classical micro-foundations. The mainstream literature
somehow ignores this, and continues to make the ad hoc assumption that
the behavior in the economy can be characterizes by a representative
agent. (Recall that I do not oppose ad hoc theorizing, so I am attacking
on the hypocrisy not the ad hocery.)

For macroeconomics in particular, it is essential to accommodate stylized
facts. The willingness of economists in the Monetarist and Keynesian
to do so has been one of their enduring strengths. (E.g., even K.Brunner
acknowledged that we should not ignore sticky prices just because we
don't know how to provide a decent micro story.) And of course Keynes
pointed the way on this by introducing a useful, _ad hoc_, collection
of macro behaviors that he integrated into a general theory of the
macro economy.

Rather than attacking theory for being ad hoc, we should attack theory
for not offering insight or for not being able to accommodate important
empirical data within its purview. That is, we should have critical,
pragmatic criteria for judging theories.

If we can agree on this, maybe we can find some way to discuss whether
some of the New Keynesian theory is useful despite its shortcomings.

(What follows is part-appropriately chosen I hope--of an exchange
between Jim Devine and Paul Davidson.)

On Thu, 13 Jan 1994 15:13:40 -0700 Jim Devine said:

>On Thu, 13 Jan 1994 12:59:09 -0700 Paul Davidson said:
>> Unfortunately, most of what passes as New Keynesian "theory" is
>>logically inconsistent with its axioms -- and achieves its "Keynesian type"
>>by introducing ad hoc constraints arbitrarily on its axiomatic system.
>
>Even though I reject the Walrasian system, some of the ad hoc constraints
>that the New Keynesians have introduced into their system to explain
>important aspects of empirical reality -- crucially, involuntary
>unemployment -- seem to be useful.
>
>(By the way, Paul, I am a little uncomfortable with your criticism
>of the New Keynesians for being _ad hoc_.  After all, that is
>precisely Lucas's critique.  Is an _ad hoc_ assumption necessarily
>bad? For example, it might lead a Walrasian in the direction of
>empirical reality, which seems a definite improvement.)
>
>To some extent, we have to sacrifice consistency with empirical
>reality and people's experience with it in order to get a logically-
>consistent theory.As economists are always saying, there's a
>trade-off.  How we make this trade-off depends on what our goals
>are.  For me, the goals of macroeconomics are to understand
>what's going on in order to give people a clear theory (as
>simple as possible) which they can use to understand the world
>and to change in the direction of attaining social justice.