April 20th, 2015
in Op Ed
by Dirk Ehnts, Econoblog101
I was at the INET conference last week and met many interesting and knowledgable people. One conversation was with somebody from the OECD (Organization for Economic Cooperation and Development) . He called for heterodox modelers to improve their models so that they can be used for policy advice.
I was a bit astonished, given that the IS/LM model, which is not heterodox, says that austerity would not work, but the OECD chose to ignore even the work horse model of the mainstream! It seems that the OECD now opposes austerity, if Euractiv is right.
Nevertheless I would like to point to a discussion of models and reality. Lopez and Assous in their book on Michal Kalecki dig out a nice discussion from 1933. Kalecki tried to show with a models that "his system gave rise to a cyclical solution of constant amplitude for a special value of parameters" (p. 91). The authors then produce a quote from Goodwin (1989) via Sebastiani (1989):
Alas, Frisch was there to point out that since the Greeks it has been accepted that one can never say an empirical quantity is exactly equal to a precise number. Given his aim, this was a deadly blow to Kalecki [...].
Thus, if Kalecki cannot "prove" with a mathematical model that capitalism is unstable, then the same must be said about DSGE models "proving" that there cannot be any inter-temporal problems of demand since any change in savings triggers a change in investment of the same magnitude.
History does not repeat itself. It seems like the economists got things right in the Great Depression, but this time around we are way behind the curve.