Tuesday, November 09, 2010

Do Angeletos And La'O Know What They Are Talking About?

Some comic gives some stupid and vile economists an opportunity to comment on some of Cosma Shalizi's ideas [1]. (I find particularly stupid the commentator that cites Amazon, a Web 2.0 exemplar, for an example of agents interacting only through prices.) Eventually, one respondent says that George-Marios Angeletos and Jennifer La'O show how to embed animal spirits in Dynamic Stochastic General Equilibrium (DSGE) models. I'm not sure which paper they are talking about, but I did download their paper Sentiments (with accompanying slides.) I do not object to how Angeletos and La'O model shocks, although in this setting I don’t see why I should care.

I was quickly stopped in reading this paper at the first footnote:
"By 'mainstream' we mean the prototypical RBC and New-Keynesian models, as well as the more recent DSGE models. This excludes models with multiple equilibria or irrational agents, which we discuss in due course."
How are models with multiple equilibria non-mainstream? They continue in this vein throughout their paper:
"In our model, agents are fully rational; preferences and technologies are standard; markets are Walrasian; there are no nominal frictions, no externalities, and no non-convexities; the equilibrium is unique; and there is no room for correlation devices or lotteries. In these respects, our theory has squarely neoclassical foundations."
"This extrinsic uncertainty has very similar flavor as the one encountered in models with multiple equilibria: it captures the self-fulfilling nature of short-run fluctuations. Importantly, though, it does not rest on the severe externalities, non-convexities and missing markets that are most often needed to sustain multiple equilibria-nor does it come with the usual difficulties in conducting policy analysis."
It is my understanding that the Sonnenschein-Mantel-Debreu theorem is proved in a Walrasian model with no externalities, non-convexities, or missing markets. The excitement over the theorem comes from being derived with the same sort of assumptions that are used in Debreu's Theory of Value to derive the existence of an equilibrium. So I find it hard to believe the authors know what they are talking about when they suggest multiple equilibria are non-Walrasian or non-neoclassical.

By the way, I happen to have available a model with multiple equilibria. Figures 1 and 2 below illustrate. I'd like somebody to point out to me how agents in this model are not fully rational; how preferences and technologies are non-standard; or where nominal frictions, externalities, and non-convexities exist in this model. I suppose one can say some markets do not exist in an overlapping generations model. Agents cannot buy commodities or sell their labor before they are born or after they are dead. I did not think such an assumption made a model heterodox or non-neoclassical.
Figure 1: Equilibrium Interest Rates as a Function of One Parameter in the Utility Function
Figure 2: Equilibrium Wages as a Function of Another Parameter

[1] Cosma Shalizi is on a team of three that has recently received a grant awarded by the Institute for New Economic Thinking.


Cosma Shalizi said...

I really shouldn't have followed that link, should I? But at least I learned I'm a "Commie".

Anonymous said...

Good God you're a complete idiot. No wonder nobody even knows who you are, let alone thinks you're useful.

Anonymous said...

^nice critique, why not explain where he goes wrong?

Robert Vienneau said...

You can find somebody else here who is presumably an inarticulate economist calling me a "moron".

I found quite interesting many of Cosma's references in his notes on socialism. I don't think I would jump to conclusions about the politics of somebody who recommends The God that Failed, Kolakowski's Main Currents of Marxism, Popper's Open Society, or Schumpeter's Capitalism, Socialism, and Democracy, for example. But, hey, maybe that's just me.

Magpie said...

I don't mean to sound elitist, but what do you guys care about what the economics' Tea Party believe?

It's a free country. If they want to believe in creationism, flat earth, Nazi UFOs, the chupacabras or whatever, it's their choice.

Besides, you guys and I know that economics is just a rationalization, a justification, for policies that benefit some groups. If it's not their bullshit, it's going to be another one, roughly equivalent.

As they used to say in the USSR, enjoy today, because tomorrow it's going to be worse. ;)

Just my two cents.

Anonymous said...

I called you a moron in both places. Just wanted you to know.