Robert Lucas and the Cargo Cult that is modern macroeconomics

I'm going to rearrange a DeLong blog post and add some Feynman.

Robert Lucas, founder of modern macroeconomics, and chief proponent of "rational expectations" and "microfoundations", said in his "Nobel" Prize Lecture:

The discovery of the central role of the distinction between anticipated and unanticipated money shocks resulted from the attempts, on the part of many researchers, to formulate mathematically explicit models that were capable of addressing [some issues regarding monetary policy]...

In [these] models... real effects of monetary policy need to work through movements in prices...[but T]hough the evidence seems to show that monetary surprises have real effects, they do not seem to be transmitted through price surprises...

DeLong notes:

I will just remark that "discovery" is used in an unusual way here: Lucas "discovers" that anticipated monetary shocks don't and unanticipated monetary shocks do have real effects because anticipated monetary shocks don't and unanticipated monetary shocks do move relative prices in a way that is correlated with movements in employment and production. But they don't. This to me to be very different than Galileo's discovery of the moons of Jupiter, or Rutherford's discovery of the atomic nucleus, or Crick, Russell, and Watson's discovery of the structure of DNA.

Karl Smith weighs in on the Lucasian paradigm:

Lucas is essentially saying that Keynesian [models don't] make any sense. [His opponents respond] that [Lucas'] Frictionless Markets don’t match reality.

My take is that at its heart this is exchange is about whether economics is philosophy or science. For philosophy logical consistency is paramount. But, in science, empirical observation wins. I side with science.

If the world doesn’t act [as] described by Freshwater Models then all the elegance in the world can’t save you.

And Richard Feynman weighs in from beyond the grave:

So we really ought to look into theories that don't work, and science that isn't science...

[True science requires] a kind of scientific integrity...

Details that could throw doubt on your interpretation must be given, if you know them. You must do the best you can--if you know anything at all wrong, or possibly wrong--to explain it. If you make a theory, for example, and advertise it, or put it out, then you must also put down all the facts that disagree with it, as well as those that agree with it. There is also a more subtle problem. When you have put a lot of ideas together to make an elaborate theory, you want to make sure, when explaining what it fits, that those things it fits are not just the things that gave you the idea for the theory; but that the finished theory makes something else come out right, in addition...

And it's this type of integrity, this kind of care not to fool yourself, that is missing to a large extent in much of the research in [what I call] cargo cult science...

We've learned from experience that the truth will come out...Nature's phenomena will [either] agree or they'll disagree with your theory. And, although you may gain some temporary fame and excitement, you will not gain a good reputation as a scientist if you haven't tried to be very careful in this kind of work.

Bob Lucas started his career by pointing out some very real problems with existing macroeconomic models. But then he and his fellow-travelers (e.g. Ed Prescott) claimed that, in order to replace those flawed theories, we should focus first and foremost on making theories that are internally consistent, intuitively plausible, and mathematically elegant. If these theories didn't match the data (which they didn't), that was of secondary importance.

So Robert Lucas and his followers turned macroeconomics from a struggling infant science into a Cargo Cult Science. Our discipline has not yet recovered.

Update: In the comments on DeLong's post, I addressed the common misconception that neoclassical macroeconomics involves "beautiful mathematics":

[T]ell me, what "beautiful mathematics" is there in neoclassical macro? If "beautiful" = "simplistic", then sure, there's plenty. Neoclassical guys demanded that everyone use DSGE models, then they picked the simplest possible DSGE model (frictionless RBC) and worked it out, then sat on that for over a decade while everyone else slowly, laboriously worked out much more difficult (and ever so slightly more realistic) models.

Picking a class of models for which the price of realism is extremely high in terms of tractability, and then implying that anyone who doesn't use that class of models is a dum-dum, is not "beautiful mathematics". I don't know what to call it - Academic patent trolling? - but it is not "beautiful mathematics."