The positive nature of normative analysis
2009-12-14 · Original WordPress address
When you first take a grad level economics class, it occurs to you the discipline appears to be "social physics". Where you thought the discipline was "a tool for understanding and social criticism and an instrument for intellectual enlightenment" you begin to suspect its "a tool for social engineering and an instrument for progressive politics". The suspicion morphs into a full blown conspiracy theory when you learn the math behind the welfare theorems.
But look at how normative analysis is actually done in economics. Consumers of models compare their intuitions about how policy should work against the prescriptions of the model and use this difference to evaluate the model. "Wow, this model says money is too loose right now. I know that's wrong, why does the model get it wrong?"
One of the reasons to reject real business cycle models is because they provide no room for macroeconomic management. The dissatisfaction with exogenous growth models is that they're silent about institutions. There's a heavy bias against models of wage inequality that rely on transient features of workers; the problems *must* be structural. Unemployment must be responsive to aggregate demand manipulations and so they can't be a result of real frictions. And so on.
Despite these examples, after a couple years of doing this, I've come to believe that this is an acceptable way to evaluate models. There is no THE MODEL of the economy and our intuitions are basically trustworthy when it comes to social arrangements. Our intuitions are data. If a model gives counterintuitive policy implications, it bears the burden of showing us why our intuitions are incorrect.