Caballero #3: The Pretense of Knowledge Syndrome in Macroeconomics

This is the third of three posts based on an interview that Ricardo Caballero of  MIT did with Douglas Clement of the Minneapolis Fed.

Caballero on the pretense-of-knowledge syndrome in macroeconomics:

"[T]he economy is so complex that there is little hope of understanding much without models. I just don’t want these models to acquire a life that is independent from the purpose they are ultimately designed to serve, which is to understand the functioning of real economies.... [T]he current core of macroeconomics has become so mesmerized with its own internal logic that it begins to confuse the precision it has achieved about its own world with the precision it has about the real one.

"There is absolutely nothing wrong with building stylized structures as just one more tool to understand a piece of the complex problem. My problems with this start when these structures take on a life on their own, and researchers choose to “take the model seriously”—a statement that signals the time to leave a seminar, for it is always followed by a sequence of naïve and surreal claims....

"My point is that by some strange herding process, the core of macroeconomics seems to transform things that may have been useful modeling short-cuts into a part of a new and artificial “reality.” And now suddenly everyone uses the same language, which in the next iteration gets confused with, and eventually replaces, reality. Along the way, this process of make-believe substitution raises our presumption of knowledge about the workings of a complex economy and increases the risks of a “pretense of knowledge” about which Hayek warned us in his Nobel Prize acceptance speech."

The interview questions here are focused on a paper by Caballero called "Macroeconomics after the Crisis: Time to Deal with the Pretense-of-Knowledge Syndrome." that was published in the Fall 2010 issue of my own journal, where Caballero spells out these arguments in greater detail.