Ten Years and Beyond, Ten Years Ago: NSF's long-term research agenda

A criticism of my first two posts (coming from myself, as the lone reader of this blog), is that it is easier to criticize than to build. As the Wikipedia summary of the Cambridge capital controversy states "it was much easier to destroy neoclassical theory than to develop a full-scale alternative that can help us understand the world."

One group working to support innovative economic modeling is the National Science Foundation. Today, NSF's Directorate for Social, Behavioral and Economic Sciences (SBE) "supports research and infrastructure to advance understanding of a full range of human networks", through its Human Networks and Data Science (HNDS) program.

In this post I summarize an earlier effort. In 2010, the NSF's SBE invited economists to write

white papers describing the questions that are "likely to drive next generation research in the social, behavioral, and economic sciences." They called it "Ten Years and Beyond: Economists Answer NSF's Call for Long-Term Research Agendas". NSF received 252 papers from economists including Daron Acemoglu, David Autor, Andrew Lo, Raj Chetty, Stanley Fischer, and Hal Varian.

First, I highlight a couple of quotes from various papers and my thoughts on them, in particular their relevance to interdisciplinary agent-based models / theoretical macro. Then, I give a bit more of a summary of a few of the papers that were especially interesting to me.

Relevant quotes

• "I suggest supporting agent-based models of decentralized market systems with sophisticated financial sectors, as well as theoretical research that provides the analytical foundation for the phenomena discovered through agent-based models" (Herbert Gintis)
• 500 person-years of work on agent-based economic models vs. 50,000 years of work on general equilibrium models. Time to lay the groundwork for more serious work on systems that reflect the real world more closely.
• “Social network patterns of interaction influence many behaviors including consumption, career choice, …” (Matthew Jackson)
• How to incorporate research on realistic consumption behavior. Are papers such as Abel's 1990 "Asset Prices Under Habit Formation and Catching Up with the Joneses" relevant for an ABM, and/or is more recent research more useful?
• “The answer to [the question of which behavior humans choose] has obvious consequences for virtually all economic models, yet the tools by which we will solve this challenge may come from other disciplines such as psychology, neuroscience, ecology, and evolutionary biology.” (Andrew Lo)
• The approach needs to be interdisciplinary
• “If I was to bet on where the next revolution in economic will come from, I would say it is [cooperating across disciplines, including using tools from neuroscience to measure brain activity].” (Ricardo Reis)
• Again, the approach needs to be interdisciplinary
• “Macroeconomics is perhaps the only applied field within economics today in which more training puts greater distance between the specialist and the real world, owing to its reliance on highly unrealistic models that sacrifice relevance to technical rigor.” (Dani Rodrik)
• In "The Decline of Economics" in The New Yorker in 1996, John Cassidy quotes Laurence Meyer, a former Fed governor and successful macroeconomic forecaster: "Because of Lucas and others, for two decades no graduate students were trained who were capable of competing with us by building econometric models that had a hope of explaining short-run output and price dynamics. We educated a lot of macroeconomists who were trained to do only two things--teach macroeconomics to graduate students and publish in the journals."
• Also, Stephen Roach, then head of global economics at Morgan Stanley -- "We insist on at least a three-to-four-year cleansing experience to neutralize the brainwashing that takes place in these graduate programs"

In the article, Cassidy also quotes Joseph Stiglitz on the general equilibrium models that emerged from Arrow and Debreu's math, which proved that under certain conditions the free market will allocate resources efficiently. "The models were fundamentally wrong in that they assumed perfect information, perfect competition, and no technical change ... Anybody looking at those models would say they can't provide a good description of the modern world."

Cassidy mentioned that "These days, general equilibrium theory is widely regarded as a splendid intellectual curiosity rather than as a model of reality." He was not wrong, and that was almost 25 years ago. Nevertheless, they've persisted.

Relevant papers

Matthew Jackson: Research opportunities in the study of social and economic networks (p. 189)

• “Social network patterns of interaction influence many behaviors including consumption, career choice, employment, investment, voting, hobbies, criminal activity, risk sharing, and even participation in micro-finance.”
• “The study of how network structure influences (and is influenced by) economic activity is becoming increasingly important because it is clear that many classical models that abstract away from patterns of interaction leave certain phenomena unexplained. For example, the fact that information about jobs is largely disseminated through social networks has significant implications for patterns of wages, unemployment, and education.”

Andrew Lo: A complete theory of human behavior (p. 215)

• Can we develop a complete theory of human behavior that is predictive in all contexts?
• Tolstoy …
• One of the most prominent inconsistencies among the SBE disciplines is the rational expectations paradigm of economics and the many behavioral biases documented by psychologists, behavioral economists, sociologists, and neuroscientists
• It is easy to forget the many genuine breakthroughs that have occurred in economics over the last half-century such as general equilibrium theory, game theory, growth theory, econometrics, portfolio theory, and option-pricing models. But any virtue can become a vice when taken to an extreme.
• Why do we choose one particular behavior from our repertoire for a given occasion and not another, and how does that repertoire change over time and across circumstances? The answer to this question has obvious consequences for virtually all economic models, yet the tools by which we will solve this challenge may come from other disciplines such as psychology, neuroscience, ecology, and evolutionary biology
• Although economics occupies an enviable position among the social sciences because of its axiomatic consistency and uniformity, Homo economicus is a fiction that can no longer be maintained in light of mounting evidence to the contrary from allied fields in SBE.

Scott Page: Complexity in social, political, and economic systems (p. 245)

• Current social science models cannot help us harness complexity because, for the most part, they rely on an equilibrium paradigm.

Ricardo Reis: Future research in macroeconomics (p. 257)

• Economists have just started using tools from neuroscience to measure brain activity and for a while drawn on philosophy and psychology to understand the limits of human knowledge.
• If I was to bet on where the next revolution in economics will come from, I would say it is here. The challenge is great, but also well-defined and appreciated, usual pre-requisites for any glimmer of progress the new data from brain scans, as well as the amazing information from surveys and activities of people using the Internet is allowing the discussion to move from ideological positions to testable propositions. One problem with the cooperation across disciplines is that they are terribly expensive, and often frustratingly slow to yield progress.

Dani Rodrik: A research agenda in economic diagnostics (p. 263)

• The fault lies less with economics than with how economists have used the tools at their disposal. The problem was that economists (and those who listen to them) became overconfident in their preferred models of the moment: markets are efficient, financial innovation transfers risk to those best able to bear it, self-regulation works best, and government intervention is ineffective and harmful. They forgot that there were many other models that led in radically different directions. Hubris creates blind spots.
• Macroeconomics is perhaps the only applied field within economics today in which more training puts greater distance between the specialist and the real world, owing to its reliance on highly unrealistic models that sacrifice relevance to technical rigor.