Today’s Must-Must-Read: Simon Wren-Lewis: Do Not Underestimate the Power of Wrong Microfoundations!
…even if it is achieved by abandoning external consistency. You will hear how the Lucas critique proved that any non-microfounded model is inadequate for doing policy analysis, rather than it simply being one aspect of a complex trade-off…. Many macroeconomists today are blind to the fact that adopting microfoundations is a methodological choice…. This has two implications…. The first is that the discussion needs to be about methodology…. Deficiencies with particular microfounded models… simply provide an agenda for more research. Second, lack of familiarity with methodology means that this discussion cannot presume knowledge that is not there…. That makes discussion difficult, but I’m not sure it makes it impossible.
Newtonian physics lacks internal consistency: The motion of Venus is governed by this strange microfoundation-lacking and absurd “action at a distance”. Astrology possesses internal consistency: The motion of Venus is determined by the Angel of Venus as she beats her wings against the Aether. Newtonian physics is vulnerable to the Lucas critique: without microfoundations, who is to say how the mysterious gravitational “action at a distance” might change if something were to perturb the orbit of Venus? Astrology, by contrast, is invulnerable to the Lucas critique: the Angel of Venus will adjust the force with which her wings beat in order to keep Venus in its proper sphere.