Thursday, May 22, 2008

The Lesson of Don Patinkin on Global Warming

Don Patinkin’s exposition of Keynesian macroeconomics in the 1960’s, with page after page of equations, created what appeared to be a very compelling theory, because it was consistent and logical at every step. All the partial derivatives 'made sense' [a partial derivative is what happens when you change one variable, and assume all others remain constant]. It was not until the empirical failures of the 1970’s that people began to ignore, not refute, Patinkin, and this is the fate of bad theory: based on faulty assumptions, all the nice logic is not wrong, but irrelevant. Yet Wikipedia describes Don Patinkin’s dissertation, Money, Interest and Prices (1956) as a 'tour-de-force', also noting that 'his 1956 treatise remains an example of Neo-Keynesian theory at its best'. Funny, Eugene Fama called the application of standard utility assumptions and statistics to create the Capital Asset Pricing Model (CAPM) a ‘theoretical tour de force’, but also acknowledged it has virtually no empirical support. I guess 'tour de force' means, 'impressive but useless'. The exceptional veneration of once popular work that turned out to be a dead end, is common in economics. Too many influential, almost-dead professors to annoy, better to say nothing at all and hope the geriatric bastards don't get it.

I was a student of Larry Meyer, who went on to become a member of the Federal Reserve Governor, and he wrote a textbook for undergrads with a Keynesian model building approach. His firm, Macroeconomic Advisers, still generates forecasts and sells them. But this was not emulated, and grad student's don't flock to this line of research, because if you do simple Vector Auto Regressions, they do as well as these seemingly much more logical Keynesian models. Both do poorly, but the Keynesian approach is worse. Patinkin's magnum opus, like the CAPM, is impressive, but a dead end. Surely there is enough written in both genres to find somethings in it that are useful, but anything large is bound to have these.

The bottom line is that the economy is a complex interdependent system. Modelers knew about the Lucas critique, feedbacks, and nonlinearities, such as the liquidity effect, but all to no avail. The models were, with hindsight, nobel efforts, but ultimately failures. Thus, I am very skeptical of Global Warming models because I sense they also have similar issues. The only real way to judge these models, is for them to have objective shorter term forecasts that hold them accountable. I don't see any database of forecasts for temperatures next year, so I sense they are unfalsifiable.

In my experience studying macro economics, you see that before out-of-sample data arise (as when models were initially built based on historical data), lots of people with great credentials, logic, and sophisticated mathematics, are highly certain these models will work. I have not seen any complex economic models work. I don't see why the global climate should be any better, and as they are more untestable. I suspect Global Warming is used as a pretext to implement policies many people want, just as the Polar Bear's appearance on the endangered species list will be used to prevent development, especially oil drilling.

1 comment:

Anonymous said...

they work the same as VaR or CAPM, on the intuitive level. everyone 'feels' the higher the risk the higher the return, even if betas can be argued about, or what have you, so they're roughly right. same with the global warming models. and since they all err on the warming side, or no effect at all (i didn't read one arguing humans are actually decreasing the temp), they might be onto smth.