Top down or bottom up models….useful thoughts
Rdan
Hat tip to Economist’s View for the post from Top-down versus bottom-up macroeconomics, by Paul De Grauwe, Commentary, Vox EU for starting an interesting conversation on macro that I think is very relevant to the public story we tell ourselves about how our economy works. One key point is the nature of central planning in the private sector by private companies, especially those who drive how things are done. The public and media narrative tend to be quite skewed and limited, depending on the nature of special interest.
Interesting twist. The rational expectations folks have always associated themselves with the need for strong microeconomic foundations, which at least in theory would be a kind of bottoms up approach. I get his point, but I’m not sure I entirely agree with the top down versus bottoms up analogy. Maybe it should be all knowing versus confused instinct.
Most of the good analysis I’ve done or seen done includes both a bottom up and top down analysis. It’s the divergence and comparison of the two that drives accurate forecasting and post-event analysis. Creating an ideological argument about tools prevents an useful environmental analysis of the problem at hand, whatever it is. Micro and macro-economists do feel that they have to continue to show value, but as they are largely analysts of value, they should know that the relational merits of different methods imply complexity rather than choosing one over the other. Of course certain tools are more useful for driving in a nail, but except in the most simple circumstances, multiple tools will be required.
Anonymous,
My take on the article is a little different. I don’t think the argument is that micro and macro don’t talk to each other, afterall, just about every New Keynesian DSGE model has microfoundations embedded in it. The criticism is that it’s the micro foundations themselves that have a “top down” perspective in the sense that they assume each economic actor is hyper-rational and all-knowing. It’s hard to reconcile that image of homo economicus with your typical Fox News viewer.