The role of economic theory

I'm nearing the end of three conferences in various parts of Europe (it's a hard life being an academic at times), and the mix of papers at these conferences has meant that I've listened to a lot of papers that are purely theoretic, and a lot of papers that are purely empirical, and some others that are somewhere in between.

Being an applied person myself, my initial reaction to purely theoretical papers is: what's the point? For a paper to be of any use, my first thought goes, it must be empirically validated.

Of course, the problem here is, can a theory be empirically validated? And the answer is, a lot cannot. I listened to a paper this morning by Gerhard Illing on 'dancing banks', asking about the effect of bailing banks out that are failing in times of financial turmoil. This kind of people, theoretical in nature, cannot really be empirically validated, unless it so happened that some country already operated the kind of regime that Illing proposes, and another didn't.

Perhaps he could get hold of data for different countries, and try to measure how likely each country was to bail out its failing banks, and then get data on the amount of liquidity at various points in inter-bank financial markets, and try to come to some conclusions. However, measuring how likely a country is to bail out its banks is very hard indeed: it doesn't happen too often, and the actions of countries usually differs from words, as no government will say it's prepared to bail out failing banks, as this would encourage reckless behaviour.

So, there's clearly a number of papers for which empirical validation is impossible, particularly papers proposing reforms in governance, and other prescriptive papers.

This doesn't excuse papers like this one on the effect of financial markets being imperfect. These Dynamic Stochastic General Equilibrium (DSGE) models make great predictions about the economy, about policy, and wider, yet rely on very flimsy relevance for the real world.

Such models claim to have "structure", and this is their great claim in the light of the Lucas critique of 1976, which pointed out that simple regression models may be undone in structural change because underlying parameters, such as those of personal preferences of individuals, change.

But what if these models have the wrong structure? Then they are no better than what came before, and no more illuminating than a simple regression model. And do they? For one thing, they assume a representative agent: i.e. everyone is the same and has the same preferences.

Yet in microeconomics, regression models are perfectly acceptable if they claim to explain less than 30% of the observed variance in a given data series; the reason? Unobserved heterogeneity between individuals. So if so much heterogeneity exists, precisely in the kinds of studies that the above DSGE models use to choose the important parameters for their models, how can these same DSGE models assume a representative agent?

The simple fact is, these models make far too great claims on far too important things given their total lack of empirical validation. Theory is by no means useless, it is vitally important, but when empirical validation is possible, it should be carried out.

God and politics

According to this chap in the New York Times, the presidential campaign should be godless.

However, I'm very much with the writers of the first two comments (Bob S and Peter Kerry Powers). Why should religion be a private thing?

Certainly secularism, and in particular materialism, are anything but private: you deserve this, go on, treat yourself, etc., abound in the adverts. Why do the gods of democracy, and consumerism, get preference over God himself?

And why, if you've got good news, or a severe warning for others that you believe is based on firm evidence, should you not tell others about it? The government in the UK has told us that using our mobile phones while driving is dangerous, is that somehow immoral of them? On what "evidence" did they make that decision to implement a law and fund numerous advertising campaigns?

On another note, it's good to see Rick Warren inviting homosexuals into his church, thankfully showing God's love to people that are still loved by God just as much as anyone else. Far better to see than the abhorrent comments from Pat Robertson and John Hagee that are cited there.

Ian McEwan and Revelation

Bit late, but last Sunday Ian McEwan, the novelist, wrote a very long article in the Guardian on prophets of doom, those who predict the end of the world.

Naturally, I had a lot of issues with the article! Not least, that it associates Christianity with people that regularly predict the end of the world. Now at first sight, that might seem a little obvious: of course that's what Christians do, isn't it? Well, just the week before, I listened to this sermon given by Julian Bidgood at St Ebbes church, and if you listen, you'll actually hear him mocking those that make such predictions, notably a chap called Michael Drosnin, who has apparently made numerous predictions about when the end will happen.

The issue is that Jesus explicitly tells Christians not to bother predicting. In Matthew 24 and 25 Jesus goes into great lengths on this, with a number of parables, not least that of the Ten Virgins, where the punchline is (25:13): "Therefore keep watch, because you do not know the day or the hour". So Christians, at least those following the teachings of Jesus (which is a fairly good description of a Christian really), should not be going about making apocalyptic predictions.

Another thing that bugged me about McEwan's article is the description of the God of Old Testament in the following way: "slave-owning, ethnic cleansing, infanticide, and genocide urged at various times by the jealous God of the Old Testament". I suspect infanticide comes from the bit about Isaac in Genesis 22, which is undoubtedly quite shocking, but the point is that the infanticide doesn't actually happen, and that God was testing Abraham. Slave-owning? There's little doubt that happened in the Old Testament, as it did in the New Testament (see the search here for all references in the Bible to slavery). Yet does that mean God urged it?

The other issue is that of the God of the Old Testament somehow being the angry vengeful God, but the New Testament God being one of love, peace, happiness etc. But that just doesn't stack up. The God of the Old Testament is the same God as the God of the New Testament, and in fact, one wouldn't make sense without the other. Jesus' death and resurrection can only be made sense of by looking at the Old Testament and reading that Jesus was long predicted, to be the savour of God's people. I've heard people say that basically the Bible is the Old Testament with the answers in the back.

But enough for now, I'm not a bible scholar, and in fact I need to get on with preparing a bible study right now....