by Philip Pilkington
In the comments to my piece on Janet Yellen the hypocrisy of my position was pointed out, as it so often is, by a certain reader of this blog. What was my hypocrisy on this particular occasion? It was the fact that I complained about Yellen’s obsession with ‘closing’ models but, in other circumstances, champion Godleyian Stock-Flow Consistent (SFC) modelling which, of course, contains models that have ‘closures’ of various forms.
I think that it’s worth talking about this in a little bit more detail. I should say right off the bat that my endorsement of SFC modelling is purely opportunistic. I know that there are many people out there who make their living by ‘closing’ models and I doubt that I will persuade them to stop doing this. SFC models seem to me a nice compromise in this regard because they are actually didactically useful in that the person who explores their properties absorbs key lessons about how the macroeconomy actually functions and the importance of the national accounts. Those doing marginalist analysis, say DSGE, on the other hand are simply absorbing ideology. In short, SFC models actually convey something about the real-world, while DSGE models are a form of brainwashing that basically lobotomise those who study them and render them useless as economists.
Anyway, I think a good way of approaching the broader question here is through the work of GLS Shackle. In his wonderful book A Scheme of Economic Theory Shackle discusses two types of approaches. The first is Keynes’ own approach which he describes as such,
The General Theory of Employment, Interest and Money is the most paradoxical of books. Constructed on a purely static and equilibrium frame of formal argument, it clothes this frame in a rich and suggestive mantle of ideas about expectations and their precarious basis and their extreme unstable sensitiveness to ‘the news’. In the present book I have had to find a special term to indicate this quality of Keynes’s though, and I have called it kaleido-static. The patterns in a kaleidoscope change abruptly to something totally different, yet, given the exact character of the twist imparted to the instrument, these patterns no doubt have their own internal logic. Keynes saw in the business world a succession of highly unstable equilibria. In his formal construction he described the equilibrium of each situation, in his powerful gloss upon this formal argument he explained their almost explosive instability. (p5)
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