Pure theory and realism

For me, it is something to scrutinize whether new classical macroeconomics can be regarded as a pure theory and a realist movement at the same time. I tended to emphasize the character of a pure theory, while, earlier, I paid little attention to the new classical efforts to describe the socio-economic reality we are directly living in. It was not a conflict for me and it is still not so. Theories can be realist while being pure. By calling attention to the technical details of the new classical methodology I made efforts to point out: new classical macroeconomics has had an indirect connection to our socio-economic environment. I am using the word ‘indirect’, because new classicals, through abstraction and idealization (or isolation, as you like), were not able to grab the totality of our realm of social life but only the very essence of it. For me, the theory of the neoclassical founding masters and that of the new classicals are very similar to one another in methodological terms.

So far, I somehow did not see the difference between the efforts of pure theories to get linked to reality in terms of goals and ambitions. In these terms, however, neoclassicals and new classicals are not alike. Neoclassicals clearly emphasized the consequences of being a pure theory: it has been a common intellectual heritage of economics to pay attention to the gaps between theoretical results and the outcomes of actual social processes. Before the new classical era, pure economic theory being used as an analytical device to generate estimations performed rather badly. These estimations could be hardly regarded as exact and precise predictions. Now, for me, it is the very essence of the new classical breakthrough: Lucas and his group could overcome the gaps mentioned above. New classicals set a new goal: they considered the possibility of build up a realist pure theory which was able to perform well in terms of predictions. When the new classicals declared the ambition to give a description of how actual socio-economic systems work and to provide numerical results that can mimic the actual outcomes of macro-economies, they did not undertake to set up, say, a phenomenological theory let alone an instrumentalist system. I strongly believe that they insisted on the concept of pure theory while being lucky to exploit the improvements in the statistical and econometric methods. In this way, new classical macroeconomics could remain a realist pure theory (similar to neoclassical theory), while becoming able to considerably improve its numerical accuracy.

Understanding New Classical Macroeconomics

Having published the Theory of New Classical Macroeconomics, my main concern has been to set my line of reasoning into the realist terminology. I want to introduce the new classical system as a realist development. Doing so, I am re-reading the classical text and looking for details that can be used as pillars for this undertaking.

It is a very interesting activity. Texts have multiple faces, and newer and newer faces reveal themselves when reading them again and again. My method when sorting and judging the papers was very simple. I was interested in the question whether new classical macroeconomics was a direct continuation of the Friedmanian method or not, so, as a first step, I skimmed through the bibliographies of the most important papers and chapters written by Lucas and other new classical economists. My idea has been to prove that new classical macroeconomics is a completely different case in terms of the methodological principles, so I was searching the references for F53. I wanted to how many times it was cited and the result was surprising and even shocking: I did not find a single record. The famous and seminal methodological paper is not mentioned in the new classical texts. Of course, it does not follow that Lucas and his group completely denied the Friedmanian macroeconomics. It is interesting, but some economic policy consequences drawn by Friedman are often mentioned in the new classical texts. The constant growth rate rule is such a principle, for example.

In the paper with the title mentioned above (Understanding New Classical Macroeconomics) I will try to focus on the methodological principles and the differences of these principles followed by Friedman and new classicals. For me, new classical macroeconomics has been a realist movement. Friedman makes a different case and his work needs a careful analysis. In my opinion, F53 was an instrumentalist manifesto, but even Friedman himself was not able to insist on his own methodological principles. The Friedmanian Phillips-curve is the classic case of the instrumentalist philosophy: it is very illuminating as for how to build up a theory and a model in order to get to pre-set findings and results. But, on the contrary, with permanent income hypothesis, Friedman moved towards a (more) realist methodology.

For me, new classical macroeconomics seems to be a definitely realist theory. It was built up following the realist principles and creating some Weberian ideal-types. The Lucasian islands are populated by the identical representatives of the rational and utility-maximizing agents of the same homo oeconomicus. If homo oeconomicus of the neoclassicals can and should be regarded as a Weberian ideal-type, then inhabitants of the Lucasian islands can and should be so. Actually, this issue can be boiled down to the problem of adaptive expectations: this hypothesis can hardly be taken as a result of isolation.