Who Were the Sea Peoples?

I have pointed this out before, and got some flack for saying it, which is surprising given the fact that RBC proponents have boasted of this as a feature of their theory. Anyway, here is Noah Smith making this point: "In fact, RBC is really sort of a giant null hypothesis -- a claim that the phenomenon known as the business cycle is just an illusion, and that recessions are the normal, smooth functioning of an efficient economy."

Real business cycle essentially denies that any true macro economic phenomena exist. We have a collections of representative agents optimizing in response to exogenous shocks. One selling point of the theory is that it lends itself to DSGE models, where we have an economy always in equilibrium being bumped hither and thither by the shocks: we can easily give microfoundations to our macroeconomics  because there really is no macroeconomics per se. It is only the fact that the responses to these shocks display hysteresis that gives rise to the appearance of business cycle; as F.H. Bradley would have put it, the business cycle in RBC is appearance, not reality.

One of the masterminds of real business cycle theory admits that sometimes financial shocks do matter, here . (Hat tip Ryan Murphy.)

Imagine someone says to you, "I have developed a satisfactory explanation of why sunspots sometimes ebb and sometimes flow at various times." "OK, that's great. And it is?" "Well, see, I looked at ten variables. None of them explain the sunspot cycle." "OK...." "So what explains the sunspot cycle is residuals ! The things that are left out of my model!" I would hope you would dismiss this fellow as a jokester. His model has totally failed to predict sunspots, and what accounts for them is not in his model at all. But when I began reading up on real business cycle theory, I began encountering what seemed to me to be just this sort of explanation for "fluctuations." Surely, I thought, I must not have adequately understood RBC yet: could any serious scholar really advance such a notion? I needed to read more! But as I did, I realized that other serious   thinkers have pointed out just this ridiculous aspect o...

In my continuing research into theories of cycles in social life, I have been reading up on real business cycle theory, and it seems to me the name is a misnomer. It really ought to be "illusory business cycle theory," as the main thrust of the idea is that there actually isn't any such thing as a business cycle at all: instead, there are a series of exogenous shocks to the economy the give the illusion of a genuine cycle. Nothing returns the system to an earlier state at which a cycle starts over, except that enough random jiggling around, in a system that exhibits hysteresis, will create cycle-like behavior. UPDATE: Noah Smith makes the same point here : there is no cycle in RBC. UPDATE II: Pulled from Smith's comments: "Economists who support RBC could be publicly shamed by those who want to actually do science. UPDATE III: And just to be clear, a model of a "genuine" cycle would be something like the predator-prey model . It is a true cycle ...