Macroeconomics and the value free ideal

 It was very interesting to read about inductive risk and the potential effects on this, when using algorithms for real life models. First off, the inductive process is “any inference that goes beyond information given in premises.” Based on that, there are “canons of inductive inference” with a broad collection of assumptions in different domains. The value free ideal bases on which of these canons are acceptable and which are impermissible. 

 As my main interest is in economics, and more so macroeconomics, I plan on analyzing one macroeconomic model to understand to the extent it is value free. In macroeconomics we use models which are simplified representations of the economy, which “provide us with a fictitious economy where issues can be analyzed and economic mechanisms understood.” I will be looking at the life cycle and permanent income hypothesis, which describes the consumption-saving behavior of people over a lifetime. 

Here we make assumptions about the agent.  They are forward looking (meaning they care about their future). Ex. if you’re working as a gov official and get your check, you’re going to save some of that money for the future and not consume all of it now. They desire to smooth consumption across time. This means they want their consumption in this period and next period to be smoother, where they aren’t spending it all today or tomorrow. Further, current consumption should not reach much to predictable changes in income that were predicted in the past. Lastly, these agents are rational meaning their behavior is optimizing, so they are optimizing utility (satisfaction, happiness). I will only focus on the assumptions of this model, to keep it simple. 

It definitely seems likely for most individuals that they care about their future, to an extent, and there is a discount factor associated with consumption in the future (it takes into account the extent someone values their future). I would say that this assumption seems fair in a life cycle model, however, it is difficult to quantify all the people that don’t value their future. Ultimately, this is an aggregate model, since it is macroeconomics so it is difficult to account for every small difference in individuals. As long as it's the majority, it seems sufficient for simplicity and consistency. 

As for smoothing consumption over time, this process may be difficult to do for some due to financial constraints. It brings to question how many of these agents have the financial ability to smooth their consumption. It seems this assumption should be critiqued for further analysis to better understand the behavior of the economy. 

Finally, to state that agents are rational and the behavior is optimizing, is a very gracious description of the people in the US economy. It is really difficult to say people are rational, and that they optimize their happiness in their decisions. This property of the agent assumes that they have proper financial literacy, and a general understanding of the economy. Further, it assumes they aren’t irrational, meaning that they won’t gamble their money or have spending problems. Further if they see marketing for an extremely overpriced product, they can be easily persuaded with the greatness of marketing. So it brings to question if this assumption of rational choice is the best way to model our economic behavior on an aggregate scale. Further, is this model severely mischaracterizing our economy, and leading to predictive failures that could substantially harm many individuals?


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