Krugman’s vindication of the IS-LM gadget — brilliantly silly

27 March, 2014 at 19:04 | Posted in Economics | 6 Comments

islmPaul Krugman yesterday responded to my critique of IS-LM. This hardly came as a surprise. For years now, self-proclaimed “proud neoclassicist” Paul Krugman has in endless harpings on the same old IS-LM string told us about the splendour of the Hicksian invention.

His argumentation is nothing new. In an earlier post on his blog, Krugman has argued that “Keynesian” macroeconomics more than anything else “made economics the model-oriented field it has become.” In Krugman’s eyes, Keynes was a “pretty klutzy modeler,” and it was only thanks to Samuelson’s famous 45-degree diagram and Hicks’s IS-LM that things got into place. Although admitting that economists have a tendency to use ”excessive math” and “equate hard math with quality” he still vehemently defends — and always have — the mathematization of economics:

I’ve seen quite a lot of what economics without math and models looks like — and it’s not good.

Sure, “New Keynesian” economists like Krugman — and their forerunners, “Keynesian” economists like Paul Samuelson and (young) John Hicks — certainly have contributed to making economics more mathematical and “model-oriented.”

wrong-tool-by-jerome-awBut if these math-is-the-message-modelers aren’t able to show that the mechanisms or causes that they isolate and handle in their mathematically formalized macromodels are stable in the sense that they do not change when we “export” them to our “target systems,” these mathematical models do only hold under ceteris paribus conditions and are consequently of limited value to our understandings, explanations or predictions of real economic systems.

Science should help us disclose the causal forces at work behind the apparent facts. But models — mathematical, econometric, or what have you — can never be more than a starting point in that endeavour. There is always the possibility that there are other (non-quantifiable) variables – of vital importance, and although perhaps unobservable and non-additive, not necessarily epistemologically inaccessible – that were not considered for the formalized mathematical model.

The kinds of laws and relations that “modern” economics has established, are laws and relations about mathematically formalized entities in models that presuppose causal mechanisms being atomistic and additive. When causal mechanisms operate in real world social target systems they only do it in ever-changing and unstable combinations where the whole is more than a mechanical sum of parts. If economic regularities obtain they do it (as a rule) only because we engineered them for that purpose. Outside man-made mathematical-statistical “nomological machines” they are rare, or even non-existant. Unfortunately that also makes most of contemporary mainstream neoclassical endeavours of mathematical economic modeling rather useless. And that also goes for Krugman and the rest of the “New Keynesian” family.

When it comes to modeling philosophy, Paul Krugman has in an earlier piece defended his position in the following words (my italics):

I don’t mean that setting up and working out microfounded models is a waste of time. On the contrary, trying to embed your ideas in a microfounded model can be a very useful exercise — not because the microfounded model is right, or even better than an ad hoc model, but because it forces you to think harder about your assumptions, and sometimes leads to clearer thinking. In fact, I’ve had that experience several times.

The argument is hardly convincing. If people put that enormous amount of time and energy that they do into constructing macroeconomic models, then they really have to be substantially contributing to our understanding and ability to explain and grasp real macroeconomic processes. If not, they should – after somehow perhaps being able to sharpen our thoughts – be thrown into the waste-paper-basket (something the father of macroeconomics, Keynes, used to do), and not as today, being allowed to overrun our economics journals and giving their authors celestial academic prestige.

Krugman’s explications on this issue is really interesting also because they shed light on a kind of inconsistency in his art of argumentation. During a couple of years Krugman has in more than one article criticized mainstream economics for using too much (bad) mathematics and axiomatics in their model-building endeavours. But when it comes to defending his own position on various issues he usually himself ultimately falls back on the same kind of models. In his End This Depression Now — just to take one example — Paul Krugman maintains that although he doesn’t buy “the assumptions about rationality and markets that are embodied in many modern theoretical models, my own included,” he still find them useful “as a way of thinking through some issues carefully.”

When it comes to methodology and assumptions, Krugman obviously has a lot in common with the kind of model-building he otherwise criticizes.

The same critique – that when it comes to defending his own position on various issues he usually himself ultimately falls back on the same kind of models that he otherwise criticize – can be directed against his new post. Krugman has said these things before, but I am still waiting for him to really explain HOW the silly assumptions behind IS-LM helps him work with the fundamental issues. If one can only use those assumptions with — as Krugman says, “tongue in cheek” – well, why then use them at all? Wouldn’t it be better to use more adequately realistic assumptions and be able to talk clear without any tongue in cheek?

I have noticed again and again, that on most macroeconomic policy issues I find myself in agreement with Krugman. To me that just shows that Krugman is right in spite of and not thanks to those neoclassical models — IS-LM included — he ultimately refers to. When he is discussing austerity measures, Ricardian equivalence or problems with the euro, he is actually not using those models, but rather (even) simpler and more adequate and relevant thought-constructions much more in the vein of Keynes.

The final court of appeal for macroeconomic models is the real world, and as long as no convincing justification is put forward for how the inferential bridging de facto is made, macroeconomic model building is little more than “hand waving” that give us rather little warrant for making inductive inferences from models to real world target systems. If substantive questions about the real world are being posed, it is the formalistic-mathematical representations utilized to analyze them that have to match reality, not the other way around. As Keynes has it:

Economics is a science of thinking in terms of models joined to the art of choosing models which are relevant to the contemporary world. It is compelled to be this, because, unlike the natural science, the material to which it is applied is, in too many respects, not homogeneous through time.

If macroeconomic models – no matter of what ilk – make assumptions, and we know that real people and markets cannot be expected to obey these assumptions, the warrants for supposing that conclusions or hypotheses of causally relevant mechanisms or regularities can be bridged, are obviously non-justifiable. Macroeconomic theorists – regardless of being New Monetarist, New Classical or ”New Keynesian” – ought to do some ontological reflection and heed Keynes’ warnings on using thought-models in economics:

The object of our analysis is, not to provide a machine, or method of blind manipulation, which will furnish an infallible answer, but to provide ourselves with an organized and orderly method of thinking out particular problems; and, after we have reached a provisional conclusion by isolating the complicating factors one by one, we then have to go back on ourselves and allow, as well as we can, for the probable interactions of the factors amongst themselves. This is the nature of economic thinking. Any other way of applying our formal principles of thought (without which, however, we shall be lost in the wood) will lead us into error.

For the n:th time organ-grinder Paul Krugman pretends it’s raining and calls upon a Keynes-Hicks-IS-LM-model — an oxymoron that really never existed. It’s deeply disappointing. You would expect more from a Nobel laureate.

So let me — respectfully — summarize: A gadget is just a gadget — and brilliantly silly simple models — IS-LM included — do not help us working with the fundamental issues of modern economies any more than brilliantly silly complicated models — calibrated DSGE and RBC models included.

Added March 29: Merijn Knibbe and Phil Pilkington have posts on the subject well worth reading.

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6 Comments

  1. As it happens, I was looking up Krugman’s debate with Steve Keen the other day. Is he always this disingenuous, to say the least, when engaging non neo-classicals?

    Lars, you chose pretty commendably to stay on the substance of the discussion in this post, but didn’t you find it a little extraordinary to read what Krugman presents as your argument, or rather the argument he guesses you made, since he’s a busy man and can’t be expected to read entire blog posts. Say:

    “I read Syll’s paean to Minsky, and I have no idea how he would answer any of these questions. What I suspect [!], however, is that he would talk about complexity and nuance, and then propose answers without basing them on any model at all – which would in fact mean engaging in implicit theorizing, and probably [!!] fairly crude implicit theorizing at that. You see that a lot among people who reject IS-LM as too simple and unsubtle: what they have ended up doing in practice, for the most part [!!!], is predicting soaring inflation and interest rates [!!!!], because whether they know it or not they have effectively reverted to crude quantity-theory and loanable-funds models.”

    Rather “gobsmacking”, as you sometimes say. Myself I thought of Borges’s description of “an argument one has to call sophistic, so as not to question the author’s intelligence, and naive, so as not to question his integrity.”

    • I totally agree. Gobsmacking indeed. Those “suspect” sentences are taken right out of the blue. If Krugman had been a little more careful in his reading, he would have found at least a couple of posts where I confront and criticize the quantity theory and loanable funds models. But I consciously wanted to focus on the essentials so I just left that part of his post [and his totally unsubstantiated tirade against American institutionalism (on which Pilkingtn has a nice riposte)] uncommented.

      • One last point, about Krugman calling Keynes “a pretty klutzy modeler.”

        This brought to mind a comment Philip Larkin made about critics writing about Hardy, which I’d paraphrase for this case as,
        “Not the least remarkable aspect of neoclassical criticism of Keynes is how its mediocre practitioners feel entitled to patronize him.”

  2. By calling Krugman, a guy who thinks like Post-Keynesian that over-leverage was a problem and wrote the most important piece on the liquidity trap after keynes, a neoclassical economist you already disqualified yourself.

    Funny that there is nothing about whether IS-LM matches the data or not in this post.

    Like the New Classicals you ignore empirics and just repeat your stupid theoretical points about ergodicity, uncertainty and whatever ad infinitum. In the meantime the oh-so-evil Keynesians with question marks like Krugman or me actually give a shit about what is happening in the real world. And no matter how long you will pretend that you and your fellows are the only proper Keynesian, I will never put quotation marks about Post-Keynesians. You know why? Because underneath all your pointless classical bashing and politically nonsensical fellow-Keynesian bashing there are actually some great economic ideas and at least to me this is all that matters.

  3. Very well put.

  4. […] saving-liquidity money), a model that has been a mainstay of macroeconomic theory for decades. Syll dismissed IS-LM as a “brilliantly silly gadget.” Krugman defended it as “a simplification of […]


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