Krugman’s gadget interpretation of economics

25 Apr, 2014 at 17:30 | Posted in Economics | 5 Comments

gadget-freak_logo (Kopie)

 

 

 

Commenting on the critique put forward by yours truly and a couple of other heterodox economists re Piketty and the neoclassical concept of capital, Paul Krugman today writes on his blog:

You fairly often find heterodox economists insisting that to accept the idea that capital and labor are paid their marginal products, even as a working hypothesis to be modified when you address things like executive pay, is to accept that high inequality is morally justified. But that’s obviously not the case: there are plenty of economists who are willing to use marginal-product models (as gadgets, not as fundamental truth) who don’t at all accept the sanctity of the market distribution of income. So this complaint is, in its own way, as much of a distortion as the right-wing claim that anyone who so much as mentions inequality is a Marxist.

Besides, again, not really trying to clinch the deep theoretical issue at stake, Krugman for the n:th time puts forward his gadget interpretation of economics.

Krugman’s argumentation illustrates well an idea of science advancing through the use of successive approximations.  Start with simple gadget models and then successively approximate reality to get at the “fundamental truth.” But is this really a feasible methodology?

All empirical sciences use simplifying or unrealistic assumptions in their modeling activities. That is not the issue – as long as the assumptions made are not unrealistic in the wrong way or for the wrong reasons.

Theories are difficult to directly confront with reality. Economists therefore build models of their theories. Those models are representations that are directly examined and manipulated to indirectly say something about the target systems. But models do not only face theory. They also have to look to the world.

Being able to model a “gadget world” — a world that somehow could be considered real or similar to the real world — is not the same as investigating the real world. Even though all theories are false, since they simplify, they may still possibly serve our pursuit of truth. But then they cannot be unrealistic or false in any way. The falsehood or unrealisticness has to be qualified.

Explanation, understanding and prediction of real world phenomena, relations and mechanisms  cannot be grounded (solely) on a gadget analysis . Some of the standard assumptions made in neoclassical economic theory – on rationality, information handling and types of uncertainty – are not possible to make more realistic by de-idealization or successive approximations without altering the theory and its models fundamentally. If we cannot show that the mechanisms or causes we isolate and handle in our models are stable, in the sense that what when we export them from our gadget models to our target systems they do not change from one situation to another, then they only hold under ceteris paribus conditions and a fortiori are of limited value for our understanding, explanation and prediction of our real world target system.

The obvious ontological shortcoming of a basically epistemic — rather than ontological — approach such as “successive approximations” is that similarity or resemblance tout court do not guarantee that the correspondence between model and target is interesting, relevant, revealing or somehow adequate in terms of mechanisms, causal powers, capacities or tendencies. No matter how many convoluted refinements of concepts made in the gadget model, if the “successive approximations” do not result in models similar to reality in the appropriate respects (such as structure, isomorphism etc), the surrogate gadget system becomes a substitute system that does not bridge to the world, but rather misses its target.

So — constructing gadgets like “minimal” or “IS-LM” macroeconomic models as “stylized facts” somehow “successively approximating” macroeconomic reality, is a rather unimpressive attempt at legitimizing using fictitious idealizations for reasons more to do with model tractability than with a genuine interest of understanding and explaining features of real economies. Many of the model assumptions standardly made by neoclassical macroeconomics are restrictive rather than harmless and could a fortiori anyway not in any sensible meaning be considered approximations at all.

Where does all this leave us? Well, I for one, is not the least impressed by Krugman’s gadget interpretation of economics. Krugman — still — hasn’t come up with a tenable explanation to why mainstream economics goes on as if the capital controversy has never occurred, or why he and other leading neoclassical economists — still — treat  ‘capital’ as if it was a well-defined and consistent concept — which it is not, as admitted by Samuelson et consortes almost fifty years ago.

Added 19:00 GMT: For those who need a refresher on the capital debates, Matias Vernengo has a short, accessible, and informative introduction here.

5 Comments

  1. Excellent post! Did you receive my recent Email asking you to sign up as an initial supporter of the international student manifesto for pluralism in economics, due to be released in 10 days? It would be a great help to have you on board.

    Best wishes,

    Severin

  2. Krugman’s insistence on this “gadget interpretation of economics” and his apparent unwillingness to see the point (or sometimes even to read) its critics tempts one to write an automated “Krugman Response to Heterodox Economists” generator of blog posts. After all, his actual ones in this vein tend to make the same points, none of which engage with the actual critique, and most of whose arguments seem to be derived from prejudices about non-neoclassical economics (airy-fairy verbal arguments about institutions, society, and the universe, etc.) absorbed during the late 80s and 90s.
    Anyway, I imagine that replying to these may feel rather Sisyphean by now, Lars, so many thanks for keeping at it.

  3. Are you really too stupid to understand Krugman? His point is that a simple model that roughly matches the facts is better than no model at all.
    Of course you can prove me wrong and show a model / mechanism which is superior to an aggregate production function or IS-LM. But we all know that you have none. All your ramblings about ergodicity and the capital controversy are nihilistic. It is absolutely important to be aware of shortcomings of a model. But this does not imply that you should ditch it. You should be aware of its disadvantages and once you have a superior model you can discard the old one.

    As nobody has done this ever since Hicks published his seminal paper nearly 80 years ago good old IS-LM will persist despite of the ramblings of heterodox economist. Of course there has been ample of good theoretical work in macro, my favourite one being Stiglitz and Greenwald’s models that create a business cycle out of asymmetric information and the ensuing incentive problems in financial markets. But, guess what, their models can be condensed into standard IS-LM.
    In other words, IS-LM can be used as a shortcut for more complex models that include market failures that potentially cause the existence and persistence of underemployment equilibria.

    So yeah, you still don’t understand Krugman. Probably because you have no idea about what you are actually talking. There is good work out there by macroeconomist of all colour but of course we all know that you only read the work of folks that belong to your “club” whereas I e.g. don’t care whether it is Minsky or Koo, Krugman or Stiglitz, a heterodox or a neoclassical who wrote something of relevance. The price of dogmatism.

  4. I think a better question is to ask the following: is the social function of gadget models for (however crudely) “[approximating] reality to get at the ‘fundamental truth'” or to justify the current set of property relations? Unfortunately, the tenancy seems to be that the whole economics enterprise (especially the undergraduate curriculum) is the latter, rather than the former.


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