Paul Krugman — a case of dangerous neglect of methodological reflection

29 juni, 2014 kl. 18:31 | Publicerat i Theory of Science & Methodology | 9 kommentarer

rosenbergAlex Rosenberg — chair of the philosophy department at Duke University, renowned economic methodologist and author of Economics — Mathematical Politics or Science of Diminshing Returns? — had an interesting article on What’s Wrong with Paul Krugman’s Philosophy of Economics in 3:AM Magazine the other day. Writes Rosenberg:

Krugman writes: ‘So how do you do useful economics? In general, what we really do is combine maximization-and-equilibrium as a first cut with a variety of ad hoc modifications reflecting what seem to be empirical regularities about how both individual behavior and markets depart from this idealized case.’

But if you ask the New Classical economists, they’ll say, this is exactly what we do—combine maximizing-and-equilibrium with empirical regularities. And they’d go on to say it’s because Krugman’s Keynesian models don’t do this or don’t do enough of it, they are not “useful” for prediction or explanation.

When he accepts maximizing and equilibrium as the (only?) way useful economics is done Krugman makes a concession so great it threatens to undercut the rest of his arguments against New Classical economics:

‘Specifically: we have a body of economic theory built around the assumptions of perfectly rational behavior and perfectly functioning markets. Any economist with a grain of sense — which is to say, maybe half the profession? — knows that this is very much an abstraction, to be modified whenever the evidence suggests that it’s going wrong. But nobody has come up with general rules for making such modifications.’

The trouble is that the macroeconomic evidence can’t tell us when and where maximization-and-equilibrium goes wrong, and there seems no immediate prospect for improving the assumptions of perfect rationality and perfect markets from behavioral economics, neuroeconomics, experimental economics, evolutionary economics, game theory, etc.

But these concessions are all the New Classical economists need to defend themselves against Krugman. After all, he seems to admit there is no alternative to maximization and equilibrium …

One thing that’s missing from Krugman’s treatment of economics is the explicit recognition of what Keynes and before him Frank Knight, emphasized: the persistent presence of enormous uncertainty in the economy … Why is uncertainty so important? Because the more of it there is in the economy the less scope for successful maximizing and the more unstable are the equilibria the economy exhibits, if it exhibits any at all …

There is a second feature of the economy that Krugman’s useful economics needs to reckon with, one that Keynes and after him George Soros, emphasized. Along with uncertainty, the economy exhibits pervasive reflexivity: expectations about the economic future tend to actually shift that future …

When combined uncertainty and reflexivity together greatly limit the power of maximizing and equilibrium to do predictively useful economics. Reflexive relations between future expectations and outcomes are constantly breaking down at times and in ways about which there is complete uncertainty.

I think Rosenberg is on to something important here regarding Krugman’s neglect of methodological reflection.

When Krugman earlier this year responded to my critique of IS-LM this hardly came as a surprise.  As Rosenberg notes, Krugman works with a very simple modelling dichotomy — either models are complex or they are simple. 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 — so, of course, to Krugman simpler models are always preferred.

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.

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. And as Rosenberg rightly notices:

When he accepts maximizing and equilibrium as the (only?) way useful economics is done Krugman makes a concession so great it threatens to undercut the rest of his arguments against New Classical economics.

9 kommentarer

  1. McCloskey review of his book remains a gem in how to put somebody right!

  2. Utter nonsense. One can accuse Krugman of many things, e.g. that he is a Clintonite liberal who is not critical enough of Democratic administrations. But he is anything but a dogmatic neoclassical economist and a fairly pragmatic guy. Most of your quotes are fairly old and do not represent how Krugman is currently thinking about macro.

    Take ”Debt, Deleveraging, and the Liquidity Trap: A Fisher-Minsky-Koo Approach”. There are two Post-Keynesians appearing in the title and while the paper is methodologically indeed classical Krugman has definitely learned his lesson from the best Post-Keynesian authors (if I wanted to be polemical I would call him a closet Post-Keynesian), namely that debt matters.

    So yeah, you are misrepresenting Krugman and totally missing that he agrees with you on vital issues. And about IS-LM, you still have not come up with a superior simple model that is suitable for laymen and undergraduates (and no, nobody in the world literally believes IS-LM).

  3. sorry Wonky but Minsky is NOT a post Keynesian. Minsky is, as john King, has demonstrated in his book on the history of post Keynesian economics, mainly a New Keynesian –similar to Paul Krugman!!

    further more I convinced John Hicks that the ISLM had nothing to do with Keynes’s general theory — and he agreed and published an article entitled ”ISLM: AN ECXPLANATION” in the Journal of Post Keynesian Economics where Hicks renounced ISLM as not being Keynes’s theory and instead agreed that economics is a nonergodic (uncertainty) science.

  4. ”sorry Wonky but Minsky is NOT a post Keynesian”

    Yeah, of course only the stuff you ramble on about (which is utterly irrelevant, non-ergodicity means that the future is unknowable which makes the concept unscientific) is Post Keynesian and of course only you can define who is a post Keynesian and not. ^^

    What Post-Keynesians have contributed to our actual understanding of macro are their views on debt and more general SFC. Most folks who predicted the financial crisis, e.g. Roubini, basically did a sectorial flow of funds analysis. And whether you like it or not, at least in this one paper Krugman was influenced by the best Post Keynesian writers.

    Now you can go on claiming that economists like Minsky and Koo are New Keynesians and make even more of a fool of yourself.

    • Just who is the fool here? The future being nonergodic and therefore not statistically knowable given existing data — does not make economics unscientific.

      For the definition of science is to explain . Prediction is not a requirement for science. For example, Darwin’s theory of evolution explains the development of species but it does not, and cannot predict, the next species after homo sapiens to come in the future.

      Or Wonky,are you willing to say Darwin’s theory is not science?

      by the way, Hy Minsky always insisted he was not a Post Keynesian. He did not believe that Keynes’s aggregate supply [Z] function and aggregate demand function was the correct framework for macroeconomic theory?? So it is not me — but Minksy himself who insisted he was not a Post Keynesian.

      I and Sidney Weintraub, who founded the Journal of Post Keynesian Economics in the 1970s, insisted that Post Keynesians must adopt the theoretical framework of two aggregate functions [the Z function and the D function] described by Keynes in his GENERAL THEORY — We explained why the one aggregate demand function approach of Samuelson was not Keynes — for Samuelson was claiming that Keynes’ theory was simply Walrasian theory with fixity of wages and prices!!

      Samuelson never read chapter 19 of THE GENERAL THEORY entitled ”Changes in Money Wages” where Keynes demonstrates in his Z Vs. D analysis that flexible wages and prices will not restore full employment automatically in his market oriented, money using theoretical system.

    • by the way Wonky if you look on page 117 of my 2002 book FINANCIAL MARKETS, MONEY AND THE REAL WORLD you will see I specifically indicated that with the growth of nonbank financial intermediaries [ i.e., the shadow banking system] the regulators was setting up the economy for a
      ”significant expansion of debt obligations on the part of debtor households and enterprises. This suggests that a sudden switch by many [saving] households to a fast exit strategy at a future date could cause a horrific liquidity problem.”.

      so although I did not predict when the financial crisis of 2007 would occur –after all this statement of mine was published in 2002 and actually written earlier- I think I was earlier than Roubini in seeing the possibility!

  5. Is it too much to expect a professional philosopher to write down an internally consistent argument? Apparently yes – on one hand, Rosenberg criticizes Krugman because his methodology is supposedly too weak to be able to dismiss New Classical theories. This is rather absurd criticism (healthy science advances when you criticize opposing theories on the basis of constructive theoretical and empirical evidence instead of methodological meta-debates), but never mind. The problem is, of course, that Rosenberg’s own conclusion (economics should be ”a largely retrospective, historical science”) does the same thing. In such case, one cannot dismiss New Classical theories either, since they may well explain at least some of historical (or perhaps future) events too, ”to be right for one period and wrong for another.”

  6. This guy, quite obviously a philosopher and not an economist, quotes Keynes with stuff like ”Economics is a science of thinking in terms of models joined to the art of choosing models which are relevant to the contemporary world.” and pretends that Krugman thinks otherwise. No idea how even a superficial reader of Krugman’s blog can come to such a conclusion.
    Krugman uses models pragmatically and always mentions for what they can be used and for what not.

  7. ”Along with uncertainty, the economy exhibits pervasive reflexivity: expectations about the economic future tend to actually shift that future …”

    It’s a real shame that stuff like this is considered relevant criticism towards the mainstream. Almost all macroeconomic models I am aware of subscribes to this feature: Expectations about the future tend not only to change actions in the present, but also outcomes in the future.

    It would be useful if all these ”methodologists” actually read the literature they are supposed to criticise instead of cherry-picking early attempts from the 80s when the literature was in its infancy.

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