Krugman on models (II)

6 January, 2016 at 11:55 | Posted in Economics | 2 Comments

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Last year Alex Rosenberg — chair of the philosophy department at Duke University and renowned economic methodologist — had an interesting article on What’s Wrong with Paul Krugman’s Philosophy of Economics in 3:AM Magazine:

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 …

So even if the core assumptions in mainstream economics — in this case equilibrium and maximization — are false, we can always ‘save’ our pet model by shrinking the domain of applicability and turn up with a more restricted model that — lo and behold — is true. People are perfectly rational and act on perfect markets given that

In the case of Krugman the usual neoclassical macroeconomics works just fine in general, but in the special case when it doesn’t — at the zero lower bound — we have to turn to ‘Keynesian’ macroeconomics. Very handy flexibility indeed! And what a lovely way to immunize the prefered modeling framework and not having to even consider the possibility of alternative (heterodox) theories and models …

When the given that becomes a very large set, shrinking the domain of applicability, one may, of course, wonder what is the point of having theories and modeling things at all.

With ever more spatio-temporal auxiliary assumptions, the information that the model-derived theorems contain approaches zero.

Models and theorems that do not provide information are useless. The enterprise of constructing ever more of that kind of thought experiments is, as Chomsky has it, ‘totally rotten at the core.’

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  1. Axiomatized nonentities and the failure of methodologists
    Comment on ‘Krugman on models (II)’
    .
    In the Middle Ages savants were heavily occupied with questions like had Adam a navel? or how many angels can dance on the head of a pin? Methodologically economics is roughly at the same stage. Since more than 100 years economists are senselessly employed with the nonentities equilibrium and constrained optimization.
    .
    As loudspeaker of the profession, Krugman recently confirmed on his blog “most of what I and many others do is sorta-kinda neoclassical because it takes the maximization-and-equilibrium world as a starting point …”.
    .
    This starting point has been properly codified as axiom set “The [neo-Walrasian] program is organized around the following hard core propositions:

    HC1. There exist economic agents.

    HC2. Agents have preferences over outcomes.

    HC3. Agents independently optimize subject to constraints.

    HC4. Choices are made in interrelated markets.

    HC5. Agents have full relevant knowledge.

    HC6. Observable economic outcomes are coordinated, so they must be discussed with reference to equilibrium states.” (Weintraub, 1985, p. 109)
    .
    The fact of the matter is that there is no such thing as an equilibrium in the economy. Methodologically, HC6 is what is known since antiquity as petitio principii. This is a quite primitive methodological blunder. In 1990 equilibrium has been declared dead and the historians of economic thought ‘have finally hammered down the nails in this coffin’ (Blaug, 2001, p. 160).
    .
    Clearly, when one axioms fails the whole formal basis breaks apart and with it the whole theoretical superstructure.
    .
    There is no other way out of the calamity than to reconstruct economics without the concept of equilibrium. In methodology this is called a paradigm shift “There is another alternative: to formulate a completely new research program and conceptual approach. As we have seen, this is often spoken of, but there is still no indication of what it might mean.” (Ingrao et al., 1990, p. 362)
    .
    Obviously, there is until this very day ‘no indication of what it might mean’ to do economics without the nonentity equilibrium and the green cheese behavioral assumptions of constrained optimization and rational expectations.
    .
    The problem is not at all located where Krugman erroneously assumes: “The trouble is that the macroeconomic evidence can’t tell us when and where maximization-and-equilibrium goes wrong, …” (See intro). The point is that these assumptions are not admissible in the first place. To admit nonentities to the set of economic axioms is even more bloodcurdling than to admit the Easter Bunny to the founding fathers of the United States.
    .
    A competent methodologist recognizes a petitio principii or a fallacy of composition or a nonentity when he sees one. And Popper did so “Now the rationality principle, which in the social sciences plays a role somewhat analogous to the universal laws of the natural sciences, is false, and if in addition the situational models are also false, then both the constituent elements of social theory are false.” (Popper, 1994, p. 173)
    .
    For the competent methodologist there is only one logical consequence: he has to see to it that no economics paper that applies the rationality principle, constrained optimization or equilibrium is accepted in the peer review process or else he compromises the integrity of science which he is supposed to protect.
    .
    How Popper could throw away his own methodology and praise utility maximizing economics on another occasion (1994, p. 154) is a question worthy of the further scrutiny of Alex Rosenberg who correctly assessed the cognitive status of economics.
    .
    “Economics is a perplexing subject. Though I have spent the better part of my academic career thinking about its aims and methods, I have never been confident that I or anyone else for that matter really understand its cognitive status. … Without assurance about the cognitive status of the theory, there is no basis of confidence in it.” (Rosenberg, 1994, pp. 216-217)
    .
    That Krugman as sorta-kinda maximization-and-equilibrium guy is still accepted as scientist is scary enough but that the majority of economic methodologists lets this happen without much comment is the ultimate proof of professional implosion.
    .
    Egmont Kakarot-Handtke
    .
    References
    Blaug, M. (2001). No History of Ideas, Please, We’re Economists. Journal of
    Economic Perspectives, 15(1): 145–164.
    Ingrao, B., and Israel, G. (1990). The Invisible Hand. Economic Equilibrium in the
    History of Science. Cambridge, MA, London: MIT Press.
    Popper, K. R. (1994). The Myth of the Framework. In Defence of Science and
    Rationality. London, New York, NY: Routledge.
    Rosenberg, A. (1994). What is the Cognitive Status of Economic Theory? In R. E.
    Backhouse (Ed.), New Directions in Economic Methodology, pages 216–235.
    London, New York, NY: Routledge.
    Weintraub, E. R. (1985). General Equilibrium Analysis. Cambridge, London, New
    York, NY, etc.: Cambridge University Press.

  2. Chomsky basically sums up the problem I have with modern economics: Too much abstraction.

    There is a lot of talk going around now that says the subject has become more ’empirical’. However a lot of this is numerical data driven which runs large amounts of such data through computers. The most interesting evidence however is not of this type – such as unquantifiable data – and this is ignored.


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