Krugman’s dangerous lack of methodological reflection

9 July, 2016 at 13:37 | Posted in Economics | 11 Comments

How do we do useful economics?

This is an important question that every earnest economist ought to pose — and try to answer.

Here’s one answer, from Nobel laureate Paul Krugman:

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.

For everyone who knows at least a little of contemporary economics, it’s pretty obvious that this is actually not very different from the way economics is supposed to be advancing according to the New Classical school in Chicago. And just as Chicago boys like Lucas and Sargent, Krugman doesn’t give the slightest hint on when (and how) the the gap between the ‘idealized’ models with their unreal assumptions of perfectly rational individuals and markets gets so big that the models become useless nonsense.

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One of the most important things that Krugman and other mainstream neoclassical economists trivialize, or do not want to admit, is the ubiquity of genuine uncertainty. And this is, of course, not by chance. The more uncertainty there is in the economy, the less possibilities are there for any ‘maximization’ going on in any ‘stable equilibria’!

Krugman’s view should come as no surprise for those who took part of Krugman’s response to my critique of IS-LM. 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.

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, and not as today, being allowed to overrun our economics journals and giving their authors celestial academic prestige.

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.

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 methodological reflection and heed Keynes’ warnings on using thought-models in economics:

The+General+Theory+of+Employment,+Interest,+and+MoneyThe 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.

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  1. “Useful economics” awakens me from my dogmatic slumber:
    http://thorntonhalldesign.com/philosophy/2014/5/8/change-your-mind-and-see-what-was-always-there
    “A classic”-Bruce Wilder

    The head of the Philosophy Department at Duke says something very similar:
    http://thorntonhalldesign.com/philosophy/2014/7/1/credentialed-person-repeats-my-critique-of-krugman

  2. […] of this so I hope you will bear with me. Coincidentally, as I was writing this piece I came across some similar ideas some similar ideas published a few hours earlier than this post which helped to crystallize some of […]

  3. Enough! Economists, retire now!
    Comment on Lars Syll on ‘Krugman’s dangerous lack of methodological reflection’
    .
    (i) There is Orthodoxy with microfoundations and it has been nicely defined by Krugman: “… most of what I and many others do is sorta-kinda neoclassical because it takes the maximization-and-equilibrium world as a starting point.” #1
    .
    (ii) Methodologically, these premises are forever unacceptable. #2
    .
    (iii) When the premises/axioms/foundational propositions are false or contain nonentities the WHOLE theory/model/superstructure is false. Because of this, there is NO need to check the theoretical superstructure or the policy conclusions of Neoclassics in great detail.
    .
    (iv) Hydra Rule: It is not only a waste of time to fight the countless heads of the beast and to decapitate them one by one but de facto counterproductive. #3 The only effective method of refutation is to go directly to the heart of the matter, i.e. to the axioms.
    .
    (v) Neoclassical policy proposals have NO sound theoretical foundations. However, because many details/add-ons/illustrations of a longer and mixed argument are accurate, commonsensical, tautological, approximately true on a small/micro scale, credible, or part of the unquestioned social belief system, the general public cannot see that there is a TOTAL DISCONNECT between an economic policy proposal and the underlying theory. Just as there is a total disconnect between poultry entrails and the utterances of the haruspex which guided ancient Roman policy. #4
    .
    (vi) The Disconnect Generalization: ALL economic policy arguments of Walrasians, Keynesians, Marxians, and Austrians are hanging in midair and are scientifically unfounded.
    .
    (vii) The only general statement that can be made with certainty about human behavior is that it is target-oriented. Targets, though, are dependent on expectations. Expectations in turn are almost instantaneously adaptable, only loosely connected to objective reality, emotionally inflated, and subject to sudden changes which are transmitted with high speed between individuals. Because of ONTOLOGICAL UNCERTAINTY of expectations and by implication targets there can be NO such thing as a behavioral axiom. Axioms must be certain, or as Aristotle put it, certain, true, and primary.
    .
    (viii) Because human behavior cannot be axiomatized, the microfoundations program has already been dead in the cradle 140 years ago.
    .
    (ix) Keynes started the macrofoundations research program in the General Theory formally as follows: “Income = value of output = consumption + investment. Saving = income – consumption. Therefore saving = investment.” These formal foundations are conceptually and logically defective because Keynes never came to grips with profit (2011; 2012).
    .
    (x) Because of this, the macrofoundations approach (including After-Keynesianism, Post Keynesianism, New Keynesianism, and all I=S/IS-LM models) has already been dead in the cradle 85 years ago.
    .
    Review of the Troops. Provably false
    • profit theory, since more than 200 years,
    • microfoundations, since 140 years,
    • macrofoundations, since 85 years,
    • application of elementary (2012) and high powered mathematical tools, since 100 years. #5
    .
    ALL models that contain maximization-and-equilibrium or I=S/IS-LM are a priori false and this is more than 90 percent of the content of peer-reviewed economic quality journals and 100 percent of textbooks of renowned authors.
    .
    (xi) No more proof of scientific incompetence is needed. Remains only one question for society: how to get rid of the ‘throng of superfluous economists’. #6
    .
    Egmont Kakarot-Handtke
    .
    References
    Kakarot-Handtke, E. (2011). Why Post Keynesianism is Not Yet a Science. SSRN
    Working Paper Series, 1966438: 1–20. URL http://ssrn.com/abstract=1966438.
    Kakarot-Handtke, E. (2012). The Common Error of Common Sense: An Essential
    Rectification of the Accounting Approach. SSRN Working Paper Series, 2124415:
    1–23. URL http://ssrn.com/abstract=2124415.
    .
    #1 More detailed, the starting point is given with these axioms: “HC1 economic
    agents have preferences over outcomes; HC2 agents individually optimize subject
    to constraints; HC3 agent choice is manifest in interrelated markets; HC4 agents
    have full relevant knowledge; HC5 observable outcomes are coordinated, and must
    be discussed with reference to equilibrium states.” (Weintraub, 1985)
    #2 For details and proofs see blog and working papers http://axecorg.blogspot.de/,
    http://papers.ssrn.com/sol3/cf_dev/AbsByAuth.cfm?per_id=1210665
    #3 See Wikipedia Lernaean Hydra https://en.wikipedia.org/wiki/Lernaean_Hydra
    #4 See Wikipedia https://en.wikipedia.org/wiki/Haruspex
    #5 For the REAL mathiness problem see Jonathan Barzilai, Scientific Metrics, Open
    Letter to the President of the American Economic Association and papers
    http://scientificmetrics.com/publications.html
    #6 Joan Robinson

  4. I thought you might find this to be of some interest: https://citizenrat.wordpress.com/

  5. All we need to do is to discover how it REALLY works and my book can help you achieve this.

  6. The more uncertainty there is in the economy, the less possibilities are there for any ‘maximization’ going on in any ‘stable equilibria’! “
    .
    I am not sure I would concede that uncertainty is a useful quantitative variable. Uncertainty is not like heat; we cannot stick a thermometer into some orifice of the economy, take its temperature and then decide whether “maximization-and-equilibrium as a first cut with a variety of ad hoc modifications reflecting what seem to be empirical regularities ” will work today.
    .
    Uncertainty is pervasive, an inherent aspect of our ability to know things, because to learn something, to discover something, to know something is necessarily to be wholly ignorant of much else by contrast. And, our ability to cooperate in the organization of the economy is conditioned on that necessary combination: knowledge and uncertainty, the latter always the context for the former. You never get a signal without the noise; information is the result of having sufficient knowledge to distinguish the signal from the noise. Knowledge and uncertainty are foundational to the organization of human society as a political economy; uncertainty has implications for the ontology of political economy.
    .
    We really ought to ask whether Krugman’s “maximization-and-equilibrium” modeling idea accurately reflects the essential being of the political economy. Economists should be asking themselves always, “what is the nature of the political economy?” This is not, strictly speaking, a matter of methodology or methodological reflection; this question is logically before method — the struggle to answer it is the reason for critical method. Critical method enters when we ask, “is this true?” after we have ventured a guess.
    .
    The earth seems basically flat; is it truly flat? Is “flat” a property of its essential nature and being? We can see the hills, of course, but when we come to a body of liquid water, we see, ignoring the waves, what seems at first glance to be a plane surface. Is that the nature of the earth? Krugman’s unreflective method is like a man doing armchair geodesy modeling the earth as basically flat, but then adding in hills and mountains and ocean waves as a variety of ad hoc modifications reflecting casual observation.
    .
    We ought to ask whether the political economy is a system seeking stasis. Krugman’s unreflective method presumes that it is. But, we should ask, “is it true?” Is the political economy in the nature of its being a social and technical system seeking stasis?
    .
    It is easy to see why people, seeing a carpenter using a level, might imagine, “as a first cut”, that the earth was basically flat. And, in the same way, we might see a businessman calculating his profit, and imagine the economy as a system of agents individually maximizing profit and, in conflict and competition with one another, arriving at a kind of equilibrium. But, we should ask whether that guess as to the big picture is true. When we want to navigate great distances or even build large enough buildings, we find out quickly enough that the earth is not flat.
    .
    For some inexplicable reason, macro economists like Krugman, charged with the task of assessing the big picture, so to speak, somehow never notice that the earth is not flat, that the political economy is not, in fact, a system of markets seeking a general equilibrium in price driven by profit-maximizing agents.
    .
    Uncertainty, and denial of uncertainty, are at the core of this puzzling failure to see that “the true shape of the earth” is spherical, that the economy is not, in fact, a system of markets seeking general equilibrium.
    .
    I wrote this long disquisition — long for a blog comment certainly — because I think it bears emphasizing that uncertainty shapes the nature of the political economy as a system. Too often, uncertainty is invoked simply as a reason for intellectual humility, or at least that’s how many short essays on uncertainty in the economy tend to read. The arrogance of Krugman’s solipsistic approach makes humility seem to be at least one of the issues. The deep issue, though, is or ought to be the nature of the economy.
    .
    Uncertainty does relate to the curious absence of critical method. You cannot, as far as I can tell, make pervasive uncertainty an axiom and still get deductive methods to calculate definite results. In that sense, pervasive uncertainty threatens to break the whole analytic system of Samuelson’s economics. But, that’s not the point, I wish to make, either.
    .
    Everyone in the economy — not just the economists — have to cope with pervasive uncertainty and adapt to it as an ever-present aspect of reality. Uncertainty is to the denizens of political economy as water may be to a fish.
    .
    The political economy is institutionally adapted to uncertainty — this is what we need to notice. If the economists cannot make Samuelson’s system work under uncertainty as a theory, the rest of us should hardly be presumed to be making it work miraculously as an institutional machinery of actual political economy.
    .
    Uncertainty is not something the humble economist should bolt on with his other qualifications and equivocations. It is something he should notice everywhere, as a manifestation of the nature of the economy, an aspect of the political economy’s being. And, when one does that, one may begin to notice that the actual political economy does not consist of a system of markets, nor do firms inhabit stasis. Increasing returns are common, as would make sense in a world of knowledge and uncertainty, where people can and do learn and where the principal problem of business management is the control of production processes to reduce or contain waste and error.
    .
    Krugman is wrong to take “maximization-and-equilibrium” as a first cut, because the economy is not like that, is not a system of markets seeking a general equilibrium in price. He’s wrong on the ontology of political economy as well as stubbornly ignorant of method.

  7. Prof. Syll is working on a project to develop a very highly advanced theoretical philosophical methodology for economics. This is a top secret project, so there are zero progress reports. All that is known is that the ambition is the economic analogue of warm temperature nuclear fusion, or maybe a new extra-terrestrial energy.
    Such technologies may well become possible in the distant future in a parallel universe, in science fiction, in dreamland, or in cloud-cuckoo land.

    Back here on primitive terra firma, the technologies of economists today do not even have steam power, the internal combustion engine or nuclear fission.
    However, we have progressed far beyond the stone age. We do have Krugman’s donkey. This is very slow and stubborn. But sometimes it provides an efficient, albeit limited, source of power and transport. There are also yaks, camels, oxen and other types of animal power. These used today by skillful real-world economists who are not distracted by fantasies.

    • Kingsley Lewis
      .
      Your positioning of Krugman’s approach is false. Krugman is NOT on the right way and at an early stage of an development that will eventually lead to success. Krugman is definitively at the dead end of the wrong way. So he is not comparable to a precursor like Tycho Brahe* but to Ptolemy** the iconic representative of Geo-centrism. Geo-centrism was refuted by Copernicus, Kepler, Galileo, Newton in the course of the scientific revolution and fully REPLACED by Helio-centrism.
      .
      So, Krugman is the representative of an approach that will vanish from the corpus of accepted scientific thruths without a trace.
      .
      The actual situation and the alternative futures of economics are summarized in this Wikimedia-chart:

      .
      (i) Neoclassical economics is dead but not buried (squares D and G).
      (ii) Most heterodox economists are on square E (traditional Heterodoxy) and have the choice between E-C, E-F, and E-I.
      (ii) I am on square B (constructive Heterodoxy).
      (iii) Some heterodox economists are on square H (nihilistic Heterodoxy) and they are going to nowhere.
      .
      The two wrong ways are E-F (toward the pluralism of false/inconclusive theories) and E-I (toward the weaponizing/capturing/politicizing of economics).
      .
      Like you, I see Lars Syll in squares H/E but you in squares G/D. In brief, Orthodoxy/Krugman/Lewis is at the ultimate end of a cul-de-sac. Compared to this, Lars Syll’s position is a progress. All depends on where he goes from there. Krugman, in marked contrast, is locked and will not go to anywhere. Your positioning of Krugman as hopeful and modestly successful precursor of scientific truth is indefensible.
      .
      Egmont Kakarot-Handtke
      .
      * See https://en.wikipedia.org/wiki/Tycho_Brahe
      ** See https://en.wikipedia.org/wiki/Ptolemy

    • Ah, you are being sarcastic? amirite?
      .
      It is sometimes asserted by the defenders of mainstream neoclassical economics, that something beats nothing, that even a wrong theory is better, somehow, than no theory at all. “What’s your alternative, smart guy?” is the attitude, even while ignoring the alternative of admitting ignorance.
      .
      Critical method, that child of the Enlightenment, is not a super secret project. On the contrary, it is founded on the notion that public discussion in the college of science, arbitrated by a common apprehension of logic and a willingness to yield to the testimony of objective measurement, can add to the commonwealth of shared understanding and knowledge. Not by affirming an elite’s proprietary hold on esoteric doctrine and conventional wisdom, but by searching out fundamental propositions in a process of elimination. Elimination by testing logic and evidence. There is no alternative in this project to the core willingness to abandon a doctrine when it has been proven wrong.
      .
      Method is how we go about answering the key question, is this true? Not just subjectively true, but objectively true, because this is a social, discursive project.
      .
      Krugman’s transparency, which is a testament to an admirable degree of personal integrity, reveals two problems. One is solipsism. The other is an unwillingness to simply admit that a favored idea has been disproven and must be abandoned, whether any alternative to “I do not know” is on offer or not.

  8. Nice analysis and chart
    But it is spoiled by:
    – lack of any clear description for the “True” A-B-C path
    – lack of evidence for your claim that you are the only person on this path.

  9. From the Keynes quote above:

    “….. 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.”

    To me this sounds like what Krugman was saying in his post linked above about the usefulness of models in general (not specifically ISLM).

    I do think Lars pushes the models are bad/useless argument to hard and too fast. Most of his criticisms are fair enough. However, I can see that models can contribute to some degree to clarifying theoretical issues, albeit under tight unrealistic conditions. Of course extending the use of abstract models to policy formation can be a dangerous practice. And of course far too much emphasis is placed on model making in academic circles. The study of economic history should be equally emphasized.


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