Why Krugman and Stiglitz are no real alternatives to mainstream economics

17 Nov, 2017 at 20:38 | Posted in Economics | 8 Comments

verso_978-1-781683026_never_let_a_serious_crisis__pb_edition__large_300_cmyk-dc185356d27351d710223aefe6ffad0cLittle in the discipline has changed in the wake of the crisis. Mirowski thinks that this is at least in part a result of the impotence of the loyal opposition — those economists such as Joseph Stiglitz or Paul Krugman who attempt to oppose the more viciously neoliberal articulations of economic theory from within the camp of neoclassical economics. Though Krugman and Stiglitz have attacked concepts like the efficient markets hypothesis … Mirowski argues that their attempt to do so while retaining the basic theoretical architecture of neoclassicism has rendered them doubly ineffective.

First, their adoption of the battery of assumptions that accompany most neoclassical theorizing — about representative agents, treating information like any other commodity, and so on — make it nearly impossible to conclusively rebut arguments like the efficient markets hypothesis. Instead, they end up tinkering with it, introducing a nuance here or a qualification there … Stiglitz’s and Krugman’s arguments, while receiving circulation through the popular press, utterly fail to transform the discipline.

Paul Heideman

Despite all their radical rhetoric, Krugman and Stiglitz are — where it really counts — nothing but die-hard mainstream neoclassical economists. Just like Milton Friedman, Robert Lucas or Greg Mankiw.

The only economic analysis that Krugman and Stiglitz  — like other mainstream economists — accept is the one that takes place within the analytic-formalistic modelling strategy that makes up the core of mainstream economics. All models and theories that do not live up to the precepts of the mainstream methodological canon are pruned. You’re free to take your models — not using (mathematical) models at all is considered totally unthinkable —  and apply them to whatever you want — as long as you do it within the mainstream approach and its modelling strategy. If you do not follow this particular mathematical-deductive analytical formalism you’re not even considered doing economics. ‘If it isn’t modelled, it isn’t economics.’

straight-jacketThat isn’t pluralism.

That’s a methodological reductionist straightjacket.

So, even though we have seen a proliferation of models, it has almost exclusively taken place as a kind of axiomatic variation within the standard ‘urmodel’, which is always used as a self-evident bench-mark.

Krugman and Stiglitz want to purvey the view that the proliferation of economic models during the last twenty-thirty years is a sign of great diversity and abundance of new ideas.

But, again, it’s not, really, that simple.

Although mainstream economists like to portray mainstream economics as an open and pluralistic ‘let a hundred flowers bloom,’ in reality it is rather ‘plus ça change, plus c’est la même chose.’

Applying closed analytical-formalist-mathematical-deductivist-axiomatic models, built on atomistic-reductionist assumptions to a world assumed to consist of atomistic-isolated entities, is a sure recipe for failure when the real world is known to be an open system where complex and relational structures and agents interact. Validly deducing things in models of that kind doesn’t much help us understanding or explaining what is taking place in the real world we happen to live in. Validly deducing things from patently unreal assumptions — that we all know are purely fictional — makes most of the modelling exercises pursued by mainstream economists rather pointless. It’s simply not the stuff that real understanding and explanation in science is made of. Just telling us that the plethora of mathematical models that make up modern economics  “expand the range of the discipline’s insights” is nothing short of hand waving.

No matter how many thousands of technical working papers or models mainstream economists come up with, as long as they are just ‘wildly inconsistent’ axiomatic variations of the same old mathematical-deductive ilk, they will not take us one single inch closer to giving us relevant and usable means to further our understanding and possible explanations of real economies.

8 Comments

  1. What should change as a result of the 2008 Financial Crisis: we should acknowledge that the private financial sector supplies money to meet the demand of its friends, without limit. Sometimes a groupthink panic sets in and traders devalue created assets to $0. Money dealers start hoarding. But we should have learned that the Fed has the power to replace money dealers and supply liquidity without capacity limits to rescue world markets from themselves.

    The quantity theory of money should be dead. Neoclassical theories of inflation should be discredited.

    Profit-maximization should be recognized as fundamentally disconnected from the provisioning of essential goods and services. Profit maximization, logically, leads to a financial world of derivatives that multiply and become uncorrelated with any underlying real assets. The real economy ceases to matter. Real customers are insignificant compared to the returns on derivatives and swaps which only require other financial players.

    Housing prices in the US are back to 2007 levels and rising, because financial markets have figured out the insurance piece that broke in 2008 and fixed it (for the time being). Financial investors put some money in money-market funds that go into the world financial sector and return money created from thin air. The resulting returns on financial investments are used to buy houses. Then others who are also getting money created by keystroke from the world financial sector bid housing prices higher. Derivatives that multiply the underlying price value of mortgages keep returning more and more, enabling the investors to afford higher and higher prices.

    Wages don’t need to go up. The income to buy houses is coming from the world financial sector.

    Again, in a crisis, the Fed proved it can become a Dealer of Last Resort and make markets in whatever asset hysterical traders have devalued in their labile panics.

    The best solution, as I see it, is a world-wide basic income funded on the Fed’s (and other central banks in the world unlimited currency swap network) balance sheet at no taxpayer cost. Indexation of incomes to price rises neutralizes any possible unwanted inflation.

    The worst possible outcome for basic income would be that GDP grows and exploitation of resources continues apace and more animals are bred and slaughtered for mankind’s rapacious, ugly appetites.

    The best possible outcome is that a basic income would make us all stop working and meditate and realize that humanity is ugly and gross and stop breeding so that we can rid the earth of the cancer of humans.

    Comment by Robert Mitchell— 20 Nov, 2017 #

  2. Stiglitz is the certifiable grand master of neoclassical economic theory. He is not going to oppose it; he is it! His criticisms are just going to be more neoclassical economics, reinforcing the paradigm he has famously done so much to extend and elaborate.
    .
    The problem is that neoclassical economics revolves around the construction of an immunity to criticism, a construction that Krugman and Stiglitz, as eminent practitioners of the art of neoclassical economics, work to maintain. That immunity allows the proliferation of models that are never tested against reality and “applications” of theory that consist of little more than ill-considered hand-waving. The interest in models never becomes an interest in the nature and condition of the actual economy, except in the most superficial ways.

    Comment by Bruce Wilder— 18 Nov, 2017 #

    • Sargent and Krugman guard their models with their manhood. Real Men do models. Whether they have any scientific value is beside the point. Anything that is not a model is effeminate wishy washy dilettantism.

      Comment by Nanikore— 18 Nov, 2017 #

      • Somewhere Krugman admits he did not read Ohlin’s big book on international trade, until well after winning his faux Nobel. He was surprised to find the Ohlin’s intuition, fed by careful observation, anticipated Krugman’s modeling insights. Krugman had innovated in constructing models of an aspect of international trade that was of great practical, real-world importance (which Ohlin, having opened his eyes in port towns, appreciated) but which had been almost wholly neglected once the mathing up of economics was in full swing because, before Krugman’s innovations, it was not clear how to make the math work in analysis of trade in the presence of increasing returns. So, neoclassical economics pretended not to notice its dominating practical importance.
        .
        Even after Krugman, I am not sure that the real implications of scale and networking informs the neoclassical intuitions about international trade. Krugman’s analysis has not been used effectively to create new “maps” of trade and its effects on income growth and distribution. Or, if it has been used, those results have not been embraced and integrated into the worldviews of neoclassical economists writing op-eds, blog posts or teaching Econ 101. Even Krugman repeats tired cliches about currency exchange rates rebalancing trade or comparative advantage driving specialisation and mutual benefit.
        .
        I do not share Professor Syll’s apparent hostility to analysis per se, but I agree that analysis as practiced within the conventions of neoclassical economics is sterile and even degenerative. The ultimate objective must be truth about the way the real works and is structured; economics has to be about the actual (political) economy, not about a smorgasbord of models. Proliferation of models while reality remains singular is an indication that economists are using their models to test their understanding of the actual economy. If they were doing so, they would be discarding models almost as quickly as they created them. But, instead an uncritical admiration for the idle hobby of model building has substituted for investigation of the reality of the institutional economy.
        .
        And, the result is a pernicious neoliberalism, impossible to oppose effectively, because we lack an effective understanding of how to make an economy work well for the good of more than a tiny elite.

        Comment by Bruce Wilder— 19 Nov, 2017 #

        • NOT an indication

          sorry

          Comment by Bruce Wilder— 19 Nov, 2017 #

        • Bruce, China seems to have been able to make their economy work better than before for more than a tiny elite. And the US seems to have had some understanding of the same. You are very pessimistic today- plenty of people know how to make an economy work well. Problem is- they don’t make policy.

          Comment by Jerry Brown— 19 Nov, 2017 #

          • “What marked Myrdal and Hirschman was not so much the novelty of their ideas but their stylistic and methodological stance. Until their books, economists doing high development theory were trying to be good mainstream economists. They could not develop full formal models, but they got as close as they could, trying to keep close to the increasingly model-oriented mainstream. Myrdal and Hirschman abandoned this effort, and eventually in effect took stands on principle against any effort to formalize their ideas.

            One imagines that this was initially very liberating for them and their followers. Yet in the end it was a vain stance. Economic theory is essentially a collection of models. Broad insights that are not expressed in model form may temporarily attract attention and even win converts, but they do not endure unless codified in a reproducible — and teachable — form. You may not like this tendency; certainly economists tend to be too quick to dismiss what has not been formalized (although I believe that the focus on models is basically right). Like it or not, however, the influence of ideas that have not been embalmed in models soon decays. And this was the fate of high development theory. Myrdal’s effective presentation of the idea of circular and cumulative causation, or Hirschman’s evocation of linkages, were stimulating and immensely influential in the 1950s and early 1960s. By the 1970s (when I was myself a student of economics), they had come to seem not so much wrong as meaningless. What were these guys talking about? Where were the models? And so high development theory was not so much rejected as simply bypassed.”

            http://web.mit.edu/krugman/www/dishpan.html

            I am not sure that Krugman’s formalisation of well established knowledge and its “insights” about the consequences of scale for international trade has pushed forward that knowledge. But I am sure his and other’s insistence on formalisation has come at a huge social cost.

            Comment by Nanikore— 19 Nov, 2017 #

  3. Yep. With all respect for these guys’ humanism and decency, they have not climbed over the iron curse and cross of neo-classical mumbo jumbo! Sadly.

    Comment by Anonymous— 18 Nov, 2017 #


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