Krugman’s formalization schizophrenia

28 Jun, 2018 at 10:17 | Posted in Economics | 7 Comments

In an article published last week, Nicholas Gruen criticized the modern vogue of formalization in economics and took Paul Krugman as an example:

He’s saying first that economists can’t see what isn’t in their models – whereas Hicks and pretty much every economist until the late twentieth century would have understood the need for careful and ongoing reconciliation of formal modelling and other sources of knowledge. More shockingly he’s saying that those who smell a rat at the dysfunctionality of all this should just get over themselves. To quote Krugman:

“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).”

It’s ironic given how compellingly Krugman has documented the regression of macroeconomics in the same period that saw his own rise via new trade theory. I think both retrogressions were driven by formalisation at all costs, though, in the case of new classical macro, this mindset gave additional licence to the motivated reasoning of the libertarian right. In each case, economics regresses into scholastic abstractions, and obviously important parts of the story slide pristine invisibility to the elect.

Responding to the article, Paul Krugman yesterday rode out to defend formalism in economics:

What about new trade theory? What us new trade theorists did was say, “It looks as if there’s a lot going on in world trade that can’t be explained in existing formal models. So let’s see if there’s a different approach to modeling that can make sense of what we see” …

Now, we can argue about how much good this formalization did. I still believe that the formal models provided a level of clarity and legitimacy to trade discussion that wasn’t there before.

Now, this is not — as shown in Gruen’s article — the first time Krugman has felt the urge to defend mainstream formalization. In another post up on his blog, Krugman argues that the ‘discipline of modeling’ is a sine qua non for tackling politically and emotionally charged economic issues:

In my experience, modeling is a helpful tool (among others) in avoiding that trap, in being self-aware when you’re starting to let your desired conclusions dictate your analysis. Why? Because when you try to write down a model, it often seems to lead some place you weren’t expecting or wanting to go. And if you catch yourself fiddling with the model to get something else out of it, that should set off a little alarm in your brain.

So when Krugman and other ‘modern’ mainstream economists use their models — standardly assuming rational expectations, Walrasian market clearing, unique equilibria, time invariance, linear separability and homogeneity of both inputs/outputs and technology, infinitely lived intertemporally optimizing representative agents with homothetic and identical preferences, etc. — and standardly ignoring complexity, diversity, uncertainty, coordination problems, non-market clearing prices, real aggregation problems, emergence, expectations formation, etc. — we are supposed to believe that this somehow helps them ‘to avoid motivated reasoning that validates what you want to hear’ and provide ‘legitimacy.’

Yours truly is, to say the least, far from convinced. The alarm that sets off in my brain is that this, rather than being helpful for understanding real-world economic issues, sounds more like an ill-advised plaidoyer for voluntarily taking on a methodological straight-jacket of unsubstantiated and known to be false assumptions.

Krugman, as we all know, can at times be a harsh critique of economic formalism. That is, other people’s formalism. His own, and other ‘New Keynesians’ formalizations, he always seems to find some handy justification for.

Contrary to the impression Krugman wants to convey, his and other ‘New Keynesians’ modelling strategy has a lot in common with that of people like Robert Lucas and Thomas Sargent. ‘New Keynesian’ macroeconomic models build on Real Business Cycle foundations,  regularly assuming representative actors, rational expectations, market clearing and equilibrium. But if we know that real people and markets cannot be expected to obey these assumptions, the warrants for supposing that conclusions or hypothesis of causally relevant mechanisms or regularities can be bridged, are obviously non-justifiable.,