An absolutely fabulous week in Vienna with visits to Café Central, Hofburg, Vienna State Opera, Belvedere, Pratern, etc., etc., but also giving a couple of lectures.
Many thanks to University of Vienna, Rote Börsenkrach, Vienna University of Economics and Business Administration, Society for Pluralism in Economics, and Austrian Chamber of Labour.
Paul Krugman has often been criticized by people like yours truly for getting things pretty wrong on the economics of John Maynard Keynes.
When Krugman has responded to the critique, by himself rather gratuitously portrayed as about ‘what Keynes really meant,’ the overall conclusion is — ‘Krugman doesn’t care.’
Responding to a post up here on the blog, Krugman writes:
Surely we don’t want to do economics via textual analysis of the masters. The questions one should ask about any economic approach are whether it helps us understand what’s going on, and whether it provides useful guidance for decisions.
So I don’t care whether Hicksian IS-LM is Keynesian in the sense that Keynes himself would have approved of it, and neither should you.
The reason for this rather debonair attitude seems to be that history of economic thought may be OK, but what really counts is if reading Keynes gives birth to new and interesting insights and ideas.
No serious economist would question that explaining and understanding ‘what’s going on’ in our economies is the most important task economists can set themselves — but it is not the only task. And to compare one’s favourite economic gadget model to what ‘austerians’ and other madmen from Chicago have conjured up, well, that’s like playing tennis with the nets down, and we have to have higher aspirations as scientists.
Although I have a lot of sympathy for Krugman’s view on authority, there is also a somewhat disturbing and unbecoming coquetting in his attitude towards the great forerunners he is discussing. Krugman is a great economist, but it smacks not so little of hubris to simply say ‘if where you take the idea is very different from what the great man said somewhere else in his book, so what?’ Physicists arguing like that when discussing Newton, Einstein, Bohr or Feynman would not be taken seriously.
Krugman’s comment on this issue is interesting, however, because it sheds light on a kind of inconsistency in his own art of argumentation. Krugman has repeatedly criticized mainstream economics for using to 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. Models that actually, when it comes to methodology and assumptions, have a lot in common with the kind of model-building he otherwise criticizes. And although Krugman says that he is a strong believer in ‘simple models,’ those models are far from simple (at least not in any interesting meaning of the word).
But the absolute all-time low in Krugman’s response to his critics is this remarkable passage:
Has declaring uncertainty to be unquantifiable, and mathematical modeling in any form foolish, been productive? Remember, that’s what the Austrians say too.
I won’t comment on the shameful guilt-by-association part of the quote, but re uncertainty it’s absolutely gobsmacking how Krugman manages to mix up the ontological question — is the economy permeated by calculable risk or by genuine and often uncalculable uncertainty — with the epistemological question — how do we manage to analyze/understand/explain/model such an economy. Here Krugman seems to say — much in the spirit of Robert Lucas — that if reality is uncertain and non-ergodic, well then let’s just pretend it’s ergodic and susceptible to standard probabilistic analysis, so that we can go on with our FORTRAN programs and mathematical models! In other areas of science that would rightfully be considered fraud, but in ‘modern’ neoclassical mainstream economics it’s obviously thought of as an unprobematical and justified procedure.
Where does all this leave us? Well, I for one, is not the least impressed by Krugman’s gadget interpretation of economics. And if labels are as uninteresting as he says — well, then I suggest Krugman and other ‘New Keynesians’ stop calling themselves Keynesians at all. I’m pretty sure Keynes would have appreciated not having his theories and thoughts being referred to by people having preciously little to do with those theories and thoughts.
Studying great forerunners like Keynes may help us to construct better and more relevant economic models – models that really help us to explain and understand reality. So when Krugman writes
Second — and this plays a surprisingly big role in my own pedagogical thinking — we do want, somewhere along the way, to get across the notion of the self-correcting economy, the notion that in the long run, we may all be dead, but that we also have a tendency to return to full employment via price flexibility
I would certainly recommend him to compare his own statement with what Keynes himself wrote:
Though we all started out in the same direction, we soon parted company into two main groups. What made the cleavage that thus divided us?
On the one side were those who believed that the existing economic system is in the long run self-adjusting, though with creaks and groans and jerks, and interrupted by time-lags, outside interference and mistakes … These economists did not, of course, believe that the system is automatic or immediately self-adjusting, but they did maintain that it has an inherent tendency towards self-adjustment, if it is not interfered with, and if the action of change and chance is not too rapid.
Those on the other side of the gulf, however, rejected the idea that the existing economic system is, in any significant sense, self-adjusting. They believed that the failure of effective demand to reach the full potentialities of supply, in spite of human psychological demand being immensely far from satisfied for the vast majority of individuals, is due to much more fundamental causes …
The gulf between these two schools of thought is deeper, I believe, than most of those on either side of it realize. On which side does the essential truth lie?
The strength of the self-adjusting school depends on its having behind it almost the whole body of organized economic thinking and doctrine of the last hundred years. This is a formidable power. It is the product of acute minds and has persuaded and convinced the great majority of the intelligent and disinterested persons who have studied it. It has vast prestige and a more far-reaching influence than is obvious. For it lies behind the education and the habitual modes of thought, not only of economists but of bankers and business men and civil servants and politicians of all parties …
Thus, if the heretics on the other side of the gulf are to demolish the forces of nineteenth-century orthodoxy … they must attack them in their citadel … Now I range myself with the heretics. I believe their flair and their instinct move them towards the right conclusion. But I was brought up in the citadel and I recognize its power and might … For me, therefore, it is impossible to rest satisfied until I can put my finger on the flaw in the part of the orthodox reasoning that leads to the conclusions that for various reasons seem to me to be inacceptable. I believe that I am on my way to do so. There is, I am convinced, a fatal flaw in that part of the orthodox reasoning that deals with the theory of what determines the level of effective demand and the volume of aggregate employment …
It comes as no surprise to me—but it probably does to everyone outside of economics—that a senior lecturer at the University of Glasgow, Alberto Paloni, an expert in post-Keynesian theory, has been stopped from teaching a core degree module on macroeconomics.
This, after an essay in the Royal Economic Society newsletter specifically cited Paloni’s course as introducing a necessary pluralism into the teaching of economics …
All Paloni did was teach students some Post Keynesian macroeconomics. Post Keynesian theory, for those who are unfamiliar with the term, focuses on elements of the economic approach inspired by John Maynard Keynes (such as time, radical uncertainty, financial fragility, and so on) that are often domesticated by or simply removed from modern mainstream macroeconomics. Nothing too radical, then—just one among many alternatives to the theory that prevails in economics and, as we now know, the set of approaches and policies got us into the current mess.
Lucas … internalized the caricature he extracted from Samuelson’s Foundations: that mathematical analysis is the only legitimate way of doing economic theory, and that, in particular, the essence of macroeconomics consists in a combination of axiomatic formalism and philosophical reductionism (microfoundationalism). For Lucas, the only scientifically legitimate macroeconomic models are those that can be deduced from the axiomatized Arrow-Debreu-McKenzie general equilibrium model, with solutions that can be computed and simulated in such a way that the simulations can be matched up against the available macroeconomics time series on output, investment and consumption.
This was both bad methodology and bad science, restricting the formulation of economic problems to those for which mathematical techniques are available to be deployed in finding solutions.
Lucas hope of being able to mathematically model the economy as “a FORTRAN program” and “gain some confidence that the component parts of the program are in some sense reliable prior to running it” seems totally misdirected. The failure in the attempt to anchor the analysis in pure mathematics shows that if you neglect ontological considerations pertaining to the target system, ultimately reality returns with a vengeance when at last questions of bridging and exportation of mathematical model exercises are laid on the table. No matter how precise and rigorous the analysis is, and no matter how hard one tries to cast the argument in “modern mathematical form” they do not push science forwards one millimeter if they do not stand the acid test of relevance to the target. No matter how rigorous the inferences delivered inside these models are, they do not per se say anything about their external validity.
Back in the 80’s yours truly had the pleasure of studying German at University of Vienna. A wonderful town full of history and Kaffeehäuser. I’m really looking forward to visiting it again.
In case you can’t be there, here’s an admittedly insufficient substitute, but still …
A comparison of status relationships in the different “fields” shows a definite common pattern. The dominant feature, which makes status relations among the Econ of unique interest to the serious student, is the way that status is tied to the manufacture of certain types of implements called “modls.” The status of the adult male is determined by his skill at making the “modl” of his “field.” The facts (a) that the Econ are highly status-motivated, (b) that status is only to be achieved by making “modls,” and (c) that most of these “modls” seem to be of little or no practical use, probably accounts for the backwardness and abject cultural poverty of the tribe. Both the tight linkage between status in the tribe and modl making and the trend toward making modls more for ceremonial than for practical purposes appear, moreover, to be fairly recent developments, something which has led many observers to express pessimism for the viability of the Econ culture.
Though I speak with the tongues of angels,
If I have not love…
My words would resound with but a tinkling cymbal.
And though I have the gift of prophesy…
And understand all mysteries…
and all knowledge…
And though I have all faith
So that I could remove mountains,
If I have not love…
I am nothing.
General equilibrium is fundamental to economics on a more normative level as well. A story about Adam Smith, the invisible hand, and the merits of markets pervades introductory textbooks, classroom teaching, and contemporary political discourse. The intellectual foundation of this story rests on general equilibrium, not on the latest mathematical excursions. If the foundation of everyone’s favourite economics story is now known to be unsound — and according to some, uninteresting as well — then the profession owes the world a bit of an explanation.
Almost a century and a half after Léon Walras founded general equilibrium theory, economists still have not been able to show that markets lead economies to equilibria. We do know that — under very restrictive assumptions — equilibria do exist, are unique and are Pareto-efficient. But after reading Frank Ackerman’s article one has to ask oneself — what good does that do?
As long as we cannot show that there are convincing reasons to suppose there are forces which lead economies to equilibria — the value of general equilibrium theory is nil. As long as we cannot really demonstrate that there are forces operating — under reasonable, relevant and at least mildly realistic conditions — at moving markets to equilibria, there cannot really be any sustainable reason for anyone to pay any interest or attention to this theory.
A stability that can only be proved by assuming Santa Claus conditions is of no avail. Most people do not believe in Santa Claus anymore. And for good reasons — Santa Claus is for kids.
Continuing to model a world full of agents behaving as economists — ‘often wrong, but never uncertain’ — and still not being able to show that the system under reasonable assumptions converges to equilibrium (or simply assume the problem away), is a gross misallocation of intellectual resources and time. As Ackerman writes:
The guaranteed optimality of market outcomes and laissez-faire policies died with general equilibrium. If economic stability rests on exogenous social and political forces, then it is surely appropriate to debate the desirable extent of intervention in the market — in part, in order to rescue the market from its own instability.
In loving memory of Kristina Syll