Home > Uncategorized > Krugman on models (II)

Krugman on models (II)

from Lars Syll

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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.’

  1. January 9, 2016 at 5:31 pm

    Economists are trained to ignore the one most important feature of the economy… money and banking!!!

    Build an accurate model of banking as I have and it tracks quite logically with the disastrous results experienced in the REAL WORLD.

    moneyasdebt.net

  2. January 9, 2016 at 7:32 pm

    The comment that, “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” is not necessarily correct. It’s correctness depends on what the goals are. If the goal of economics is to study, write about, and summarize the economies and economic actions taken by mostly non-economists, then the comment is correct. If the goal is as VP Cheney and others claimed in invading Iraq to “create” certain ways of life with certain goals and parameters, rather than waiting for others to do this then the comment is not correct. I think the majority of economists are following the Cheney/Bush road. They want to create reality, not study it.

    • January 9, 2016 at 8:09 pm

      Correct. Main stream economists are the hired priests of the Status Quo. They cough out statements in return for dollars.

  3. John Hermann
    January 10, 2016 at 2:11 am

    One of the problems with orthodox economic modelers is that they don’t really understand modern banking. In particular they don’t understand that today’s registered depositories are, in a monetary sense, expansive. They are not merely intermediaries, but create credit money whenever they lend, spend or invest with the private non-bank sector. If economics happened to be a scholarly discipline concerned with studying reality then it would beggar belief that so many of these high priests remain in a state of confused ignorance, especially since the whistle was blown on the nature of banking recently by BoE and other economists in some well-publicised recent publications. The obvious reason for their behavior, as explained above, is that they are more concerned with creating reality than with studying it. There is a hidden agenda.

  4. January 10, 2016 at 7:07 pm

    DSGE alleges accurate micro-foundations, and for that matter so do most of the various heterodox theories. None of them has it right. Looking at the cost accounting realities of every enterprise and juxtaposing the fact that private finance basically has a monopoly on the creation and form in which credit can be distributed and you’ll see that the economy is not only in a radical state of scarce individual incomes in ratio to costs/prices and hence disequilibrium, but all that the present system allows for is more excess costs via borrowing and that goes into the system before it can become anyone’s actual income. The resulting costs, time lags and indirectness of monetary policy must be resolved with a direct supplement to individual incomes and rebated discounts to ending (retail) prices.

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