Home > Uncategorized > Krugman’s textbook — mistaking the map for the territory

Krugman’s textbook — mistaking the map for the territory

from Lars Syll

Paul Krugman has — together with Robin Wells — written an economics textbook that is used all over the world. As all the rest of mainstream economics textbooks, it stresses from the first pages the importance of supplying the student with a systematic way of thinking through economic problems with the help of simple models.

aaaaModeling is all about simplification …

A model is a simplified representation of reality that is used to better understand real-life situations …

The importance of models is that they allow economists to focus on the effects of only one change at a time …

For many purposes, the most effective form of economic modeling is the construction of ‘thought experiments’: simplified, hypothetical versions of real-life situations …

And these kind of rather vacuous ‘simplicity’ and ‘understanding’ statements get repeated — almost ad nauseam — over and over again in the book.

For someone genuinely interested in economic methodology and science theory it is definitely difficult to swallow Krugman’s methodological stance, and especially his non-problematized acceptance of the need for simple models.  

To Krugman modeling is a logical way to analytically isolate different variables/causes/mechanisms operating in an economic system. Simplifying a complex world makes it possible for him to ‘tell a story’ about the economy.

Is not the use of abstractions a legitimate tool of economics? No doubt–it is only that all abstractions are not equally correct. An abstraction consists of isolating a part of reality, not in making it disappear.

Emile Durkheim

What is missing in Krugman’s model picture is an explanation of how and in what way his simplifications increase our understanding — and of what. If a model is good or bad is mostly not a question of simplicity, but rather if the assumptions on which it builds are valid and sound, or just something we choose, to make the model (mathematically) tractable.

Assumptions may make the model rigorous and consistent from a logical point of view, but that is of little avail if the consistency is bought at the price of not giving a truthful representation of the real economic system.

The model may not only be simple but oversimplified, making it quite unuseful for explanations and predictions.

The theories economists typically put forth about how the whole economy works are too simplistic.

George Akerlof & Robert Shiller

Throughout his discussion of models Krugman assumes that they ‘allow economists to focus on the effects of only one change at a time.’ This assumption is of paramount importance and really ought to be much more argued for — on both epistemological and ontological grounds — if at all being used.

Limiting model assumptions in economic science always have to be closely examined since if we are going to be able to show that the mechanisms or causes that we isolate and handle in our models are stable in the sense that they do not change when we ‘export’ them to our ‘target systems,’ we have to be able to show that they do not only hold under ceteris paribus conditions and a fortiori only are of limited value to our understanding, explanations or predictions of real economic systems.

Since a relationship to reality is usually ensured by the language used in economic statements, in this case the impression is generated that a content-laden statement about reality is being made, although the system is fully immunized and thus without content. In my view that is often a source of self-deception in pure economic thought. peanutsplatonismThe only assertions that remain in these procedures are related to the logical connections, and they are thus often of a meta-economic (that is meta-linguistic) nature. A further possibility for immunizing theories consists in simply leaving open the area of application of the constructed model so that it is impossible to refute it with counter examples. This of course is usually done without a complete knowledge of the fatal consequences of such methodological strategies for the usefulness of the theoretical conception in question, but with the view that this is a characteristic of especially highly developed economic procedures: the thinking in models, which, however, among those theoreticians who cultivate neoclassical thought, in essence amounts to a new form of Platonism.

Hans Albert

Economic models may be an informative tool for research. But if its practitioners and textbook authors do not make an effort of providing a justification for the credibility of the assumptions on which they erect their building, they will not fulfill their tasks. There is a gap between modeling aspirations and accomplishments, and without more supportive evidence to substantiate its claims, critics like yours truly will continue to consider its ultimate argument as a mixture of rather unhelpful metaphors and unsubstantiated assumptions.

The rather one-sided emphasis on usefulness and its concomitant instrumentalist justification cannot hide that neither Krugman, nor the legions of other mainstream economics textbooks authors,  give supportive evidence for their considering it fruitful to believe in the possibility of analyzing complex and interrelated economic system ‘one part at a time.’ For although this atomistic hypothesis may have been useful in the natural sciences, it usually breaks down completely when applied to the social sciences. Dubious simplifying approximations do not take us one single iota closer to understanding or explaining open social and economic systems.

The kind of relations that Krugman and other mainstream economists establish with their ‘thought experimental’ modeling strategy are only relations about entities in models that presuppose causal mechanisms being atomistic and additive. When causal mechanisms operate in real world social target systems they only do it in ever-changing and unstable combinations where the whole is more than a mechanical sum of parts. If economic regularities obtain they do it (as a rule) only because we engineered them for that purpose. Outside man-made ‘nomological machines’ they are rare, or even non-existant. Unfortunately that also makes most of the mainstream modeling achievements rather useless.

All empirical sciences use simplifying or ‘unrealistic’ assumptions in their modeling activities. That is not the issue – as long as the assumptions made are not unrealistic in the wrong way or for the wrong reasons.

Theories are difficult to directly confront with reality. Economists therefore build models of their theories. Those models are representations that are directly examined and manipulated to indirectly say something about the target systems. But models do not only face theory. They also have to look to the world. Being able to model a ‘credible world’ — Krugman’s ‘thought experiment’– a world that somehow could be considered real or similar to the real world, is not the same as investigating the real world. Even though all theories are false, since they simplify, they may still possibly serve our pursuit of truth. But then they cannot be unrealistic or false in any way. The falsehood or unrealisticness has to be qualified.

Some of the standard assumptions made in mainstream economic theory – on rationality, information handling and types of uncertainty – are not possible to make more realistic by ‘de-idealization’ or ‘successive approximations’ without altering the theory and its models fundamentally. And still there is not a single mentioning of this limitation in Krugman’s textbook!

From a methodological pespective yours truly has to conclude that Krugman’s economic textbook — as are those of Mankiw et consortes — is a rather unimpressive attempt at legitimizing using fictitious idealizations for reasons more to do with model tractability than with a genuine interest of understanding and explaining features of real economies.

Krugman’s textbook and its simplicity preaching shows that mainstream economics has become increasingly irrelevant to the understanding of the real world. The main reason for this irrelevance is the failure of mainstream economists to match their deductive-axiomatic methods with their subject.

It is — sad to say — a fact that within mainstream economics internal validity is everything and external validity nothing. Why anyone should be interested in that kind of theories and models — as long as mainstream economists do not come up with any export licenses for their theories and models to the real world in which we live — is beyond my imagination. Sure, the simplicity that axiomatics and analytical arguments bring to economics is attractive to most economists. But …

aSimplicity, however, has its perils. It is one thing to choose as one’s first object of theoretical study the type of arguments open to analysis in the simplest terms. But it is quite another to treat this type of argument as a paradigm and to demand that arguments in other fields should conform to its standards regardless, or build up from a study of the simplest forms of argument alone a set of categories intended for application to arguments of all sorts: one must at any rate begin by inquiring carefully how far the artificial simplicity of one’s chosen model results in these logical categories also being artificially simple. The sorts of risks one runs otherwise are obvious enough. Distinctions which all happen to cut along the same line for the simplest arguments may need to be handled quite separately in the general case; if we forget this, and our new found logical categories yield paradoxical results when applied to more complex arguments, we may be tempted to put these rules down to defects in the arguments instead of in our categories; and we may end up by thinking that, for some regrettable reason hidden deep in the nature of things, only our original, peculiarly simple arguments are capable of attaining to the ideal of validity.

Krugman’s and other mainstream economists’ textbooks are sad readings. Both theoretically and methodologically they are exponents of an ideology that seems to say that as long as theories and hypotheses are possible to transform into simple mathematical models, everything is just fine. As yours truly has tried to argue, there is actually no reason — other than pure hope — for believing this. The lack of methodological reflection in these books not only makes things wrong, but even worse, makes economics absolutely irrelevant, when it comes to explaining and understanding real economies.

  1. March 9, 2016 at 1:26 pm

    Why economics is a failed science: the 25 best explanations/excuses
    Commwnt on ‘Krugman’s textbook — mistaking the map for the territory’

    1. It is all just a matter of opinion and negotiation; there is no such thing as a clear-cut objective true/false conclusion in economics.

    2. Economics is not a failure, just the contrary. Pluralism/inconsistency/anything goes/eclecticism is superior to dogmatism. With postmodern flexibility economists model every contingency and the opposite of it. WYWIWYG — what you want is what you get.

    3. Economics as ‘separate and inexact science’ (J. S. Mill) has its own criteria of success/failure which laypersons cannot understand without proper initiation. Given the peculiarities of the subject matter, economics is always reasonably successful.

    4. Strictly speaking, economics as a science does not yet exist. It has always been dominated by politics and has served various agendas independent of any scientific content.

    5. Economics is not a Science with a capital S (Solow, 1998, p. x).

    6. Economics lacks the experimental method as a way of testing hypotheses.

    7. Rival theories cannot be put to an experimental test. This is why the contradictions between various approaches cannot be resolved and false theories cannot be eliminated.

    8. All there is to observe is history, and history does not conduct experiments: too many things are always happening at once.

    9. The inferences that can be made from history are always uncertain, always disputable.

    10. The ‘laws’ of behavior change and evolve.

    11. Economists cannot predict, and novelty/emergence is unpredictable in principle.

    12. Economists employ a host of nonentities (utility, equilibrium, rational expectations, etc) which are not testable in principle.

    13. Ontological uncertainty: “We simply do not know.” (Keynes, 1937, p. 214)

    14. Too much abstraction, distorting simplification, mathiness, flawed formalization, misplaced rigor, and phony precision.

    15. Economists cannot keep the scientific realm of true/false and the political realm of good/bad apart. Because of positive/normative confusion, they mess up both.

    16. Economists violate well-defined scientific standards on a daily basis.

    17. Economic methodology is borrowed from old-fashioned physics (instead of evolution theory, chaos theory, complexity theory, information theory, sociology, history, new EconoPhysics, etc).

    18. To begin with, the definition of the subject matter is dead wrong: “Economics is the science which studies human behavior as a relationship between ends and scarce means which have alternative uses.” (Robbins, 1935, p. 16)

    19. Economists never realized that economics is not a social science but a system science. A system can be unambiguously defined, but human behavior cannot: “The human or personal factor will remain the irrational element in most, or all, institutional social theories.” (Popper, 1960, pp. 157)

    20. False axiomatic foundations: “most of what I and many others do is sorta-kinda neoclassical because it takes the maximization-and-equilibrium world as a starting point” (Krugman). Maximization-and-equilibrium are inadmissible as axioms.

    21. Economists oscillate between vacuous model bricolage and crude empiricism but never managed to formulate a logically consistent and testable theory of how the monetary economy works.

    22. There is ineradicable scientific incompetence of both orthodox and heterodox economists since Adam Smith.

    23. Bad luck: “But we can never make sure that the right man will be attracted to scientific research.” (Popper, 1960, p. 157) It seems that economics somehow got more than a fair share of lemons.

    24. Economics was never meant to be a science but a placebo: “But he [Adam Smith] had no such ambitions; in fact he disliked whatever went beyond plain common sense. He never moved above the heads of even the dullest readers. He led them on gently, encouraging them by trivialities and homely observations, making them feel comfortable all along.” (Schumpeter, 1994, p. 185) And this is why economics teachers pass on until this very day the silly story of supply-demand-equilibrium to their dull 101 students (2013).

    25. Economists have not figured out since more than 200 years what profit is (2015). When the pivotal economic concepts profit and income are inconsistent all the rest of the theoretical superstructure is logically defective and, as a consequence, bound to fail when applied as economic policy guidance.

    Egmont Kakarot-Handtke

    References
    Kakarot-Handtke, E. (2013). How to Get Rid of Supply-Demand-Equilibrium. SSRN Working Paper Series, 2263172: 1–24. URL
    http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2263172.
    Kakarot-Handtke, E. (2015). How the Intelligent Non-Economist Can Refute Every Economist Hands Down. SSRN Working Paper Series, 2705395: 1–6. URL
    http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2705395.
    Keynes, J. M. (1937). The General Theory of Employment. Quarterly Journal of Economics, 51(2): 209–223. URL http://www.jstor.org/stable/1882087.
    Popper, K. R. (1960). The Poverty of Historicism. London, Henley: Routledge and Kegan Paul.
    Robbins, L. (1935). An Essay on the Nature and Significance of Economic Science. London, Bombay, etc.: Macmillan, 2nd edition.
    Schumpeter, J. A. (1994). History of Economic Analysis. New York, NY: Oxford University Press.
    Solow, R. M. (1998). Foreword, volume William Breit and Roger L. Ranson: The Academic Scribblers. Princeton, NJ: Princeton University Press, 3rd edition.

  2. March 9, 2016 at 2:00 pm

    I see models as a good tool to focus distributed human intelligence from the bottom up, a support for democratic decision making.

    Belief in modeling like Paul’s has led him to propound the idea of borrowing money from savers and managing inflation such that the value of the notes approach zero upon maturity.

    Simplified reasoning like this is almost child-like.

  3. March 9, 2016 at 3:16 pm

    Krugman has 12 main principles of Economics. No Uncertainty among them. In one of his books, forgot which, there is no uncertainty even in the Index. And two pages are on Risk – risk for shares. JMK would turn in his grave.

  4. David Chester
    March 9, 2016 at 4:11 pm

    Indeed, economics is a systems-science, but when looked at through our badly biased monopolistically financed, political eyes, it is a confused mess. The system has been expressed by yours-truly in his new politically incorrect book. If somebody can do better, I would be very pleased to see it and hope that it is making headway, through the cluttered economics waters in which we presently navigate. “Sail on, oh ship of State, sail on oh Union, might, great, ” etc.. (Wordsworth)

  5. louisperetzperetz
    March 9, 2016 at 4:51 pm

    Economics is a human science. That means non exact one, because human can fail. It is an experimental science as biology which is a life system. That is the reason why medicine doctors say medicine is an art more than a science. Sometime they make a mistake, sometimes they try to say the future, but not the date exactly.

  6. March 9, 2016 at 7:53 pm

    Very nice overview, but Gabriel Tarde says it more succinctly in his Psychologie Economique (really an economic anthropology).

    “But is this a reason, when the moment comes to study the reciprocal relationships of selves-that is, to establish the social sciences-for the self to continue to try to run away from itself, and to take as a model for its new sciences the sciences of nature? By the most exceptional
    of privileges, he finds himself, in the social world, seeing clearly to the bottom of those beings whose relationships he studies, holding in his hands the hidden drives of the actors, and yet he would gladly give up this advantage to be able to model himself after the physicist or the naturalist who, not having it, is forced to do without it and to compensate for it as he can!”

    All around the economist are models. Humans have been involved in their creation for thousands of years. They are right in front of the economist, if s/he would only take the time to look. And they are the economy. Seems economists cannot escape “physics envy!”

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