Home > Uncategorized > Why Krugman and Stiglitz are no real alternatives to mainstream economics

Why Krugman and Stiglitz are no real alternatives to mainstream economics

from Lars Syll

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 other mainstream economists — accept is the one that takes place within the analytic-formalistic modeling 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 modeling strategy. If you do not follow this particular mathematical-deductive analytical formalism you’re not even considered doing economics. ‘If it isn’t modeled, 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 modeling 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.

  1. March 20, 2017 at 6:23 pm

    “about representative agents, treating information like any other commodity, and so on”

    I don’t get this. I thought that Stiglitz was one of the leading voices exposing the problem of information asymmetry.

    “‘If it isn’t modeled, it isn’t economics.’”

    I would generally agree with this criticism, but then on the positive side, at least it does keep the Austrians out.

    I am sure some mainstream economists would defend themselves with the claim, “We know our models are bad, but at least they are the ‘least bad’ approach”. I would argue that replacing equilibrium ideas with chaotic systems in which wage history is the key chaotic component, being both an input and output would be an improvement. But that would be my approach.

    I am curious which parts of modelling the author would suggest are “baby” and which parts would be considered “bathwater”.

    • William Bell
      March 20, 2017 at 10:58 pm

      Resolving the baby and bath water issue is important to progress the economic profession. The CORE economics project (http://www.core-econ.org/) provides a pathway to help filter out unhelpful economics theories. For instance the work completed by alchemists and astrologist did provide some use contributions to chemistry and astronomy, similarly there will be useful bits within neoclassical economics. Even the CGE, DSGE and GTAP projects contain useful dataset for reuse elsewhere in the same way astrologers kept records of the stars only requiring a reinterpretation of same data within astronomy. The push for agreement on a filtering process is important. I recommend having a look at the CORE economics project as such a process.

  2. Paul Davidson
    March 20, 2017 at 7:22 pm

    As I have written many times, Paul Samuelson in hi book THE FOUNDATIONS OF ECONOMIC ANALYSIS insists that any valid economic theory must be based on Walrasian microfounfations. But such foundations requires the decision maker to “know” not only the current spot price for every marketable item but also every forward price from tomorrow to the end of time.

    since Stiglitz and Krugman are students of Samuelson and believe that Samuelson’s neoclassical synthesis Keynesianism is correct and New Keynesian theory merely adds rational expectations explicitly to the system, Stiglitz and Krugman must implicitly assume the economic future is certain, at least in an actuarial sense.since Warasian microfoundations assumes each decision maker faces the spot price and foirward price of every date and item.

    Thus they use the same fundamental assumption as efficient market theorists of the University of Chicago, in assuming decision makers “know” the future

    Keynes however insisted that the real future is uncertain and no knowable — and tht the institution of legel money contracts, t least, provided some degree of knowledge regarding future cash inflows and oulflows and hus the importance of liquidity!!!

    • May 11, 2017 at 10:28 pm

      “Keynes however insisted that the real future is uncertain and no knowable”

      How ironic it is that critics of Keynes like Hayek liked to talk about “The pretense of knowledge”…

  3. Risk Analyst
    March 20, 2017 at 7:38 pm

    I think part of this is a self-inflicted wound. President Trump will be appointing three new FOMC members in addition to probably replacing Janet Yellen as Federal Reserve Chairman. His statements and choices for economic advisors make it clear he has little patience for mainstream economists because of the conflict especially over trade theory and questionable Federal Reserve behavior. Have the heterodox schools tried to take advantage of this great opportunity? Have you guys started an “anybody but a New Keynesian” movement for the Fed replacements to echo the Trump campaign’s “anyone but Hillary” movement? No, or at least no as evidenced by the postings here. In the past week the posts have compared Trump to a Nazi, called him racist in another, and in another called him a plutocrat. No one from the Trump camp is going to fight through those comments to see what else the authors offer here. You seem to be doing your best to stay marginalized. And you are succeeding.

  4. March 20, 2017 at 7:47 pm

    “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.”

    Your comment, this piece, and your other work in this regard are all breaths of fresh air.

    I was trained, in the 60s, in economics and agricultural economics at that bastion of liberalism, Berkeley. The core undergraduate textbook was Samuelson. At both undergrad and grad levels, the core microeconomics book was Friedman’s Price Theory. Both books are well-written and accessible, and Samuelson’s was famous — perhaps unique in those days — for its attractive graphs. Price Theory was a bit of a Trojan Horse, as it was relatively free of Friedman’s polemical nature. When I got my degrees and left the field in confused disgust, I observed: “both these guys — one a liberal and one a conservative — are teaching market fundamentalism”. On my own I needed to dig out John Kenneth Galbraith, Kenneth Boulding, Georgescu-Roegen, among others, to provide some different perspective. Such luminaries as Marx, Veblen and Henry George were either completely ignored or marginalized. As I still tell people, all my teachers except for one — including three future Nobel winners — were Hubert Humphrey/ADA liberals hawking Friedman’s religion.

    I’ll offer two propositions that I’d love to see discussed here:
    1. The neoclassical ideology is a cover for capitalism and has been intended so since its inception, much more than a century ago; and
    2. In order to break free from the neoclassical straitjacket, we must confront the dominant institution, predatory corporate capitalism.

    Work such as Krugman’s and Stiglitz’s, popular though it is and sometimes plausible, does nothing to break us out, as you are saying in this post.

    I’d give much to be shown I am wrong in my propositions. I am too old to be egotistical about this; I simply observe, and these are some of my observations.

    • May 11, 2017 at 10:44 pm

      “Work such as Krugman’s and Stiglitz’s, popular though it is and sometimes plausible, does nothing to break us out, as you are saying in this post.”

      I have often said that Krugman was a liberal person trapped in a conservative economist’s body. I haven’t said the same about Stiglitz as he routinely points out many of the biggest problems with neoliberal theory:

      * Rent seeking behavior
      * Everybody cannot be export driven at the same time
      * There is a large Agency problem, especially when you use public money and private providers
      * Actors in the economy have a large asymmetry of information and this prevents normal price seeking.
      * Monopsony (sort of a duplicate of Rent seeking behavior, but…)

      As far as I know, neoliberal theory doesn’t really handle any of these properly.

      My criticism of Stiglitz would be that has not addressed further problems, including:

      * Chaotic nature of economics (wage history is both an input and an output, instantly invalidating any equilibrium approaches)
      * V-Shaped supply curve in the cases of currency trading and labor supply (as far as I know, I am the only person who talks about this)
      * Worldwide supply glut (well, he and Krugman both make the “export can’t work for everyone” criticism, but I think this point should be taken much further).

      But Stiglitz has written far more than I have read by him, so who knows if he addressed far more than I realize?

  5. March 20, 2017 at 9:14 pm

    How does it survive?
    Because the critique fails to hit the true mark? Why? Because the critique is built from the same foundation.

    The problem is that only people with a PhD in economics are allowed into the debate. Thus, we have screened out social intelligence in favor of math ability. Math savants regard physics (which many of them majored in) as he paradigmatic science. They can’t understand the non-reducibility of biology because it doesn’t track their mathematical reasoning. Thus they are blind to social reality as Darwinian, stuck forever shoving it into Newtonian metaphors. They can’t perceive this because all the people talented at such reasoning are screened out by the PhD in economics requirement.

    • May 11, 2017 at 10:51 pm

      “Math savants regard physics (which many of them majored in) as he paradigmatic science.”

      I was pretty good at math back in the day, and I didn’t really consider someone who could learn all the equations as being nearly as good at math as someone who knew when to and when not to use them. I think someone like Richard Feynman would be horrified if someone handed him Mankiw’s textbook.

      You know that feeling, where you are watching someone in a slasher movie slowly walk toward where you know the killer is hiding? That’s what a good mathematician feels when he watches someone use a relationship between two variables and assumes incorrectly that it is a continuous function, as Laffer did when he infamously misapplied the high school calculus mean value theorem without understanding the requirements properly.

  6. Craig
    March 21, 2017 at 4:54 am

    What economics (and probably most of Man’s systems) really needs is a new philosophy. You know, the thing that can include all of the figure-figure-figure of economics and policies that have far better ethical end results than the current 250 year old strains have largely failed to accomplish….for like 250 years.

    What if there was a philosophical concept that contained and encompassed the above bothness and even a more integrated and unified thirdness. That might be a good place for economists to start looking for that new philosophy.

  7. anastas
    March 21, 2017 at 6:22 pm

    The neoclassical theory assumes a world whers agents are atomistically isolated, have perfect rationality, and infinite computational ability. The implications are that in equilibrium agents deal optimally only with risks that are beyond their control. Thus, the economy performs the best it is possible, given its human and physical resources.
    Obviously, these assumptions are unrealistic, and their implications far from obvious. However, the theory provides an ideal framework which should guide our understanding of what is wrong with what we observe in reality. Several of the assumptions of the theory can be relaxed, others have to be discarded. The question is: how close we can get to the ideal famework of the open market economies? We have very little guidance to persue this goal from alternative theories. That is where I see the contribution of Krugman, Stiglitz, and other modern economists.

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