Home > Uncategorized > Paul Krugman — a methodological critique

Paul Krugman — a methodological critique

from Lars Syll

Alex Rosenberg — chair of the philosophy department at Duke University and renowned economic methodologist — has an interesting article on What’s Wrong with Paul Krugman’s Philosophy of Economics in 3:AM Magazine. Writes Rosenberg:

theoryKrugman 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 …

One thing that’s missing from Krugman’s treatment of economics is the explicit recognition of what Keynes and before him Frank Knight, emphasized: the persistent presence of enormous uncertainty in the economy … Why is uncertainty so important? Because the more of it there is in the economy the less scope for successful maximizing and the more unstable are the equilibria the economy exhibits, if it exhibits any at all …

Along with uncertainty, the economy exhibits pervasive reflexivity: expectations about the economic future tend to actually shift that future … When combined, uncertainty and reflexivity together greatly limit the power of maximizing and equilibrium to do predictively useful economics. Reflexive relations between future expectations and outcomes are constantly breaking down at times and in ways about which there is complete uncertainty.

I think Rosenberg is on to something important here regarding Krugman’s neglect of methodological reflection.

When Krugman responded to my critique of IS-LM this hardly came as a surprise.  As Rosenberg notes, Krugman works with a very simple modelling dichotomy — either models are complex or they are simple. For years now, self-proclaimed “proud neoclassicist” Paul Krugman has in endless harping on the same old IS-LM string told us about the splendour of the Hicksian invention — so, of course, to Krugman simpler models are always preferred.

In a post on his blog, Krugman has argued that ‘Keynesian’ macroeconomics more than anything else “made economics the model-oriented field it has become.” In Krugman’s eyes, Keynes was a “pretty klutzy modeler,” and it was only thanks to Samuelson’s famous 45-degree diagram and Hicks’s IS-LM that things got into place. Although admitting that economists have a tendency to use ”excessive math” and “equate hard math with quality” he still vehemently defends — and always have — the mathematization of economics:

I’ve seen quite a lot of what economics without math and models looks like — and it’s not good.

Sure, ‘New Keynesian’ economists like Krugman — and their forerunners, ‘Keynesian’ economists like Paul Samuelson and (young) John Hicks — certainly have contributed to making economics more mathematical and “model-oriented.”

wrong-tool-by-jerome-awBut if these math-is-the-message-modellers aren’t able to show that the mechanisms or causes that they isolate and handle in their mathematically formalized macromodels are stable in the sense that they do not change when we “export” them to our “target systems,” these mathematical models do only hold under ceteris paribusconditions and are consequently of limited value to our understandings, explanations or predictions of real economic systems.

When it comes to modelling philosophy, Paul Krugman has earlier defended his position in the following words (my italics):

I don’t mean that setting up and working out microfounded models is a waste of time. On the contrary, trying to embed your ideas in a microfounded model can be a very useful exercise — not because the microfounded model is right, or even better than an ad hoc model, but because it forces you to think harder about your assumptions, and sometimes leads to clearer thinking. In fact, I’ve had that experience several times.

The argument is hardly convincing. If people put that enormous amount of time and energy that they do into constructing macroeconomic models, then they really have to be substantially contributing to our understanding and ability to explain and grasp real macroeconomic processes. If not, they should – after somehow perhaps being able to sharpen our thoughts – be thrown into the waste-paper-basket (something the father of macroeconomics, Keynes, used to do), and not as today, being allowed to overrun our economics journals and giving their authors celestial academic prestige.

Krugman’s explications on this issue are really interesting also because they shed light on a kind of inconsistency in his art of argumentation. For years now, Krugman has repeatedly criticized mainstream economics for using too 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. In his End This Depression Now — just to take one example — Paul Krugman maintains that although he doesn’t buy “the assumptions about rationality and markets that are embodied in many modern theoretical models, my own included,” he still find them useful “as a way of thinking through some issues carefully.”

When it comes to methodology and assumptions, Krugman obviously has a lot in common with the kind of model-building he otherwise criticizes. And as Rosenberg rightly notices:

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.

  1. rogerglewis
    January 18, 2019 at 6:42 am

    This is a great article. I recall the comment on your article on Romers Nobel and so forth
    https://rwer.wordpress.com/2018/10/11/at-last-paul-romer-got-his-nobel-prize%E2%80%8B/
    I linked to that article on my Linken in profile as I will with this article.
    https://www.linkedin.com/pulse/worthy-nobel-prize-economics-paul-romer-roger-lewis/

    The issue with static models is that they are static and we need to recognise complex flows and the vector of the system not snapshots of a System which is never stationary or in equilibrim.

    Claes Johnson has done work on Turbulent Air flow using finite element analysis The point he makes regarding Well posed and ill posed

    http://claesjohnson.blogspot.com/search?q=well+posed

    Dx(t)=limΔt→0x(t+Δt)−x(t)Δt
    and a small perturbation in x(t+Δt) or x(t) gets divided by the quantity Δt tending to zero and thus gets amplified by the large factor 1/Δt. The standard approach to the Fundamental Theorem puts the emphasis on the ill-posed or unstable process of differentiation.

    We sum up as follows:
    The standard approach to the Fundamental Theorem is ill-posed, unstable and of questionable meaning. As an illposed problem, it rests on symbolic mathematics of infinite precision, which appears as magics.
    The approach in BodyandSoul is well-posed, stable and clearly meaningful. As well-posed problem it can be solved by numerical mathematics in finite precision, which is reasonable and not magics.
    These aspects would be possible to discuss constructively with the man on the street, but may be very difficult to present to a teacher of standard Calculus for which Adams’ book is the bible.

    http://www.golemxiv.co.uk/2016/01/re-branding-dissent/

    Roger January 22, 2016 at 8:55 am #
    See Keen’s analysis below of MMT and Monetary Circuit Theory.
    I have been an avid student of Keens since around 2010 so in 6 years I have enjoyed the first use of Minsky when it became available and I have it on my computer tool bar. I am also a qualified Chartered Surveyor the branch I belong to is the Valuation branch My business I was in business seriously, was all about income flows John G.
    If you were interested enough to follow keens lecture, it is 20 minutes long you will see he gets into the mathematics of the Mathematical Identity you posted earlier, representing your sectoral balances approach.
    The Post Ante Nature of your summed flows is a weakness which I have explained due to the ill-posed nature of a derivative that can experience large Changes as a result of small increases in inputs. This is a particular problem for Ex Post models like the Balance sheet identity represented by MMT theory in Sectoral balances.

    Back to Martin Shubik,

    Its the Vector and not the destination or coordinates at any particular point in time which we should concern ourselves with.

    Martin Shubick,

    ”The monetary and financial system of an economy are part of the socio-politico-economic control mechanism used by every state to connect the economy with the polity and society. This neural network provides the administrative means to collect taxes, direct investment, provide public goods, trade. The money measures provide a crude but serviceable basis for the accounting system which in turn, along with the codification of commercial law and financial regulation are the basis for economic evaluation and the measurement of trust and fiduciary responsibility among the economic agents. A central feature of a control mechanism is that it is designed to influence process. Dynamics is its natural domain. Equilibrium is not the prime concern, the ability to control the direction of motion is what counts.

    Money and financial institutions provide the command and control system of a modern society. The study of the mechanism, how they are formed, how they are controlled and manipulated and how their influence is measured in terms of social, political, and economic purpose pose questions, not in pure economics, not even in a narrow political economy, but in the broad compass of a political economy set in the context of society. ”
    Martin Shubik

    All of that and no 2nd law of thermodynamis.

    Intrigued go here.
    https://drive.google.com/file/d/1jlcoMGZWSXVwGuStQgHfhZ1CDy84zyWX/view?usp=sharing

    https://longhairedmusings.wordpress.com/2018/07/08/redefining-fiscal-conservatism-the-terra-energy-based-fiscal-unit-fores-and-lagom-white-paper-boundary-conditions-for-a-fiscal-conservatism-based-upon-circular-economics-part-one-scope/

    https://longhairedmusings.wordpress.com/2018/05/08/to-richard-murphy-and-the-mmt-witch-finder-generals/

  2. rogerglewis
    January 18, 2019 at 6:56 am

    This is a great article. I recall the comment on your article on Romers Nobel and so forth
    https://rwer.wordpress.com/2018/10/11/at-last-paul-romer-got-his-nobel-prize%E2%80%8B/
    I linked to that article on my Linken in profile as I will with this article.
    https://www.linkedin.com/pulse/worthy-nobel-prize-economics-paul-romer-roger-lewis/

    The issue with static models is that they are static and we need to recognise complex flows and the vector of the system not snapshots of a System which is never stationary or in equilibrium.
    https://longhairedmusings.wordpress.com/2019/01/18/paul-krugman-a-methodological-critique-january-18-further-thoughts/

  3. Jan Milch
    January 18, 2019 at 9:29 am

    John Hicks,IS-LM: An Explanation”, Journal of Post Keynesian Economics, 3 (2) (Winter 1980-81 https://www.tandfonline.com/doi/abs/10.1080/01603477.1980.11489209

  4. Frank Salter
    January 18, 2019 at 11:26 am

    Both Lars Syll and rogerlewis are correct. Equilibrium is obviously false to fact. I have asked lars Syll on a number of occasions why he fails to draw the logical conclusion that the analysis must be conducted in time. This is the only possibility of developing valid theories,

    Kaldor (1957) describes in principle a model development over time. However no solution is developed to justify the methodology. Salter (2017) develops a formal solution of manufacturing development, the predictions of which conform to the empirical data. Even if people disagree with these approaches, it behoves a proper discussion of their reasons. Solution of the appropriate differential equations is the only valid form of quantitative analysis.

    References:
    N. Kaldor, “A Model of Economic Growth”, The Economic Journal, Vol. 67, No. 268 (Dec., 1957), pp. 591-624.

    F. M. Salter, “Transient development”, real-world economics review, issue no. 81, 30 September 2017, pp. 135-167.

  5. Geoff Davies
    January 20, 2019 at 12:43 am

    Yes, the unknowable future and reflexivity prevent equilibrium … along with pervasive economies of scale, severely incomplete information, delayed feedbacks, fashion, herd behaviours, ‘irrational’ thinking, innovation …

    Economies are far-from-equilibrium systems, all the time.

    They are radically different from near-equilibrium systems, which are grossly misleading.

    You get to the nub (disequilibrium) but then deflect onto the role of mathematics. Mathematics is a collection of tools, you have to choose an appropriate one (or none) for each context. That’s a quite different issue.

    http://betternaturebooks.net.au/index.php/my-books/little-green/

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