Home > Uncategorized > Paul Krugman — a case of dangerous neglect of methodological reflection

Paul Krugman — a case of dangerous neglect of methodological reflection

from Lars Syll

rosenbergAlex Rosenberg — chair of the philosophy department at Duke University, renowned economic methodologist and author of Economics — Mathematical Politics or Science of Diminishing Returns? — had an interesting article on What’s Wrong with Paul Krugman’s Philosophy of Economics in 3:AM Magazine a couple of years ago. Writes Rosenberg:

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.

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 modeling 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 splendor of the Hicksian invention — so, of course, to Krugman simpler models are always preferred.

In an earlier post on his blog, Krugman argues 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-modelers aren’t able to show that the mechanisms or causes that they isolate and handle in their mathematically formalized macro models 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 paribus conditions and are consequently of limited value to our understandings, explanations or predictions of real economic systems.

Science should help us disclose the causal forces at work behind the apparent facts. But models — mathematical, econometric, or what have you — can never be more than a starting point in that endeavor. There is always the possibility that there are other (non-quantifiable) variables – of vital importance, and although perhaps unobservable and non-additive, not necessarily epistemologically inaccessible – that were not considered for the formalized mathematical model.

The kinds of laws and relations that ‘modern’ economics has established, are laws and relations about mathematically formalized 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 mathematical-statistical “nomological machines” they are rare, or even non-existent. Unfortunately, that also makes most of contemporary mainstream neoclassical endeavors of mathematical economic modeling rather useless. And that also goes for Krugman and the rest of the ‘New Keynesian’ family.

When it comes to modeling philosophy, Paul Krugman has in an earlier piece 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. During a couple of years, Krugman has in more than one article criticized mainstream economics for using too much (bad) mathematics and axiomatics in their model-building endeavors. 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.

The same critique – that when it comes to defending his own position on various issues he usually himself ultimately falls back on the same kind of models that he otherwise criticizes – can be directed against his new post. Krugman has said these things before, but I am still waiting for him to really explain HOW the silly assumptions behind IS-LM help him work with the fundamental issues. If one can only use those assumptions with — as Krugman says, “tongue in cheek” – well, why then use them at all? Wouldn’t it be better to use more adequately realistic assumptions and be able to talk clear without any tongue in cheek?

The final court of appeal for macroeconomic models is the real world, and as long as no convincing justification is put forward for how the inferential bridging de facto is made, macroeconomic model building is little more than “hand waving” that give us rather a little warrant for making inductive inferences from models to real-world target systems. If substantive questions about the real world are being posed, it is the formalistic-mathematical representations utilized to analyze them that have to match reality, not the other way around. As Keynes has it:

Economics is a science of thinking in terms of models joined to the art of choosing models which are relevant to the contemporary world. It is compelled to be this, because, unlike the natural science, the material to which it is applied is, in too many respects, not homogeneous through time.

If macroeconomic models – no matter what ilk – make assumptions, and we know that real people and markets cannot be expected to obey these assumptions, the warrants for supposing that conclusions or hypotheses of causally relevant mechanisms or regularities can be bridged, are obviously non-justifiable. Macroeconomic theorists – regardless of being New Monetarist, New Classical or ‘New Keynesian’ – ought to do some ontological reflection and heed Keynes’ warnings on using thought-models in economics:

The object of our analysis is, not to provide a machine, or method of blind manipulation, which will furnish an infallible answer, but to provide ourselves with an organized and orderly method of thinking out particular problems; and, after we have reached a provisional conclusion by isolating the complicating factors one by one, we then have to go back on ourselves and allow, as well as we can, for the probable interactions of the factors amongst themselves. This is the nature of economic thinking. Any other way of applying our formal principles of thought (without which, however, we shall be lost in the wood) will lead us into error.

So let me — respectfully — summarize: A gadget is just a gadget — and brilliantly silly simple models — IS-LM included — do not help us working with the fundamental issues of modern economies any more than brilliantly silly complicated models — calibrated DSGE and RBC models included. 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. Questa Nota
    July 14, 2020 at 1:42 pm

    Therapist: “One of the hard lessons learned is that not all people are rational.”

    Also attributed to many prosecutors and defense attorneys, among others.

    Economics seems to be a prominent outlier in that learning distribution.

  2. Yoshinori Shiozawa
    July 14, 2020 at 6:29 pm

    Lars’s argument is hardly convincing.

    Lars Syll is right to claim that there is always a possibility of the existence of variables, phenomena, and causal relations that are “not considered for the formalized mathematical model.” As a refutation of Krugman’s contention, it is not strong enough. Krugman has already contended that he had “seen quite a lot of what economics without math and models looks like” and he had judged “it’s not good.” Lars Syll argues a possibility. Krugman has examined existing theories and claims that there is no good economics. Which is more persuasive?

    But, there is a method to refute Krugman. According to Alex Rosenberg, Krugman seems to claim (or concede) that “there is no alternative to maximization and equilibrium”. (I cite on the assumption that Rosenberg correctly summarized Krugman’s thought.) The strongest refutation is to present a useful theory that assumes neither maximization nor equilibrium.

    our book Is such an example:
    It is highly mathematical but we refuse two concepts: maximization and equilibrium. What we analyze is interactive processes which are generated by historically or empirically confirmed routine behaviors. The new theory is also useful. At least it gives microfoundations to evolutionary as well as Post Keynesian economics. Further development is expected. See Marc Lavoie’s book review:

    Krugman thought that no useful economics was possible without maximization nor equilibrium. But such a theory actually exists. This is clear counter-evidence against Krugman’s belief.

  3. Gerald Holtham
    July 14, 2020 at 9:48 pm

    What drives economic theorising is the search for generalisations that can be applied to different economies at different times. It is always possible to model a particular situation in an economy at a particular time making realistic assumptions ad hoc. Perhaps that is what we should always do but then economics shades into cliometrics or quantitative history. The search for generality may be the pursuit of a mirage in social affairs but it is what motivates all science. That said, I agree with Yoshinori Shiozawa, that economists have backed themselves into far too tight a corner. As Herb Simon knew, it is necessary to take account of uncertainty and look for the actual heuristics that people use in making decisions when they don’t really know what’s going on. That means what is currently assumed has instead to be researched. Economics and social psychology overlap. When we make more sensible hypotheses about human behaviour we generally find that equilibrium is an exception rather than the rule. I retain the faith that generalizations and some sort of theory will still be possible and it will be much more useful
    Interestingly there are some signs of a break from methodological extremism. The theory of consumption, for example, is starting to move away from assumptions of inter-temporal optimisation and beginning to reincorporate sociological elements like “keeping up with the Joneses”. James Duesenberry’s relative income hypothesis is being rehabilitated. Why? Data. You cannot explain patterns in aggregate consumption with standard theory. This is a too-rare case of people heeding the results of econometric analysis, the main means of empirical testing in economics

    • Yoshinori Shiozawa
      July 27, 2020 at 3:52 pm

      There is one thing that Gerald had misunderstood me/us. Our theory is not a generalization of neoclassical economics. Neoclassical vision on how market works draws on the image of price adjustment. Our vision is different, because it tells that (1) prices has normally no function of equating demand and supply, (2) it is producers who adjust supply quantity to the demand quantity by the aid of product inventories. If this is not a paradigm change, it is a Gestalt change on the working of market economy.

      Our result is not an extension or a retouching by bringing new realistic assumptions. It may not seem very revolutionary, because such a vision was told by many economists in many occasions. However, nobody before us have succeeded to build on this vision a theory that has rigid logic which is compatible with Arrow and Debreu’s general equilibrium theory. Moreover, we do not claim that our theory is valid for the economy as a whole. We explicitly exclude financial economy because the latter has a working totally different with modern industrial production economy. This last point is confirmed by Marc Lavoie’s book review.

  4. Ken Zimmerman
    July 26, 2020 at 5:01 pm

    Social sciences rely increasingly on modeling because of their mathematization, the overall computerization of science, and the increase of available data. Once dubbed the “hermeneutic sciences,” the social sciences now resemble more closely the natural sciences, in which model building, testing, and comparison occupy a central role. In this development, economists have undoubtedly been trend setters among the social scientists. Since World War II, model building has become the main practice of economists. What is more, the various modeling methods adopted and developed by economists have disseminated to other social sciences. Especially, political scientists have been inspired by the rational-choice style of modeling and the associated mathematical techniques used by economists. Sociologists, however, still prefer statistical modeling, being rather skeptical about modeling social phenomena in abstract mathematical terms. Anthropologists build models based on the models the people they study build. All people create models as simplified representations of reality that help them handle the largely undifferentiated mass of stimuli that impinges on their senses. Many of these models are tacit while others are quite elaborate conscious models. Some of which evolve into shared cultural models. For anthropologists, then, model is a generic term for any systematic (tacit or conscious) set of guesses or interpretations that people make about their surroundings. And which they then use to navigate and manipulate those surroundings. All which feed back to the original guesses. Sometimes changing the guesses. The guesses can, of course involve mathematics, even mathematics about the structure of the guesses themselves. But it is not the mathematics or the logic that makes the models formal. It is the sharing of the guesses over a large part or all of a society that does that.

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