Home > Uncategorized > Paul Krugman’s gadget version of Keynesianism

Paul Krugman’s gadget version of Keynesianism

from Lars Syll

krugmanPaul Krugman has often been criticized by people like yours truly for getting things pretty wrong on  the economics of  John Maynard Keynes.

When Krugman has responded to the critique, by himself rather gratuitously portrayed as about “What Keynes Really Meant,” the overall conclusion is — “Krugman Doesn’t Care.”

Responding to a post up here on this blog, Krugman writes:

Surely we don’t want to do economics via textual analysis of the masters. The questions one should ask about any economic approach are whether it helps us understand what’s going on, and whether it provides useful guidance for decisions.

So I don’t care whether Hicksian IS-LM is Keynesian in the sense that Keynes himself would have approved of it, and neither should you.

The reason for this rather debonair attitude seems to be that history of economic thought may be OK, but what really counts is if reading Keynes gives birth to new and interesting insights and ideas.

No serious economist would question that explaining and understanding “what’s going on” in our economies is the most important task economists can set themselves — but it is not the only task.  And to compare one’s favourite economic gadget model to what “austerians” and other madmen from Chicago have conjured up, well, that’s like playing tennis with the nets down, and we have to have higher aspirations as scientists.

Although I have a lot of sympathy for Krugman’s view on authority, there is also a somewhat disturbing and unbecoming coquetting in his attitude towards the great forerunners he is discussing. Krugman is a great economist, but it smacks not so little of hubris to simply say “if where you take the idea is very different from what the great man said somewhere else in his book, so what?” Physicists arguing like that when discussing Newton, Einstein, Bohr or Feynman would not be taken seriously.

Krugman’s comment on this issue is interesting, however, because it sheds light on a kind of inconsistency in his own art of argumentation. Krugman has in more than one article criticized mainstream economics for using to 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. Models that actually, when it comes to methodology and assumptions, have a lot in common with the kind of model-building he otherwise criticizes. And although Krugman repeatedly says that he is a strong believer in “simple models,” those models are far from simple.

But I think the absolute all-time low in Krugman’s response is this remarkable passage:

Has declaring uncertainty to be unquantifiable, and mathematical modeling in any form foolish, been productive? Remember, that’s what the Austrians say too.

23e17eb61f800c21ca20e84926a714a278a62f70f97c7ed404223ffa5adfbd3eI won’t comment on the shameful guilt-by-association part of the quote, but re uncertainty it’s absolutely gobsmacking how Krugman manages to mix up the ontological question — is the economy permeated by calculable risk or by genuine and often not calculable uncertainty  — with the epistemological question — how do we manage to analyze/understand/explain/model such an economy. Here Krugman seems to say — much in the spirit of Robert Lucas — that if reality is uncertain and non-ergodic, well then let’s just pretend it’s ergodic and susceptible to standard probabilistic analysis, so that we can go on with our FORTRAN programs and mathematical models! In other areas of science that would rightfully be considered fraud, but in “modern” mainstream economics it’s obviously thought of as an unprobematic and justified procedure.

And then, of course, not really trying to clinch the deep theoretical issue at stake, Krugman for the n:th time puts forward his IS-LM gadget interpretation of economics.

Being able to model a “gadget world” — 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 lack of realism has to be qualified.

No matter how many convoluted refinements of concepts made in the gadget model, if the “successive approximations” do not result in models similar to reality in the appropriate respects (such as structure, isomorphism etc), the surrogate gadget system becomes a substitute system that does not bridge to the world, but rather misses its target.

So — constructing gadgets like IS-LM macroeconomic models as “stylized facts” somehow “successively approximating” macroeconomic reality, 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. Many of the model assumptions made in IS-LM models and “New Keynesian” DSGE models are restrictive  rather than harmless and could a fortiori anyway not in any sensible meaning be considered approximations at all.

Where does all this leave us? Well, I for one, is not the least impressed by Krugman’s gadget interpretation of economics. And if labels are as uninteresting as he says — well, then I suggest Krugman and other “New Keynesians” stop calling themselves Keynesians at all. I’m pretty sure Keynes would have appreciated not having his theories and thoughts being referred to by people having preciously little to do with those theories and thoughts.

Studying great forerunners like Keynes may help us to construct better and more relevant economic models – models that really help us to explain and understand reality. So when Krugman writes

we do want, somewhere along the way, to get across the notion of the self-correcting economy, the notion that in the long run, we may all be dead, but that we also have a tendency to return to full employment via price flexibility

I would certainly recommend him to compare his own statement with what Keynes himself wrote:

Though we all started out in the same direction, we soon parted company into two main groups. What made the cleavage that thus divided us?

On the one side were those who believed that the existing economic system is in the long run self-adjusting, though with creaks and groans and jerks, and interrupted by time-lags, outside interference and mistakes … These economists did not, of course, believe that the system is automatic or immediately self-adjusting, but they did maintain that it has an inherent tendency towards self-adjustment, if it is not interfered with, and if the action of change and chance is not too rapid.

John Maynard KeynesThose on the other side of the gulf, however, rejected the idea that the existing economic system is, in any significant sense, self-adjusting. They believed that the failure of effective demand to reach the full potentialities of supply, in spite of human psychological demand being immensely far from satisfied for the vast majority of individuals, is due to much more fundamental causes …

The gulf between these two schools of thought is deeper, I believe, than most of those on either side of it realize. On which side does the essential truth lie?

The strength of the self-adjusting school depends on its having behind it almost the whole body of organized economic thinking and doctrine of the last hundred years. This is a formidable power. It is the product of acute minds and has persuaded and convinced the great majority of the intelligent and disinterested persons who have studied it. It has vast prestige and a more far-reaching influence than is obvious. For it lies behind the education and the habitual modes of thought, not only of economists but of bankers and business men and civil servants and politicians of all parties …

Thus, if the heretics on the other side of the gulf are to demolish the forces of nineteenth-century orthodoxy … they must attack them in their citadel … Now I range myself with the heretics. I believe their flair and their instinct move them towards the right conclusion. But I was brought up in the citadel and I recognize its power and might … For me, therefore, it is impossible to rest satisfied until I can put my finger on the flaw in the part of the orthodox reasoning that leads to the conclusions that for various reasons seem to me to be inacceptable. I believe that I am on my way to do so. There is, I am convinced, a fatal flaw in that part of the orthodox reasoning that deals with the theory of what determines the level of effective demand and the volume of aggregate employment …

John Maynard Keynes (1935)

  1. topcat
    July 9, 2021 at 10:30 pm

    Krugman is a fully paid up member of the citadel and has no interest in any other ideas. He will carry on until he retires and dies. He will never change his mind and discussing the issues with him is pointless.

  2. Ikonoclast
    July 9, 2021 at 11:18 pm

    “Fixing a Hole” by Lennon-McCartney (mainly McCartney) sums up the issue of the citadel and the gatekeepers.

    “I’m fixing a hole where the rain gets in
    And stops my mind from wandering
    Where it will go

    (Interpretation: I don’t want empirical reality to get in and interfere with my fantastic models.)

    I’m filling the cracks that ran through the door
    And kept my mind from wandering
    Where it will go

    (Interpretation: The door or “gate” must be fixed so the door-keeper or gate-keeper can keep out unwanted reality and critical people.)

    And it really doesn’t matter if
    I’m wrong I’m right
    Where I belong I’m right
    Where I belong
    See the people standing there
    Who disagree and never win
    And wonder why they don’t get in my door

    (Interpretation: “If I’m wrong I’m right” needs no interpretation. It is entirely literal. I belong in the citadel because that’s where I’m right. People who disagree will never win and they will never get past the door or gate into the citadel.)

    I agree with Keynes. The truth, or at least the genuinely critical search for it, is always outside the citadels of orthodoxy. As I see it, all the arguments from within the citadel will become obsolete when capitalism collapses. When will capitalism collapse? It’s collapsing right now, Western capitalism first. Then Chinese (state) capitalism will collapse too. Capitalism, as the unfettering of appetite, desire and acquisitiveness without regard for natural limits is destroying the biosphere; ending the Holocene and ushering in not the Anthropocene but the Anthropocalypse: the destruction of the world by man, no gods needed.

    The Bowie/Iggy Pop song “China Girl” is almost prophetic.

    “My little China girl
    You shouldn’t mess with me
    I’ll ruin everything you are
    You know it
    I’ll give you television
    I’ll give you eyes of blue
    I’ll give you a man who wants to rule the world.”

    China “messed with the West”. It adopted Marxism (a Western ideology) and then Capitalism (a Western ideology). It now appears to have won and it has in a sense. The Chinese economy is the biggest in the world on PPP measures. However, it has made the same Faustian bargain as the West. Riches and power now and the Anthropocalypse later (not very much later).

    “I’ll ruin everything you are… I’ll give you television.. I’ll give you a man who wants to rule the world.” The latter being Xi Jinping. If I believed in prophecy, I would call this prophetic. Television as the symbol of consumerism indicates consumerism ruins everything we are. China now has more obese people in total than the USA (though less on a percentage basis). China cannot escape the fate we have all doomed ourselves to. Human weakness raised to the power of capitalism equals collapse.

    I can’t even be bothered with making more serious arguments. The situation is too late for that. If people think there is still an argument (that capitalism is okay) then they aren’t paying any attention to real world evidence. It’s useless arguing with such people. The real world evidence has to bite THEM in the ass. Then they will know what’s happening although no doubt they still won’t have any idea why it’s happening. Much of the ignorance in many humans now is undispellable. That’s the tragedy elucidated by agnotology (the study of deliberate, culturally-induced ignorance or doubt, typically to sell a product or win favour). More than anything, capitalism requires mass ignorance and mass denial to operate.

    • Econoclast
      July 10, 2021 at 1:01 am

      Good post, Ikonoclast.
      I’ve long referred to the power of predatory corporate capital (um, did I repeat myself just now?) as the elephant in the room, a giant presence underlying every important issue (did I just understate? um, every issue) yet rarely discussed.

      • July 12, 2021 at 3:12 pm

        Agreed, Econoclast.

  3. Ken Zimmerman
    July 11, 2021 at 8:34 am

    On the one side were those who believed that the existing economic system is in the long run self-adjusting, though with creaks and groans and jerks, and interrupted by time-lags, outside interference and mistakes … These economists did not, of course, believe that the system is automatic or immediately self-adjusting, but they did maintain that it has an inherent tendency towards self-adjustment, if it is not interfered with, and if the action of change and chance is not too rapid.

    Those on the other side of the gulf, however, rejected the idea that the existing economic system is, in any significant sense, self-adjusting. They believed that the failure of effective demand to reach the full potentialities of supply, in spite of human psychological demand being immensely far from satisfied for the vast majority of individuals, is due to much more fundamental causes …

    This begs the question, what is self-adjusting? Rather than go down that rabbit hole, I prefer to begin with a concept with a long and useful history that thus might benefit economics and economists—homeostasis.

    I begin with this from the journal article, ‘Exploring the concept of homeostasis and considering its implications for economics’ (Antonio Damasio, Hanna Damasio).

    In its standard format, the concept of homeostasis refers to the ability, present in all living organisms, of continuously maintaining certain functional variables within a range of values compatible with survival. The mechanisms of homeostasis were originally conceived as strictly automatic and as pertaining only to the state of an organism’s internal environment. In keeping with this concept, homeostasis was, and still is, often explained by analogy to a thermostat: upon reaching a previously set temperature, the device commands itself to either suspend the ongoing operation (cooling or heating), or to initiate it, as appropriate. This traditional explanation fails to capture the richness of the concept and the range of circumstances in which it can be applied to living systems. Our goal here is to consider a more comprehensive view of homeostasis. This includes its application to systems in which the presence of conscious and deliberative minds, individually and in social groups, permits the creation of supplementary regulatory mechanisms aimed at achieving balanced and thus survivable life states but more prone to failure than the fully automated mechanisms. We suggest that an economy is an example of one such regulatory mechanism, and that facts regarding human homeostasis may be of value in the study of economic problems. Importantly, the reality of human homeostasis expands the views on preferences and rational choice that are part of traditionally conceived Homo economicus and casts doubts on economic models that depend only on an “invisible hand” mechanism.

    This clearly lays out how homeostasis can apply to economic arrangements (institutions). These are regulatory mechanisms aimed at achieving balanced and thus survivable life states but not via any automatic or automated processes. In other words, economics is a regulatory process that helps but does not guarantee human success or survival. It promotes homeostasis.

    Constructing ‘gadgets’ like IS-LM macroeconomic models, or, for that matter any mathematical model is not just useless but destructive of all efforts to create such an economy. By this the result is direct threats to the survivability of our species. Economic institutions that do not regulate leave the door open for disaster.

    This brings us to the question of the point of the regulation. Do economic institutions regulate to maintain themselves or to protect our species? Currently, most regulate to protect themselves and the small minority of humans that benefit from them. Reversing this is one of major projects of our time.

  4. Gerald Holtham
    July 14, 2021 at 6:11 pm

    “Although I have a lot of sympathy for Krugman’s view on authority, there is also a somewhat disturbing and unbecoming coquetting in his attitude towards the great forerunners he is discussing. Krugman is a great economist, but it smacks not so little of hubris to simply say “if where you take the idea is very different from what the great man said somewhere else in his book, so what?” Physicists arguing like that when discussing Newton, Einstein, Bohr or Feynman would not be taken seriously.”
    That illustrates a difference between economic and natural sciences. On the whole physicists.do not discuss Newton, Einstein or Bohr.. They might discuss the version of their theories that has become canonical but only to assess its continued relevance to the latest data and not to ponder the footnotes or marginalia of the masters. That is because physicists are dealing with a system with some stable properties and they have accepted procedures for eliminating theories. That is not true in economics so theories never die. There is someone somewhere still promoting every single economic theory ever propounded. There are also people trawling the works of past economists for neglected insights.
    It is a legitimate occupation but there is no particular assurance that it will yield anything useful to present concerns.
    Incidentally didn’t Keynes himself say he thought IS-LM was a useful gadget? The IS bit is not problematical but the LM curve assumes the money supply is exogenous or fully under policy control. That is seriously counterfactual and means the model can mislead in some situations. It can never be applied on its own anyway but always requires auxiliary hypotheses about things like the labour market, international trade and the state of expectations. Even useful gadget can’t do everything. IS_LM has been the Swiss army knife of macroeconomics but it is silly to expect too much. The knife is no good for hammering nails or digging deep holes.

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