Even a Blind Squirrel Occasionally Finds a Nut

| Peter Boettke |

 Paul Krugman discusses what went wrong with economics.  His indictment that the profession confused beauty with truth is a particularly important one to critically assess.

 

Readers may want to look at my papers "What is Wrong with Neoclassical Economics (and still wrong with Austrian economics)" and "Where Did Economics Go Wrong?" both written during the mid-1990s and develop a similar sort of argument about beauty and truth in economic reasoning, and in particular the issues of precision and relevance.  

Hat tip to Tyler Cowen.  

Comments

[Tom Dougherty]

So far, I’ve only read page one of his eight page article on the web, but I am having a hard time believing what I am reading.

Krugman writes, “More important was the profession’s blindness to the very possibility of catastrophic failures in a market economy.”

I didn’t know recessions were to be categorized as catastrophic failures. But notice how he is linking the market with catastrophic failure. This will be the theme on page one: the market is the problem.

Krugman: “But the main division was between those who insisted that free-market economies never go astray and those who believed that economies may stray now and then but that any major deviations from the path of prosperity could and would be corrected by the all-powerful Fed.”

Here he goes again, suggesting that the US economy is free from government intervention, i.e. free-market economy. And when he say “go astray” that means go in to recession, right? Who are these economists who believe the economy never goes in to a recession? I don’t believe you could find any economist over the age of eight years old that would believe the economy never goes in to a recession. The second group of economists (there is only two you see) believes the economy could go in to a recession (and a major one at that) but the Fed could correct it.

But in the very next sentence Krugman writes, “Neither side was prepared to cope with an economy that went off the rails despite the Fed’s best efforts.”

But didn’t he just say that the second group of economists thought that the economy could go off the rails in to a recession. Does he not remember what he wrote one sentence before? Of course, I can see how he could forget since he writes in such a convoluted way.

Krugman: “Until the Great Depression, most economists clung to a vision of capitalism as a perfect or nearly perfect system. That vision wasn’t sustainable in the face of mass unemployment, but as memories of the Depression faded, economists fell back in love with the old, idealized vision of an economy in which rational individuals interact in perfect markets, this time gussied up with fancy equations.”

Once again, Krugman is unclear in his meaning. What does he mean when he says most economists thought of capitalism as perfect or nearly perfect? Does he mean economists thought capitalism was better than any other system of organizing the economy or capitalism doesn’t have depressions and mass unemployment? It appears the latter. Did most economists think the economy was impervious to recessions/depressions and high unemployment? Perhaps, the degree of unemployment was unprecedented, but were economists really unaware of recessions/depressions and unemployment and thought capitalism was “perfect”?
For Krugman so far we have had catastrophic failure of market economies, a mistaken belief that free-markets could never “go astray” or “off the rails”, economists’ mistaken vision of perfect markets, but nowhere is the notion that the government could be responsible for recessions, depressions, and unemployment.

Krugman finally gets to the causes of the economy getting “off track”: “Unfortunately, this romanticized and sanitized vision of the economy led most economists to ignore all the things that can go wrong. They turned a blind eye to the limitations of human rationality that often lead to bubbles and busts; to the problems of institutions that run amok; to the imperfections of markets — especially financial markets — that can cause the economy’s operating system to undergo sudden, unpredictable crashes; and to the dangers created when regulators don’t believe in regulation.”

I think economists can safely keep ignoring Krugman’s advice on how to improve the profession if this is his vision of how the economy functions: Bubbles and busts created by irrationality? An economy zooming in to a recession because of a lack of regulation? Analogizing the economy to a Windows operating system that crashes? Unspecified institutions that run amok? Wow. If this is the new vision of the economy that economists need, then give me the old vision.

That is only from part one. I don’t know if I can stand anymore of the Krugman vision.

[fundamentalist]

I get your point about the math, but it seems to me that economics turned to math because economists decided that theory had been decided and there was nothing more to debate about theory. That left them free to pursue math elegance that described the underlining theory. I don’t think the math took economics away from reality. Neoclassical theory did that and the math just followed. Ricardo, for example, simplified economics to the point of unreality with his aggregates long before math became popular in the field.

As a counter example, think of what neoclassical economics would be like without the math. Stripped down to theory, it’s still no better. On the other hand, imagine that Samuelson had taken Hayek’s works and tried to mathematize them. We probably wouldn’t be complaining about the math today. Hayek’s “Pure Theory of Capital” is chock full of math hidden in his graphs. Of course, he deals almost exclusively with equilibrium in the book.

“…the language of mathematics is not designed to deal with issues of semantic meaning.”

I don’t think math is that limited. It expresses some very complex structures in the natural sciences. There is no reason for the math in economics to express simplistic ideas. A technique called structural equation modeling (SEM) is popular in the social sciences, especially psychology, sociology and even marketing. It’s popular in those fields because it can express subtle concepts that are difficult to measure. I use the technique at work to analyze customer satisfaction. I have yet to find any economist who is even familiar with the technique. But I think SEM was invented for Austrian econ.

Rather than abandon math, I would like to see Austrian econ move more in the direction of attempting to mathematize its theories without simplifying them to unrealistic proportions.

[Maximum Liberty]

Amazing how I never knew that al economists were either neoclassical or neokeynesian. But Krigman knows all. So, which are we?

Max

[Rafe Champion]

Bad news for the Turks, Paul Krugman is avaılable ın translation. Seen ın a book dısplay ın İstanbul. Krugman on lıberalısm.
http://www.ilknokta.com/urun/90483/Bir-Liberalin-Vicdani--Paul-Krugman.html

Off topıc but irresıstable, wısh you were here!
http://www.kismet.com.tr/

Fundamentalist, İ dont know enough math or economics to be sure but right now İ dont see how Aust economıcs will be ımproved by maths, apart from statıstıcal analysıs of the kınd used ın all scıences ın analysıng data - a la Koppl for example. The use of maths ıs ınstrumental, not an ıntergral part of the theory. You may be onto a good method for testıng certaın kınds of hypotheses that ınvolve subjectıve thıngs lıke perceptıons and ıntentıons. But thıs ıs not mathematicising economıcs.

The fırst thıng ıs to have hypotheses that are worth testıng.

[Max]

I don't know in which universe Mr. Krugman lives, when he writes a sentence like that: "“The General Theory” is a work of profound, deep analysis — analysis that persuaded the best young economists of the day. Yet the story of economics over the past half century is, to a large degree, the story of a retreat from Keynesianism and a return to neoclassicism."

Perhaps this is true for the US of A, but Europe tried Keynes, excessively so (France f.e.) and they failed miserably. Then they adopted a more neoclassical approach and they got bummed this year and last.

So, no, Mr. Krugman your knowledge about modern economic history seems to be lacking a bit especially on Europe...

[Roger Koppl]

I tend to think we could use a little more math. Economics is about the unintended consequences of human action. It's hard to much with math on the human action part, but unintended consequences have no meaning and it is easier to apply math to them. As followers of this blog may know, I'm also pretty keen on computable economics, which involves some rather heavy math. Here is an example of how I've tried to use that stuff:
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1248409

As fundamentalist seems to suggest, capital theory is a place Austrians could use more math. I like Pete Lewin's (unpublished?) idea to replace all the stuff about orders of goods with the notion of "duration."

[fundamentalist]

Rafe, I don't think math would improve Austrian theory at all. As Mises wrote, math is just a translation of English theory into math symbols. I think math would help sell Austrian econ to others, and people long for specificity. All math does is make theory more specific. Austrians could provide that specificity, with the appropriate caveats, if we translated the theory into math.

[Rafael Guthmann]

"Rather than abandon math, I would like to see Austrian econ move more in the direction of attempting to mathematize its theories without simplifying them to unrealistic proportions."

Well, Boettke pointed out in this blog last year that there is one article by Andrew Yates were he tries to formalize some aspects of Kirzner's theory:
http://www.sciencedirect.com/science?_ob=ArticleURL&_udi=B6WJ3-45FCBT6-2F&_user=10&_rdoc=1&_fmt=&_orig=search&_sort=d&_docanchor=&view=c&_searchStrId=1003659484&_rerunOrigin=google&_acct=C000050221&_version=1&_urlVersion=0&_userid=10&md5=6721f14f23994fb2dcb63f9fd572300f

I think that he failed to formalize anything successfully.

[Eric]

This is the second time I've seen something like this:

"economists fell back in love with the old, idealized vision of an economy in which rational individuals interact in perfect markets, this time gussied up with fancy equations."

Robert Skidelsky published a similar indictment of contemporary economics a few weeks ago, where he too disingenuously blamed the mathematization of economics on the New Classical (ie Rational Expectations) school. Krugman tries to go back even further and blame it all on Milton Friedman. As I recall from when I was in Pete's class a few years ago, it was actually Paul Samuelson, a Keynesian, who mathematized economics in the late 1940s. Samuelson was the one who transformed economics from a real-world applied discipline to a blackboard theoretical one. Friedman, the Monetarists, the New Classicals, and everyone who came after, just carried on the party that Samuelson had already started.

[Barkley Rosser]

fundamentalist,

While SEM was initiated by the brilliant geneticist, Sewall Wright in 1921, whom I knew personally, its next major promulgators and advocates were Trygve Haavelmo in 1943 and Herbert Simon in 1953, both economists.

Max,

Sorry, but France has never been a place where Keynesian views have had much influence on policy making or most of economic analysis, although there has been a group of "temporary equilibrium" Keynesians at CEPREMAP, such as Benassy, and a group of Post Keynesian circuitist theorists who mostly publish only in French and have little sway with practically anybody (and none ever with the French government). The French politicians did not like being influenced par un Anglais, and they long preferred indicative planning, which Keynes briefly advocated in his "The End of Laissez-Faire," only to completely ignore thereafter.

Eric,

There were people mathematizing economics long before Samuelson, see a bunch of Frenchies in the 19th century such as Cournot and Walras, among others, not to mention Pareto, who wrote in French, even if he was Italian.

It is true, however, that Samuelson had an enormous influence in pushing the economics profession en masse towards more mathematical approaches, and his 1947 Foundations of Economic Analysis became the standard foundation for most grad micro theory courses in the US for decades (now that is supplemented by lots of game theory in most programs).

[fundamentalist]

Barkley, Do you know any economists who have used SEM recently? I have searched but haven't found any myself.

Austrian theory does great at qualitative forecasting, but people naturally long for specificity, as much as possible. There is no reason that sound theory can't produce good math models that offer greater specificity with the appropriate caveats.

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[Sam Hill]

Application of a mathematical model in economics or any subject matter
where validation is absent from the result or projected result, by some reasonable method, is flawed. Too many mathematical models in economics
that are sheer theory. End of story.

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