What came next: Doctor Paul and Mister Krugman

In a previous post, Pedro told us about the two first rounds of the lynching of macroeconomics in these times of crisis: the Economist debate in which Lucas engaged, and a “letter to the Queen” bringing to light the dissent with the british economic community. What comes next, Pedro asked.

What comes next, of course, is Krugman’s article on “how did economists get it so wrong” in the NYT and the additional comments he made last week and today on his blog on “mathematics and economists.”

Essentially, economists got it so wrong, he says, 1) « because economists, as a group, mistook beauty, clad in impressive-looking mathematics, for truth » and 2) because Keynes-like realistic vision of markets and especially financial markets was replaced by the « elegant, convenient, and lucrative » efficient market and rationality hypotheses, two hypotheses that even the skeptical pragmatic new keynesiens were unable to relinquish decisively. « Economics, as a field, got in trouble because economists were seduced by the vision of a perfect, frictionless market system ,» he concludes, arguing that economists should rediscover Keynes, and pay more attention to behavioral finance/economics.

He subsequently clarified/ qualified his position on his blog. He is not against mathematics, « they served an essential function — that of clarifying though », but against equating mathematical elegance with truth (like in these « silly », but « seductive » RBC models)

On unrealistic hypothese,« neoclassical economics radically oversimplifies both the individuals and the system — and gets a lot of mileage by doing that; I, for one, am not going to banish maximization-and-equilibrium from my toolbox. But the temptation is always to keep on applying these extreme simplifications, even where the evidence clearly shows that they’re wrong. What economists have to do is learn to resist that temptation. But doing so will, inevitably, lead to a much messier, less pretty view. »

dr-jekyll-and-mr-hydeAn interesting exercise is to compare these statements with two biographical essays Krugman wrote for the American Economist in 1993 (“how I work and rules for research”) and for a book in 1995.

His rules for research were

1)“listen to the gentiles” (pay attention to empirical evidence). Nevertheless,

“ I have no sympathy for those people who criticize the unrealistic simplifications of model-builders, and imagine that they achieve greater sophistication by avoiding stating their assumptions clearly. The point is to realize that economic models are metaphors, not truth. By all means express your thoughts in models, as pretty as possible. But always remember that you may have gotten the metaphor wrong, and that someone else with a different metaphor may be seeing something that you are missing. “

2) question the question (try to get back to simple question so as to write not too “messy” models)

3) Dare to be silly (in your assumptions)

What seems terribly hard for many economists to accept is that all our models involve silly assumptions. Given what we know about cognitive psychology, utility maximization is a ludicrous concept; equilibrium pretty foolish outside of financial markets; perfect competition a howler for most industries. The reason for making these assumptions is not that they are reasonable but that they seem to help us produce models that are helpful metaphors for things that we think happen in the real world.”

4) Simplify, simplify

In the NYT piece, it now seems that there are two silliness. The good one (using small-scale, but real examples), and the bad one (the RBC type ). And that economists should accept more “messy” models.

But OK, the rules for research were written 15 years ago. The problem is that Krugman did it again. Last year, in the middle of the crisis, during his Nobel prize speech. Published in the AER in June. There, as befits a Nobel prize, he attemps to “samuelsonize” his work, that is, to establish the historical canon for his own discoveries. And he tells a fairy-tale history. At the beginning there were empiricalkrugman-thumb-320x248 puzzles (the growth of similar-similar trade) which could not be explained by the “old” theory of trade rooted in perfect competition. When the first models of monopolistic competition offered the possibility to integrate increasing return to scale into models in the late 70, Krugman proved able, with simple models, to account for intrasectorial trade, drawing on comparative advantages and increasing returns. This “new” theory of trade was made possible by a whole generation of economists’ “new willingness to explore the implications of illuminating special cases rather than trying to prove general results”, e.g., focusing on “silly-seeming cases” (quoting the rule again). On the unrealisticness of his assumptions, he interestingly notes that “The use of deliberately unrealistic assumptions is, of course, common in much of economics. Nonetheless, I can report from early experience that the new style of modeling was met with considerable hostility at first. Some discussants dismissed the whole enterprise as obviously pointless, given the unrealism of the setup.” The same historical pattern is seen in his research in “new” geographical economics. At the end of the story, “the impossible complexity that had previously daunted economists contemplating a major revision of trade theory had vanished, replaced by a surprisingly simple and elegant structure.

chapelierEconomists’ claim that their positive science is in principle independent from values have made them seemingly schizophrenic, and proudly so. So far, contemporary economists have coped with the pretty and elegant silliness of doctor Paul and the messy realisticness of Mister Krugman. Here is for instance how Ed Gleaser is coping:

In his public role, Paul Krugman is often a polarizing figure, loved by millions but also intensely disliked by his political opponents. I still chuckle over an old New Yorker cartoon with one plutocrat saying to another that he gets some satisfaction from the fact that his vote will cancel out the vote of Paul Krugman. Within the less divided world of the academy, Mr. Krugman’s economic research has generated plenty of light, but far less heat. His papers are universally acknowledged to be immense contributions that helped to create two distinct fields.”

But how long will it last?

Edit: Sumner, Cochrane, and Altig responses to Krugman.

Edit 2: also of interest is Krugman’s 1998 piece in the Economic Journal, “two cheers for formalism.”

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12 thoughts on “What came next: Doctor Paul and Mister Krugman

  1. Q:”But how long will it last?” A:Forever?

    Isn’t this what they have always done (with few exceptions, e.g. Galbraith) since the second world war? Empiricists, modelers, good community chaps when in the conference and seminar rooms. Polemicists, political theorists when the microphone is on.

    Paradoxically, if economists did not attack economics, economics might look much more suspicious and dangerous to the public’s eye.

    1. Tiago. I’m not saying that they never did it before (I should know more about that….). It’s just that so far I’ve looked at how economists qua scientists and economists qua public figures have managed (or failed to do so) their multiple identities over their whole life. Here, the personality split is occuring not sequentially, but Krugman’s two personae speak simulatenously, and I can also watch economists as a profession reacting to this schizophrenia.

      And while rejoinders to Krugman are flourishing, no one is turning on Krugman’s AER against him. In that sense, they seem to “ratify” (frind no better word) his behavior

  2. Two brief comments:

    1. If one of the points of the post is that NYT Krugman is inconsistent with Krugman the autobiographer, I for one remain unconvinced. He seems to draw a pretty consistent distinction between “good” uses of models (as metaphors that help to simplify complex questions usually by focusing on special cases) and “bad” ones (as general truths depicting the whole reality). Whether this distinction makes sense is another different question.

    2. At least Krugman deals with his schizophrenia in a straightforward way. He tries to be observant with Robbins’ dividing line by creating two different identities (Scientist and Public Commentator) and goes to greath lenghts to signal to readers/listeners who is saying what at any particular time. Most of his colleagues seem to have convinced themselves that they have monolithic Pure Scientist personalities and try to earn their living selling that to the rest of the world.

    1. Samuel, thank you for this challenging comment.

      Re 1. I have been unable to find in this various pieces as clear a dividing line as clear as you do. He does not classify economists’ models as good or bad, but as nicely or badly silly ( sometimes silly means small-scale, as you put it -the babysitting coop in the NYT, or creative -and he mentions Arrow-Debreu as an exemple of “inspired, marvellous silliness” in 93, and sometimes silly just means stupid and ill-suited, such as real business cycles in the NYT), and as elegant or messy (advising economists to write “not too messy” models in 93, then urging them to accept “messier” models in the NYT blog, and at the same time telling how his own focus on “special cases” kin trade theory helped him fashion a “simple and elegant structure” (AER 2009)).

      Therefore, I don’t see the opposition between good “special case” and bad “generalization” model. In 1993 he praised Arrow-Debreu models, and in 2009-NYT he warned against applying these “extreme simplifications” (“maximization and equilibrium”), while at the same time defending the “use of deliberately unrealistic assumptions” in 2009-AER.

      Re 2. Again (cf comment to Tiago), I’m not criticizing such and such way of dealing with being an scientist and a politically committed public figure. I’m just observing how Krugman manages it, and how the profession responds to that (questioning the public figure without questioning the scientist, even if what he says in one sphere contradicts what he says in the other).

      However, I don’t agree with you implicit presupposition that these two sphere (scientific and public) are hermetically separated. Krugman’s NYT columns on health care (which he is not a “specialist” of) are, for me, carry for me a meaning different from Krugman’s columns on trade (on which he can directly claim nobelized expertise), which are themselves different from Krugman’s columns on the mathematization of economics and macroeconomic models. In the latter case, the subject matter of the scientific sphere is transfered to the public sphere where it is dealt with. And I wonder whether his two identities remain separate in the process. Also, I wonder whether his work as a public figure will alter/are altering/have altered his assessment of scientific theories (such as Arrow Debreu). I’m working on this, but I’m not used to work on material and characters that are moving and changing at the same time I’m trying to pinpoint them.

    2. Beatrice, thank you for your thoughtful answer to my comments.

      Re Re 1. As I read Krugman, he says all models are good because they are silly (I concede that in order to be fully consistent, maybe he should say all models are neutral and silly, but hey, he got a Nobel Prize for building models!), it is when they are used/applied that he can separate the wheat from the chaff, by comparing (somehow) the narratives told with the model/metaphor and reality. I do not think this makes much sense, but he seems to me to be fairly consistent in applying this kind of demarcation criterion.

      Re Re 2. Sorry if I made myself unclear. I do not presuppose that the public and scientific spheres are separated. (Mainstream) economists, at least since Robbins, invariably do, and Krugman is not an exception.

  3. Both Samuel and Tiago’s comments make me think I may be overdoing this schizophrenia analogy, and that I may be wrong in questioning his consistency. Maybe I’d better speak of multiple identity. Or maybe this can be interpreted as using two langages and two set of values to adress two different audiences. I have to think harder.

  4. The proof of the pudding is in the eating they say…
    My own experience with Krugman’s theorizing is the wonderful little book “geography and Trade”. It might be a special case because it is basically made of two or three conferences which he rewrote later as chapters with the models themselves put in annex. However, what I found both intriguing and idiosyncratic in Krugman’s book is that he pretty much integrates the models in a narrative. I read his book as a bunch of stories about the economy (why certain activities are concentrated in certain places/regions? One upon a time in America…) based on evidence (a few key numbers, maps) where he introduces models to provide a rationale, a kind of thought experiment (let’s imagine for a moment a world as simplified as that of this model, now in this world my stylised fact can be explained by such or such effect).
    The columns in the NYT I read are also often written in the same style: a question, a few real-world numbers (it is an idiosynchratic practice, other economists rarely use this kind of number they rather talk about ideas, generalities, Krugman rarely do that at least without providing a few stats), a narrative which he spices up with a few references to technical models/theories/effects (in these articles, he cannot put the technical stuff even in the annex).
    From these loose remarks, I will put Krugman in the category ‘the economist as artist (and story teller)’ – the man who is able to find kind of model to understand the world. I think what he reproachs to others is their lack of sharpness: they can draw models better than me (Krugman’s early articles are reputed for their bad maths), but they do not understand how they can be used the way they should (while I do). If I am right, there is no contradiction between the economist as good model-builder (he needs good models the way the poet needs good metaphors) and good story-teller, that is one that does not believe for a moment that the model should structure the narrative – it is the reverse: the narrative should structure what kind of models we use (models that are meaningful to explain what we can see with a few crude stats/maps and a lot of good sense).
    One can say that Krugman is a kind of post-modern economist who went beyond the positivist model of science, which explains why a lot of people are pissed by what he says: Economics is not about no unique and grand truth (which nt only does not exist but is very dangerous), but about chunks of science artfully disposed in narratives about the real world. He is a scientist who went beyond scientism (at least this the way he would like us to think about him).
    Voilà, this is my grand interpretation of Krugman’s stance.

    1. Whaou, je peux aller me rhabiller.
      This is really enlightening. It is so different from the Krugman I built myself from the AER-JPE papers on scale economies, specialization, increasing returns and geography, etc.
      Your picture of Krugman actually reminds me of my impression when I read Akerlof’s book of tales, the best story book ever.

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