Contra Krugman II
I generally agree with Paul Krugman, so it is exiting that I am outraged by something he wrote (I’ve calmed down now).
Paul Krugman says that scratchpads are useful. They are sloppy easy models which are not taken seriously. Or maybe which shouldn’t be taken seriously, but it’s not a big problem that many powerful people take them literally. I lose my temper.
IS-LM isn’t the prime example of a scratchpad. What is?
The answer is, supply and demand.
It is not easy to derive supply and demand curves for an individual good from general equilibrium with rational consumers blah blah. And it’s definitely not easy to justify consumer and producer surplus as measures of welfare. And there have always been some purists who condemn any use of the S and D curves we all grew up with, the use of triangles to measure welfare loss, and all that.
But for the most part nobody pays attention. The supply-and-demand framework is so convenient, while pretty much getting at what you want to get at, that it’s what almost everyone uses to get a first-pass analysis of economic issues.
Which is perfectly fine as long as you keep the limitations of the scratchpad in mind.
No it isn’t !!! It is perfectly fine so long as you and all the people who read or skim what you right keep the limitations in mind. What is in, say, Krugman’s mind can’t protect us from people who don’t have those limitations in their mind.
Before I really get going, I note the first example of a scratch pad IS-LM. Here many people (including Jeff Sachs) think Krugman argues that fiscal stimulus is always a good approach to disappointing growth. In fact, Krugman argues that monetary policy is better except when the economy is in a liquidity trap. Policy makers forgetting what Krugman remembers but doesn’t always stress about the limitations of IS-LM will lead to trouble. The fact that Krugman knows what Krugman thinks won’t protect us.
OK so he also has some use for supply and demand curves. Here there is a problem. Economists know that the assumed slopes of curves based on utility maximisation is just one possibility. Basic micro includes the explanation of substitution effects and income effects. But policy makers generally act as if there are no income effects. The fact that economists know about them doesn’t make policy better.
The thing which outraged me (I’m calm now) is the reference to the sum of consumer and producer surplus as a measure of welfare. This makes sense so long as the distribution of income has no effect on welfare. Of course Krugman doesn’t think that or else he wouldn’t have written the post immediately below. The idea that inequality is not a negligible problem should not be confined to purists. The idea that economic analysis and economic efficiency are based on consumer surplus plus producer surplus is extremely powerful and damaging.
What economists keep in mind doesn’t matter much. What matters is what is in policy makers’ minds. The habit of treating consumer plus producer surplus as welfare while keeping the fact that it isn’t in mind has done vast damage.
Reading Krugman’s blog is more like picking up the conversation from the day before. I can see your concern but I have never misunderstood because the clarification was in a blog a few months ago. I think maybe the problem is with blogs but there is no solution to that. I’d rather keep a healthy Robert than lose him to blogitis anxiety.
Blogging is part of the problem, but I think a lot of it is and always has been the human condition. People don’t pay attention to everything (or remember everything they once noticed).
“Practical men, who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back”, but they can’t be trusted to remember the qualifications.
I too feel I understand Krugma, but I too read his blog everyday. What matters is not what is in his heart and mid *or* what his fans (I sure am a fan) think. What matters is the vague impression of the general public, of policy makers and maybe of young economists deciding on what approach to follow.
The qualifications in his mind matter to no one but him. The
qualifications in his academic papers and in some but not all of his blog posts matter little as only obsessive devotees (such as myself) know about them.
If I remember my freshman mechanics correctly, the displacement of a spring is proportional to the applied force, except when it’s not. (That’s what they taught us.) It’s not too harmful in physics, because you don’t have complete idiots designing bridges or suitcase closures. You are right that it is harmful in economics, because we have complete idiots in our economy, many of them greedy bastards in powerful decision making positions.
The problem is that things like Hooke’s Law (see above) and supply and demand curves is that they can be useful for a first approximation. Maybe it’s high time for some economist to come up with something better that allows for some form of reasoning and argument, but doesn’t require a lot of provisos and deep understanding.
In physics, the approach has involved dynamics simulation. Ever since the late 80s, all those intractable problems that freshman physics glosses over have become quite tractable thanks to massive doses of computrons.
Maybe we need a popularly accessible simulation, maybe even disguised as a game. Then economists can reason about rising demand or what ever and refer to various game situations. I know this sounds like something from over on the Cracked web site where they describe famous battles in terms of events or levels in popular games, but there is some point to it. Besides, economics in detail is much more tractable nowadays what with all the computrons. It would take only seconds to balance a mere ten billion accounting ledgers. The old fashioned statistical approaches to economics are just that, awfully old fashioned. It’s time to move the field into the 20th century.
P.S. Yes, I know, my biases are obvious.
Robert,
It is precisely the limitations they want policy makers to forget when economists are making strong policy pronouncements to the policy community (think free trade and the litany). Every time I get in a public scuffle with an economist on the limitations to the models in policy debates I get a placid stare back that says: “yawn, you loose the details don’t matter.”
It is an elitist anti intellectual posture and its not just boring it is harmful.
What Kaleberg said. In academic work computers have changed macroeconomics. We don’t rely on some silly assumptions needed to get closed form solutions, because models are simulated.
I think that the level of complexity of the computer solved models is not close to that of models used by physicists (the program tends to be written by one person a new one for each article). I think the reason is that the models are fundamentally unlike reality, so the problem is not one which can be solved by using computers and not pen and paper. The simplest models and more complex models have the same fundamental defects. But that’s just my guess.
The real problem is that the people who do things based on physics are engineers some of whom might be boring but almost all of whom sweat the details. Economics is used by politicians who are overwhelmed, sloppy, ideological and who have the incentive to believe that serving powerful interest groups is good policy.
Also what Travis said. A very large part of the problem is bad faith — people who know better using the scratch pad assumptions to bamboozle. Also it is very true that in economics an economist thinks “this silly model might be a useful approximation” .Over decades the guy gets a Nobel prize, the silly model is used a lot and it generates lots of false predictions. Finally economists decide that it must be a good first approximation because … huh wha.
This is definitely true of the IS-LM model. Second hand but I think Hicks once said “It’s just a doodle.”
Anyway, I really like this thread.
Policymakers will abuse what economists say regardless of whether it comes from a scratch pad, an iPad, some elaborate model, or simply counting to 20 by taking one’s shoes off.
Sorry, but your argument here seems to be that your standard is “the” standard. You have decided that Krugman is not allowed to convey his views of economics in a way that doesn’t satisfy you. You are not arguing that his economics is wrong, or that the policy conclusions he draws from his economics is wrong. You are not arguing that his use of “scratch-pads” and “gadgets” is substantively wrong. You are arguing that he has an obligation to make clear to his less devoted readers the possible misconception that they could arrive at from his writings about scratch-pads and gadgets and nudge them away from those misconceptions. In other words, his job is to serve your agenda. (By they way, has it occurred to you that the set of possible misconceptions is infinite? What you are asking, apparently without realizing it, is that Krugman stop writing about economics. To avoid the possibility of allowing any reader to misconceive his intentions, Krugman can’t write anything.)
That is not his job. Krugman is doing vastly more good with his popular writing that you are with yours, and would be a fool to let you tell him how to do his job. The difficulty of conveying economic ideas, smacking the “Overton window” back toward reality, and doing those things in a way makes him eligible for space in the NYT is monumental. Adding somebody else’s agenda to that list is very likely to water down the effect of his other efforts.
Oh, by the way, here is a very good example of why Krugman should ignore you: “The thing which outraged me (I’m calm now) is the reference to the sum of consumer and producer surplus as a measure of welfare.”
The some of consumer and producer surplus is a measure of welfare. There isn’t any question that it is “a” measure of welfare. It may not be the one you want Krugman to feature, but there’s no doubt he is correct in his statement. In the context of what he was writing, it is perfectly simple to understand why he mentioned that measure rather than any other. Manipulating supply and demand curves gives you consumer and producer surplus measures and shows how various circumstances can reduce those surpluses. You want to put different weights on consumer and producer surpluses? Feel free. Make the argument. What you haven’t done is make any sort of argument against examining consumer and producer surpluses as a way of assessing welfare implications.
Robert said, “What matters is what is in policy makers’ minds. The habit of treating consumer plus producer surplus as welfare while keeping the fact that it isn’t in mind has done vast damage.”
Do you mean policy makers that may be academics who have some influence on elected officials? Or, do you mean elected officials that make policy? If the latter, when have you ever witnessed a “policy maker” thinking in such an elaborate manner when seeking to excuse his own idiotic policy decisions? “….treating consumer plus producer surplus as welfare…” I can’t imagine any elected official making such a comment under any circumstances.
We hear policy makers make inane connections between concepts and their actions which bear no relationship to the real world. “Don’t taxs job creators.” Who might they be? “Don’t tax small business people. They are the back bone of our economy.” What has one thing to do with the other?
The point is that policy makers lie. They take any concept and bend it around until it seems to support their actions. Debate does not drive policy. Policy frames the debate.
Professor Lars Pålsson Syll writes in “The nodal point of the macroeconomics debate”
16 July, 2012
http://larspsyll.wordpress.com/2012/07/16/the-nodal-point-of-the-macroeconomics-debate/
“This summer both Oxford professor Simon Wren-Lewis and Nobel laureate Paul Krugman have had interesting posts up discussing modern macroeconomics and its alleged needs of microfoundations.
Most “modern” mainstream neoclassical macroeonomists more or less subscribe to the view that microfoundations somehow has lead to better models enabling us to make better predictions of future macroeconomic events…Yours truly basically side with Wren-Lewis and Krugman on this issue, but I will try to explain why one might be even more critical and doubtful than they are re microfoundations of macroeconomics.
Microfoundations today means more than anything else that you try to build macroeconomic models assuming “rational expectations” and hyperrational “representative actors” optimizing over time. Both are highly questionable assumptions.
The concept of rational expectations was first developed by John Muth (1961) and later applied to macroeconomics by Robert Lucas (1972). Those macroeconomic models building on rational expectations-microfoundations that are used today among both “new classical” and “new keynesian” macroconomists, basically assume that people on the average hold expectations that will be fulfilled. This makes the economist’s analysis enormously simplistic, since it means that the model used by the economist is the same as the one people use to make decisions and forecasts of the future.
Macroeconomic models building on rational expectations-microfoundations assume that people, on average, have the same expectations. Someone like Keynes for example, on the other hand, would argue that people often have different expectations and information, which constitutes the basic rational behind macroeconomic needs of coordination. Something that is rather swept under the rug by the extremely simple-mindedness of assuming rational expectations in representative actors models, which is so in vogue in “New Classical” and “New Keynesian” macroconomics. But if all actors are alike, why do they transact? Who do they transact with? The very reason for markets and exchange seems to slip away with the sister assumptions of representative actors and rational expectations.
Macroeconomic models building on rational expectations microfoundations impute beliefs to the agents that is not based on any real informational considerations, but simply stipulated to make the models mathematically-statistically tractable. Of course you can make assumptions based on tractability, but then you do also have to take into account the necessary trade-off in terms of the ability to make relevant and valid statements on the intended target system. Mathematical tractability cannot be the ultimate arbiter in science when it comes to modeling real world target systems. One could perhaps accept macroeconomic models building on rational expectations-microfoundations if they had produced lots of verified predictions and good explanations. But they have done nothing of the kind”
@jack I mean politicians. I am thinking of European politicians and especially of Eurocrats in Brussels. They don’t accept consumer plus producer surpluse as welfare, but they do call it economic efficiency and argue a lot about it.
Also say at the IMF until recently (it seems to have flipped from being at the extreme austerian end of policy makers to the opposite in the past few years(. There is an idea that subsidizing bread is extremely inefficient. It is also the only way to transfer from rich to poor in countries which can’t collect income tax (which is most of them). At the IMF economists make policy.
On another topic.
Actually my objection goes well beyond Kruman’s scratch pad to his gadget. the alternative to supply and demand curves he considers is general equilibrium with complete markets. This is an absolutely key and obviously false assumption.
@kharris I haven’t read yuor whole comment. I must stress I am not objecting to saying things which might be misunderstood. I am objecting to saying things about mathematics which are mathematically false and it’s OK because you know that. There is no way to make sure one isn’t misunderstood, but one can avoid making false claims about math.