Krugman: Economists Choose Beauty Over Truth
September 5th, 2009 . by economistmom
There’s a very thoughtful and thought-provoking article by Paul Krugman in this weekend’s New York Times Magazine about why economists failed to anticipate the severity of the current recession. I happen to believe that the naivety of the economics profession is pretty well explained by the “certain type of personality” that tends to get drawn into studying graduate-level economics and the even narrower set of Ph.D. economists who then go on to develop the latest economic theories (as opposed to those Ph.D. economists like me who merely try to apply existing economic theory to policymaking in practice and get told that our research is too “policy oriented” and “applied” to get us tenure in an economics department). I personally feel (mostly) flattered when people tell me: “gosh, you don’t seem like the typical economist”… 
Paul simplifies the explanation of why “economists get it so wrong” into a perhaps much kinder story about economists “mistaking beauty for truth” (emphasis added):
As I see it, the economics profession went astray because economists, as a group, mistook beauty, clad in impressive-looking mathematics, for truth. 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. The renewed romance with the idealized market was, to be sure, partly a response to shifting political winds, partly a response to financial incentives. But while sabbaticals at the Hoover Institution and job opportunities on Wall Street are nothing to sneeze at, the central cause of the profession’s failure was the desire for an all-encompassing, intellectually elegant approach that also gave economists a chance to show off their mathematical prowess.
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…
Paul tells a fascinating tale of the “freshwater economists” (the largely Chicago-and-Minnesota-schooled neoclassical theorists) versus the “saltwater economists” (the east and west coast academics, including Paul himself, who better incorporate the lessons of Keynes). Their “differences” are playfully pictured above, in a cartoon that accompanied Paul’s article, but you should read the article for the more complete story. I spent some time this evening trying to decide if I was more a “freshwater” or a “saltwater” economist. I think I don’t really qualify as either, although I did grow up in the Great Lakes and yet now live on the East Coast, and in some ways that geographic relocation reflects my intellectual evolution as an economist as well…
At both Brown University (M.A.) and the University of Virginia (Ph.D.) I was taught graduate macroeconomics by primarily “freshwater” economists, but to be honest, I never really had any intuition for what the mathematical models based on “rational expectations” (which I really had to memorize) really meant. I never “got” how to apply that theory to practice. I think that’s why I was drawn more to macroeconomic models that were built up from “micro foundations”–starting from models of individual and firm behavior and aggregating up to the full economy. Even those models were still “neoclassical” in nature, however, in that they assumed people saw and responded to market prices perfectly rationally and that markets always cleared (the “equilibrium” would always settle back at full employment). Over the years as I gathered more experience observing how economics tended to work “in the real world” I would try to explain to people how I still believed in the usefulness of the models I had worked with in the early part of my career, but how I viewed that usefulness as coming from their qualitative lessons (what sort of moving parts do we need to consider?) more than their quantitative precision (exactly how much are those moving parts moving?). And while my Ph.D. dissertation involved a fairly sophisticated general equilibrium model of the U.S. economy with a lot of moving parts and “bells and whistles”–with the size of the movements in the model dependent on many different parameters (which economists call “elasticities”)–I would frequently explain my intellectual evolution this way: “As I’ve gotten older, my elasticities have shrunk.” (Perhaps only the economists out there will get that joke.) Well, in the limit, if those elasticities shrink all the way to zero, then the “bells and whistles” are pointless, because there’s no longer any ringing or whistling going on. So then I began to think that building big economic models where you have to make a lot of assumptions about the kinds of responses households and businesses will make, would just not be “worth it” if those responses turn out to be (in the real world) pretty darn puny. (If a tree never falls in a forest, then who cares if no one’s there to hear the sound that never happens?)
So now I’m not a “freshwater” or a “saltwater” economist but perhaps a “nirvana-seeking” economist (the picture would be me on a yoga mat I guess…) who seeks truth over beauty. I do want to better understand how our economy works when we acknowledge all our human foibles and quirks, and I certainly no longer turn to the “beauty” of elegant mathematical models of the economy, which I honestly never ever found that “beautiful”–just conveniently simple. Now that I’m older, I recognize that life and the economy are often inconveniently complex.
I detect a note of bitterness in your comment about getting tenure when there are real world applications to your research.
I would just add that the sorts of “models” used by policymakers bear no resemblance to those that appear in the academic journals. Most of the time policymakers only need to know the order of magnitude or even just the sign–will this change help or hurt; we don’t need to know how much.
The main job of the economist working in policy is to talk policymakers out of doing bad things that they really want to do for political reasons. It’s very rare in my experience that politicians were ever talked into doing something good because the economists thought it was a good idea.
Their “differences” are playfully pictured above, in a cartoon that accompanied Paul’s article, but you should read the article for the more complete story. I spent some time this evening trying to decide if I was more a “freshwater” or a “saltwater” economist.
If the two graphs in the cartoon are projections, then the “freshwater” and “saltwater” economist appear to be in basic agreement! The only real difference is that one graph is white on black and the other is black on white. Of course, the shark fin protruding from what appears to be ankle-deep water is a bit confusing!
I happen to believe that the naivety of the economics profession is pretty well explained by the “certain type of personality” that tends to get drawn into studying graduate-level economics and the even narrower set of Ph.D. economists who then go on to develop the latest economic theories (as opposed to those Ph.D. economists like me who merely try to apply existing economic theory to policymaking in practice and get told that our research is too “policy oriented” and “applied” to get us tenure in an economics department).
True, I think that it’s a danger in any field, especially an elite one, that many of its participants become too deeply invested in certain ideas and convinced of the superiority of those ideas. Also, I’ve long thought that a brilliant theory is of little use if there is no way to validate and/or apply it. I look at the economics field as a pyramid with the nobel laureate theorists at the top. Of course, this is not to imply that they are better, just that their role is to come up with new theories. Those theories need to be scrutinized, tested, and applied by other economists, especially those theories that are too complex to be scrutinized by non-economists. Still other economists work to explain these theories in a way that can be understood by policymakers and the public at large. Everyone in the pyramid is necessary.
Of course, even this theory of the “economic pyramid” is far too simple. Often, the theorists strongly disagree with each other as with “freshwater” and “saltwater” economists. Even the great majority of theorists, as you mention, sometimes get it wrong. That’s why I’m most leery of those experts who are the most sure of themselves. There is no shortage of people who are sure of themselves but, since they often disagree with each other, a large number of them are obviously wrong. One needs to be very careful not to cross reality off of their list of possibilities. Doing so puts one in a position from which it is very difficult to recover.
The main job of the economist working in policy is to talk policymakers out of doing bad things that they really want to do for political reasons.
It’s very rare in my experience that politicians were ever talked into doing something good because the economists thought it was a good idea.
There’s a book “What Do Economists Contribute?” that is a collection of essays by notable economists on the subject.
Stigler says: “Economists exert a minor and scarcely detectable influence on the societies in which they live”.
But Coase says: No, no, don’t get down about it. Think of how much we are all paid collectively — if our influence as a group reduces waste in government spending by a small fraction of one percent then on a cost-benefit basis we are the most productive people in the world.
Tullock has the familiar complaint that academic economists are too academic, pursuing complex abstract models to impress other economists and move up the tenure and university department rankings lists — when 80% of the real-world practical benefits that economics could provide would come from average voters understanding the most basic things on election day, like rent controls are bad, price controls are bad, cartels are bad, competition is good, budgets should be balanced.
He suggests there should be mechanisms to require economists to address Rotary clubs and write newspaper articles about issues like: why price supports for milk via the milk cartel are bad.
He was writing long before blogs, but blogging would seem to fit his bill fine. So keep on blogging!
Small Paul and the Big Idea
I have managed to read most of the Krugman piece now, as ugly and fascinating a piece of gossip as I find it. (I can only take so much of it at one time.) And I have to say that it sticks in my craw in much the same way that a lot of his writing does. A perfect media child, by your own thesis Diane. I often suspect that contention stands in for consideration when it comes to Krugman. Herein for example, I find myself suspecting that Krugman’s distain of the Great Moderation is really an analogue to the Hyperpartisan problems of our political present, as you described them a day or so back.
Needless to say then that even when I agree with him, I find him so quick to point to the faults of any but himself that when Paul Krugman attacks a big name my first thought isn’t to consider the critique, but the source. And I discount it considerably, almost without fail. Remarkably I often come to appreciate his point of view, but not before distancing myself from the embittered arrow slinger I see him to be. He seems to me to be the John McEnroe of the profession, the inside Outsider who plays against foe, judge, and audience alike. (Much like McEnroe, he is at home in the announcers box, and appears to have more or less retired from the rank and file of the profession in which he gained his fame and fortune.)
That said I think the central tenant of “Beauty over Truth” is a profoundly real criticism, hugely accessible, and easily seen to be useful to the profession, in private, public and academic circles alike.
If you ask me, the Achilles heel of some many of these things stems from the common evolution of Logic and Mathematics, both of which are fascinated with Proof as a tool. Let us not forget that Proofs are somewhat rhetoric. Whether it be from Construction or Contradiction, most Proof is reliant on assumptions which are vulnerable to fallacy. For those without joyful exposure to their –/Beauty/–, I’ll remind you that you do know the problem, as you have since you were a child—answer me this, how much wood to woodchucks chuck again? In –/Truth/–, they do not chuck.
Way to go Paul. The big idea is what counts. This one is very important, in my opinion.
Oh where oh where to begin re: Dr. Bubble Paul Krugman’s latest praise for the Keynesian snake oil…
1. Dr. Bubble says, “Keynes did not, despite what you may have heard, want the government to run the economy. He described his analysis in his 1936 masterwork, “The General Theory of Employment, Interest and Money,” as “moderately conservative in its implications.”
Keynes also wrote on Sept 7, 1936 in the prologue to the German edition of The General Theory in which Keynes said his theories were “more easily adapted to the conditions of a totalitarian state.”
2. Dr. Bubble says, “The General Theory” is a work of profound, deep analysis — analysis that persuaded the best young economists of the day.”
While there’s no doubt that some of the best young economists of the day were persuaded, it doesn’t mean Keynesian economics was, or is, correct.
Moreover, for those familiar w/ Professor Haberler’s “Prosperity and Depression,” first published in 1937, there was considerable debate at that time and many of Keynes’ errors & fallacies were immediately exposed. It is laughable to say “The General Theory” is somehow “profound, deep analysis”.
As Paul Samuelson himself put it, “It is a badly written book, poorly organized; any layman who, beguiled by the author’s previous reputation, bought the book was cheated of his 5 shillings. It is not well suited for classroom use. It is arrogant, bad-tempered, polemical, and not overly generous in its acknowledgments. It abounds in mares’ nests and confusions… In short, it is a work of genius.”
The fact that Samuelson was persuaded, and quickly incorporated this nonsense into the most widely used economics textbooks in America’s “best” schools, means only that we now have a lot of very confused people, including Dr. Bubble and Brad DeLong.
3. Note that I included Samuelson’s last sentence, “In short, it is a work of genius.” While I reject “The General Theory,” I at least attempt to be fair to it. Now note Dr. Bubble’s deliberate distortion of Schumpeter. Does anyone really believe Schumpeter thought “whatever happens in a market economy must be right?”
4. I often wonder if Kosinski conjured up the character Chauncey Gardner, for the book & film “Being There,” after attempting to read “The General Theory.” The fact that Keynesian economics is devoid of a capital theory should, by itself, confirm the theory lacks “depth” and it also explains why “The General Theory” prescribes simplistic Chauncey Gardner-like policies such as Govt borrowing mountains of fiat money, printed out of thin air by the central bank, and spent digging holes. Could one possibly advocate a more insane economic policy than this?
And this is where Dr. Bubble expressly states the root problem of Keynesian dogma, “And he called for active government intervention — printing more money and, if necessary, spending heavily on public works — to fight unemployment during slumps.”
Because Keynes had no capital theory, as Hayek pointed out & Keynes himself admitted, Keynes believed “printing more money” out of thin air by central banks is neutral because S = I.
As Professor Jesus Huerta de Soto explains:
“Keynesians hold no theory to explain why crises recur in a hampered market economy that suffers credit expansion (that is, one in which traditional legal principles are violated). Keynesians simply attribute crises to sudden halts in investment demand, interruptions caused by irrational behavior on the part of entrepreneurs or by an unexpected loss of confidence and optimism on the part of economic agents. Moreover Keynesians neglect to recognize in their analyses that crises are an ENDOGENOUS consequence of the very credit expansion process which first feeds the boom. Unlike their fellow macroeconomists, the monetarists, Keynesians believe the results of monetary expansion policies to be relatively less effective and important than those of fiscal policy, and they advocate public spending as a means to directly increase effective demand. They fail to comprehend that such a policy further complicates the process by which the productive structure readjusts, and it worsens the outlook for the stages furthest from consumption.”
For those attempting to detox from the Keynesian snake oil, I recommend this four step reading ‘program’ to assist your return to sanity:
1. Henry Hazlitt’s 1959 classic, “The Failure of the ‘New Economics’” in which he dismantles Keynes’ “mare’s nests and confusions” line by line.
2. Roger Garrison’s “Time and Money: The Macroeconomics of Capital Structure.”
3. Jesus Huerta de Soto’s “Money, Bank Credit and Economic Cycles.”
4. John B Taylor’s, “Getting Off Track” as it demonstrates precisely how the inherently unstable fractional reserve / central bank monetary operating model (described in de Soto’s book) wrecks havoc in the real world.
All of these are, of course, built primarily on the work of Menger, Bohm-Bawerk, Mises, Hayek & Rothbard.
So Krugman says that everyone in his profession is wrong except for a crank (who he happened to study in college) whose opus minimus was never clearly written nor universally accepted, and who now must be followed unquestioningly and without debate because there’s no time.
If he were writing about the climate he would be called a global warming denier. But he gets away with his clap-trap because he’s writing about economics — a subject he’s given up in favor of writing about partisan politics. MIT should ask for their PhD back.