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View Diary: A Very Candid Krugman: "Economists Themselves Are Confused" (127 comments)

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  •  Krugman on "The Evolution of Ignorance:" (8+ / 0-)

    It is important to understand why economic devolved into a "dark age:"  If it couldn't be expressed mathematically and measured, it was deemed irrelevant and worthless.  As Krugman explained in his MIT speech:

    A friend of mine ...  has written a fascinating paper called "The evolution of European ignorance about Africa." The paper describes how European maps of the African continent evolved from the 15th to the 19th centuries.

    You might have supposed that the process would have been more or less linear: as European knowledge of the continent advanced, the maps would have shown both increasing accuracy and increasing levels of detail. But that's not what happened. In the 15th century, maps of Africa were, of course, quite inaccurate about distances, coastlines, and so on. They did, however, contain quite a lot of information about the interior, based essentially on second- or third-hand travellers' reports. Thus the maps showed Timbuktu, the River Niger, and so forth. Admittedly, they also contained quite a lot of untrue information, like regions inhabited by men with their mouths in their stomachs. Still, in the early 15th century Africa on maps was a filled space.

    Over time, the art of mapmaking and the quality of information used to make maps got steadily better. The coastline of Africa was first explored, then plotted with growing accuracy, and by the 18th century that coastline was shown in a manner essentially indistinguishable from that of modern maps. Cities and peoples along the coast were also shown with great fidelity.

    On the other hand, the interior emptied out. The weird mythical creatures were gone, but so were the real cities and rivers. In a way, Europeans had become more ignorant about Africa than they had been before.

    ....

    Between the 1940s and the 1970s something similar happened to economics. A rise in the standards of rigor and logic led to a much improved level of understanding of some things, but also led for a time to an unwillingness to confront those areas the new technical rigor could not yet reach. Areas of inquiry that had been filled in, however imperfectly, became blanks. Only gradually, over an extended period, did these dark regions get re-explored.

    ....

    So why didn't [good non-mathematical] theor[ies] get expressed in formal models? Almost certainly for one basic reason: [they] critically on the assumption of economies of scale, but nobody knew how to put these scale economies into formal models.

    The essential problem is that of market structure. From Ricardo until about 1975, what economists knew how to model formally was a perfectly competitive economy, one in which firms take prices as given rather than actively trying to affect them. There is a standard theory of the behavior of an individual monopolist who faces no comparably-sized competitors, but there is no general theory of how oligopolists, firms who have substantial market power but also face large rivals, will set prices and output. Still less is there any general approach to modeling the aggregate behavior of a whole economy largely peopled by oligopolistic rather than perfectly competitive industries.

    ....

    . In the 1940s and even in the 1950s it was still possible for an economist to publish a paper that made persuasive points verbally, without tying up all the loose ends. After 1960, however, an attempt ... would have immediately gotten a grilling: "Why not build a smaller factory (for which the market is adequate)? Oh, you're assuming economies of scale? But that means imperfect competition, and nobody knows how to model that, so this paper doesn't make any sense." It seems safe to say that such a paper would have been unpublishable any time after 1970, if not earlier.

    .... Economic theory is essentially a collection of models. Broad insights that are not expressed in model form may temporarily attract attention and even win converts, but they do not endure unless codified in a reproducible -- and teachable -- form. You may not like this tendency; certainly economists tend to be too quick to dismiss what has not been formalized (although I believe that the focus on models is basically right). Like it or not, however, the influence of ideas that have not been embalmed in models soon decays.

    Keynes did not write mathematically.  Like Galbraith, Minsky, and others, his style was discursive.  He argued by persuasive logic.  All of these were lost -- were assumed to 'randomize out' -- by mathematically oriented economists.

    Until, for example, economists can model market and political power, their theoretical math will be measuring castles in the sky.

    "When the going gets tough, the tough get 'too big to fail'."

    by New Deal democrat on Wed Feb 10, 2010 at 03:34:59 AM PST

    [ Parent ]

    •  None of the models are dynamic. (5+ / 0-)

      They cannot represent change over time.  In part, that's because time is left out of the equation.  All data represent conditions AT A MOMENT IN TIME.  If time is considered, it's accompanied by the assumption that the moment will recur indefinitely.

      A practical example can be found in the projections for electric energy consumption, projections which were used to justify the construction of nuclear power plants--specifically, that consumption would increase 7% per year for ever.  In other words, they planned for a doubling of electricity consumption every ten years.  The real rate hasn't even come close.  Of course, since the construction of nuclear plants consumes a tremendous amount of energy, if the plants had been built, the rate of increase would have been closer to the projections.

      The other problem with economics is that it doesn't recognize waste as the alternative to trade and exchange.

      Also, money--the medium of exchange--has come to represent the totality of the behavior.  In other words, economic activity has come to be defined as trade and exchange that involves money.  An underdeveloped economy is one that doesn't use money.  It it can't be measured, it doesn't exist.  The irony here is that everyone knows that there's a lot of trade and exchange using money that's not being recorded and, ipso facto, not being measured.  About the year 2000 it was hypothesized that the "underground" or "undocumented" economy was equivalent to one third of GDP.  Efforts to "capture" this activity are on-going.  But, I suspect it's just been growing.

      How do you tell a predator from a protector? The predator will eat you sooner rather than later.

      by hannah on Wed Feb 10, 2010 at 04:03:08 AM PST

      [ Parent ]

      •  Re: money. Exactly (2+ / 0-)
        Recommended by:
        semiot, bobswern

        Money can be measured and is fungible.  So it is used as the measure.  If it isn't expressed in money terms, it doesn't exist.

        Here's a good example having to do with the shibboleth of Pareto Optimality.  Let's make a reasonably accurate assumption that people first and foremost want to stay alive.  That should mean that the choices which cause the most people to remain alive at the end of any given period ought to be "Pareto optimal" and in fact superior to any other choice.  A system which needlessly allowed a lot of people to die because they didn't have sanitary conditions, or enough money to afford treatment wouldn't come close.

        So, when was the last time you heard Pareto optimality used as a justification for socialized health care?  Never.  Why?  Because it can't be expressed in $$$ and so is deemed irrelevant.

        Peace, NDD

        "When the going gets tough, the tough get 'too big to fail'."

        by New Deal democrat on Wed Feb 10, 2010 at 04:18:57 AM PST

        [ Parent ]

    •  The "measure what you can" problem (1+ / 0-)
      Recommended by:
      JG in MD

      I face that in my work in preventive health and health promotion. People need to change their behavioral choices that affect health. My doctor says she wished they'd make a pill to do that. Hah!

      Most of the tools we use to measure behavioral health - which we use because they are required in most grant applications and peer-reviewed journals - allow us to look for our keys under the street light.

      "I wished I were sober." Dashiell Hammett

      by semiot on Wed Feb 10, 2010 at 06:58:08 AM PST

      [ Parent ]

      •  Sounds like what's overtaken the educational (1+ / 0-)
        Recommended by:
        semiot

        system as well. If test scores improve, education is doubtless taking place, in direct proportion. By the same sort of numerology, one can "prove" whether the recession is over or not. And don't confuse the issue with qualities that can't be quantified.

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