A turning point?

by Russ Roberts on October 13, 2009

in Economics

Something is happening in the field of economics when two people with pretty different worldviews say almost the same thing in their reflections on yesterday’s Nobel Prize:

There was an old tradition of economics that focused on the origins and nature of economic institutions. This tradition was very influential before World War II.

But it proved not at all helpful during the Great Depression. My caricature version is that when the Depression hit, institutional economics, asked for advice about what to do, replied that well, it’s all very complicated, and has deep historical roots, and … Meanwhile, Keynesian economists, using very simple mathematical models, basically said “Push this button — we need more G”.

And this had a somewhat perverse effect. The rise of Keynesian economics also meant the rise of the equations guys (Samuelson in particular), and in the end the equations crowded out institutional economics even as Keynes fell into disfavor.

And this:

Economists…who think that they are doing deep theory but are really just assuming their conclusions, find it hard to even understand what it would mean to make the rules that humans follow the object of scientific inquiry. If we fail to explore rules in greater depth, economists will have little to say about the most pressing issues facing humans today – how to improve the quality of bad rules that cause needless waste, harm, and suffering.

Cheers to the Nobel committee for recognizing work on one of the deepest issues in economics. Bravo to the political scientist who showed that she was a better economist than the economic imperialists who can’t tell the difference between assuming and understanding.

The first is Paul Krugman. The second is Paul Romer (HT: Tyler). One has a Nobel Prize. The other is likely to get one. Both are superb theoreticians and superbly skilled at the formal side of economics. What they are saying that is the same is that economics has taken a wrong turn or at least gone too far in the last sixty years. We’ve lost something important because of an  over-emphasis on formalism.

It is a very sobering time to be an economist and a very exciting one.

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{ 30 comments }

BoscoH October 13, 2009 at 2:22 pm

Now I understand Krugman’s opposition to the stimulus. It never really made sense to me.

Anonymous October 13, 2009 at 4:14 pm

He thinks we should spend $100 trillion on stimulus. In the end of all this we will have a Nuremberg trials where scum like Krugman will be held to account.

Anonymous October 13, 2009 at 4:23 pm

If we run a lottery to be on the jury, we can retire the national debt.

Anonymous October 13, 2009 at 4:28 pm

1. You’re off by a factor of about 100

2. Aside from that innumeracy, it’s a disgusting sentiment

Anonymous October 13, 2009 at 4:35 pm

Why am I disgusting? Because I want to hold the criminals to account? Krugman is an economic criminal.

Anonymous October 13, 2009 at 4:42 pm

The fact that you consider him a criminal is just confusing – not really bothersome. It’s the comparison to Nazis and the particular version of “held to account” that’s associated with Nuremberg that’s more disgusting. But never mind – there’s no use in my trying to argue with a position like that.

JohnK October 13, 2009 at 6:53 pm

I’d enjoy watching government officials and those who encouraged them go on trial for unjustly spending money that was not theirs to spend.
Crimes like larceny, robbery and fraud come to mind.
Especially with regards to Social Security and the other government Ponzi schemes. Any and all politicos who support those programs should be in a cell next to Madoff.

gappy October 13, 2009 at 3:17 pm

Mainstream Economics viewed for a long time Mathematical Physics (not the same as Theoretical Physics) as a role model for their methodology. Unfortunately, Mathematical Physics is largely a mop-up operation that is unable to predict anything new. Perhaps in the future economists can borrow a page from Medicine and Biology. Both are able to produce consistent, falsifiable theory with only the needed amount of formalism, and giving due respect to empirical evidence. This year’s prize seems a step in the right direction, and I see this as a departure from Economics-as-Mathematics, but also from Economics-as-Philosophy (i.e., a priori), which is what a lot of Austrian did.

There is also the risk of degenerating into “cute” Economics by doing only empirical work. It consists of isolated, counterintuitive experimental outcomes with no theoretical glue, or shallow explanations. A lot of recent behavioral Economics fits this description.

Last observation: most people (myself included) knew of Williamson but not of Ostrin. The explanation is in my view that the former is more connected to mainstream Economics via Coase and Hurwicz. Conversely, Ostrin is cross-disciplinary and has done field work (the horror! the horror!). I suspect that Ostrin may be the more forward-looking choice. I think that some new economists like Esther Duflo are very much in the same mold and will gradually reshape economic methodology.

Anonymous October 14, 2009 at 5:13 am

Very thoughtful comments.

I think I find myself predicted accurately by your theory. I cannot understand Economics as Math, I am suspicious of Economics as Philosophy in the sense that you describe. I wonder what Karl Popper (or even Hayek, who praised Popper) would have made of modern Economics. I tend to appreciate cute Economics and greatly enjoy hearing about behavioural Economics’ counter-intuitive experimental outcomes. I probably have more confidence then is merited in this group’s ability to produce something useful for that reason.

Do you have no confidence at all in cute Economics’ (I assume you are referring to most experimental behavioural economics, but please correct me if I am wrong) ability to provide a more robust starting point on the path to taking economics from philosophy to science?

Anonymous October 13, 2009 at 4:00 pm

I’ve found it very interesting how all sides seem to have embraced Ostrom and Williamson as their own in a sense. I think it’s an important reminder that just because some economists don’t write about everything we’d like them to write about, doesn’t mean they don’t have it in mind. Ostrom and Williamson excel at explaining the institutional factors that I think all economists clearly recognize but have trouble applying in a practical way. You can notice this in Krugman’s critique of the American institutional school. He doesn’t seem to have a problem at all with the approach of the school itself – just it’s inability to make it’s conclusions practical or even understandable. Ostrom and Williamson (and Coase) have done this and are understandably getting praise for it. It was a very good pick by the prize committee.

Anonymous October 13, 2009 at 4:11 pm

Hunh. The Krugman quote doesn’t quite seem to synch up with what Don B. quoted Krugman as saying here. Any thoughts, Russ?

Anonymous October 13, 2009 at 4:31 pm

It goes to show that using your opponent’s reading habits as a kid and decades old inspiration for his choice of academic major to criticize him is a pretty weak way to debunk his actual work in the field.

Anonymous October 13, 2009 at 4:58 pm

??

Anonymous October 13, 2009 at 5:05 pm

Why do you think it doesn’t synch up? Because Asimov wouldn’t have seen eye to eye with Ostrom and Williamson and Don built a case that Krugman wanted to plan people’s lives based on a singular response to a book he read as a kid?What I’m saying is that if one would put less stock in their ability to decipher people’s motives based on their reading habits or even their inspiration from their reading habits, and if one would just give Krugman the benefit of the doubt on understanding that “science fiction” is “fictional”, then the two quotes can synch pretty well.

Anonymous October 13, 2009 at 5:35 pm

Can we please put aside the Krugman vs. Romer bickering and get back to the real issue – why Barack Obama was passed over for the Nobel?

SymbolicalHead October 13, 2009 at 6:26 pm

I think Krugman nails this one. The important sections being:

“[When] asked for advice about what to do, replied that well, it’s all very complicated… Meanwhile, Keynesian economists… basically said “Push this button — we need more G”.

The politicians came looking for a politically palatable solution, and the Keynesians had an answer.

The important shift in economics was the shift in the role of economics. It was the transfer of the entire institution from academic discipline to political brain trust. Economists were the tools used to argue that all of the impossible things I promise my constituents are, in fact, possible. Worldwide, governments from roughly 1930 onward bought the economics profession lock, stock, and barrel, and not surprisingly they hired the people that told them what they wanted to hear and what they wanted to sell.

The failure of Keynesian economics in the late ’70s and early ’80s was most importantly a political failure, not an academic one. Through bad policies (admittedly, many of them theirs) the political climate shifted and they were left out in the cold. In proper economic tradition, however, I think the profession has realized the long term advantage to them in siding with government.

This is not unique to economics. Governments, starting around the same time, have also purchased almost all of the hard sciences (eg, NSF) and the arts (eg, NEA) as well.

What died in the Depression was independent scientific (and eventually, artistic) inquiry.

JohnK October 13, 2009 at 6:57 pm

The politicians came looking for a politically palatable solution, and the Keynesians had an answer.

Politicians always have the same answer: more. More government, more spending, more laws, more control, more regulations, always more.

Keynes simply provides them with intellectual justification.

Mike M. October 13, 2009 at 9:58 pm

Thomas-

I completely agree with you and think that you’ve illustrated your point very clearly.

Anonymous October 14, 2009 at 9:39 am

>>In proper economic tradition, however, I think the profession has realized the long term advantage to them in siding with government…This is not unique to economics. Governments, starting around the same time, have also purchased almost all of the hard sciences…<<

I think that you've nailed it here.

DRDR October 13, 2009 at 6:35 pm

Russ’ point is all well and good. But is anyone going to give me my first faculty job in the next few years for presenting an argument without the kind of formalism that the field has demanded over the last 60 years? I look forward to not having to worry about that constraint.

joenorton October 13, 2009 at 9:04 pm

I think Russ is saying that this Nobel, and the debate going on recently about the wrong-turn in economics in general, has advanced the ball just a bit towards that goal. No one is saying ‘done, all well and good since 8am Monday’, just that it’s an exciting time to be an economist because of the growing potential for a shift.

Ray Gardner October 14, 2009 at 12:29 am

Free market economics basically say that we can’t possibly know enough about the innumerable and tiny little details that go into a dynamic economy.

Central planners think that it can be done.

So as the government grows, those in positions of influence seek to find justifications for the expanding state.

I don’t see any evidence that the human race has broken the pattern of the rise and fall of civilization, and so since we’re on an inevitable track towards despotism, this has less to do with economics, and more to do with the problem of centralized power.

It used to be the church, now it’s economics. But men in power will glom on to whatever tools necessary to justify their arrogance.

BoscoH October 13, 2009 at 4:47 pm

How you have any outrage left from the Bush/Cheney years is beyond my comprehension!

Anonymous October 13, 2009 at 4:48 pm

Huh?

BoscoH October 13, 2009 at 4:51 pm

Oh, I think it might have started around 2003, but calling for Nuremberg trials for someone else just means you have a slight disagreement which could be settled over lunch if not over AOL IM.

Anonymous October 13, 2009 at 4:53 pm

I’m confused about your point. I should find Arrowsmith’s reference funny because we’ve been enduring six years of the same odious references from the Code Pink crowd? What exactly are you trying to say?

Bush called for the invasion of a country and I don’t even like hearing that talk from his critics. If we’re going to start saying it about guys like Krugman now Cafe Hayek might as well be the comment section of Daily Kos or Sean Hannity’s website.

BoscoH October 13, 2009 at 5:05 pm

You should take Arrowsmith’s quip in context and not play the role of comment board grandma with fragile ears.

Anonymous October 13, 2009 at 5:23 pm

I’m just responding to your bizarre questions about Bush, BoscoH. When someone inappropriately calls you a racist you guys go apeshit – and now you’re being hypersensitive to any suggestion that Arrowsmith probably shouldn’t compare Krugman to Nazis?

sandre October 13, 2009 at 8:47 pm

Danielle tried to mother me on several occasions. Mom’s well.

BoscoH October 13, 2009 at 5:32 pm

I don’t recall asking any questions, Daniel. And I’m pretty sure I’m not the one who is hyper-sensitive here. Besides, I’d pay to watch Nuremberg trials for everyone, so you’ve got the wrong guy.

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