Update: About a half hour after I published this post, Paul Krugman posted "Faith-based Freaks" on his blog. In that post, he explicitly distanced himself from Milton Friedman's extreme positivism. In the post below, I had criticized Krugman's defense of his own work against the Heterodox Left, likening it to Friedmanian positivism. Even if I thought that Krugman reads Dorf on Law (which I don't), the timing was too close for his post to have been written in response to mine. In any event, I view it as a good thing that Krugman is trying to distinguish his methodology from Friedman's, and I plan to return to this issue soon.
-- Posted by Neil H. Buchanan
Over the last few weeks, I have written a series of posts about a "left-on-left" debate that recently re-emerged among economists. (See here, here, here, and here.) I am calling the two warring camps the "orthodox left," which includes liberal economists who are in the top levels of academia and who (therefore) rotate into and out of jobs in Washington, and the "heterodox left," which includes liberal economists whose theoretical approach has -- largely at the behest of the orthodox left -- resulted in their banishment from the top levels of academic economics, and therefore has made them all but invisible in real-world policy debates. For those who want to put faces to labels, the "captain" of the orthodox left is Paul Krugman, and his heterodox counterpart is arguably James K. Galbraith. (Revealingly, although he is a top-flight economist, Galbraith's academic position is not in an economics department.)
The bulk of my analysis in my first three posts was actually not focused on the substance of the theoretical or policy disagreements between the two camps. I was, instead, describing the "sociology of economics," which is a deliberate tweak to the orthodox left, for whom the worst possible insult is to be called "sociological." (Sociological then translates into non-rigorous, anecdotal, bad at math, and other horrible slights.) Notwithstanding the irony, the point is that there is nothing to be gained by the orthodox left when it insults and marginalizes the heterodox left, because there is no chance that the orthodox will lose anything that they might care about, in terms of prestige and power, by taking the arguments of the heterodox seriously. Yet we regularly see nasty snark directed from the orthodox toward the heterodox.
In an upcoming post, I will return to the question of why the orthodox are so obnoxious in their attacks on the heterodox. I do think that there is more to it than the commitment to particular methodologies that I described in my third post in this series. Be that as it may, today I want to pick up where my most recent post left off. There, I had begun to explain why the left-on-left debate matters to real people. I summarized a famous debate in the 1960's called the Cambridge Controversies, which was remarkable for its definitive outcome. While most academic debates seem never to change anyone's mind, the Cambridge Controversies saw the Orthodox Left concede defeat to the Heterodox Left. Paul Samuelson said, "Our argument does not work," and stated without equivocation that the British side had won.
Why does it matter which side won that obscure debate? And more importantly, why does it matter that the side that lost soon simply acted as if it had won? In short, where is the real-world impact that I promised in my previous post? What is the on-the-ground difference between the two sides? As I have noted, after all, the two sides often are in near-complete agreement about economic policy in the real world. Regular readers of this blog certainly cannot have missed the fact that I admire Krugman's work greatly, and that I cite him frequently in my writing. Yet I think that he is on the wrong side of this debate, and I think that he does damage by being gratuitously unpleasant in his dealings with the heterodox left.
As I described last Friday, the question at issue in the Cambridge Controversies was whether there is a meaningful way to measure "capital," such that it would be possible to derive "production functions" to describe how the economy works. This might seem abstract, but it is quite powerful. If it were possible to measure a variable, K, that accurately measured the sum total of all buildings, machines, transportation networks, utilities, and so on, then we could put that number into an equation that, along with the labor inputs in the economy, would determine the GDP of the economy. If we then wanted to know how to make the economy grow over time, then we would know that we need either to put labor and capital together in more productive ways (that is, to improve technology, and thus to change the equation itself), or to use more labor, or to use "more capital."
I put scare quotes around "more capital" for a specific reason. As I described last Friday, the winning side in the Cambridge Controversies showed that there is no consistent way to measure an economy's stock of capital. But if that is not possible, then it is axiomatically impossible to say that the economy is using "more capital" or "less capital" today than yesterday. So, if the lesson from the losing side in the debate includes the claim that we can make the economy grow by making it use "more capital," but we do not know when we have more capital or less capital, then there is a serious problem.
And how does this translate into policy? One of the standard building blocks in orthodox economics (left and right) is that prices determine demand. And since interest rates are said merely to be the "price of capital," then it must be true that higher interest rates are associated with demand for less capital, and lower interest rates are associated with demand for more capital. This is what we hear in policy debates all the time: The Fed lowers interest rates, and this makes businesses buy more capital, which makes the economy grow in both the short-run and the long-run.
What does it do to that theory when we know that there is no meaningful way to measure capital in the first place? One possibility is to say, "Well, I don't really need to rely on a broadly-consistent general theory, as long as my models work." After all, one can draw rough analogies to physics and mechanics and point out that the day-to-day practical applications of physical "laws" are essentially unaffected by the emergence of the theory of relativity, quantum mechanics, or whatever. Loose analogies to the "hard sciences" are, of course, a favorite move among rigor-obsessed economists
Krugman, for example, defends his use of right-orthodox models by saying, in essence, "Well, of course these assumptions are wrong. That's what assumptions are supposed to be, because they are simplifications of reality. I just use these assumptions to focus on what I need to focus on, to answer the question at hand." He is, somewhat ironically, relying on Joan Robinson's defense of modeling (which I described in my post last Friday), by saying that he does not care about the rightness or wrongness of his assumptions. He can assume that people are hyper-rational, even though he knows that they are anything but, just as he can assume that capital can be measured coherently, even though Robinson and her team proved otherwise.
But if we replace what we know as a theoretical matter, which is that capital cannot be measured coherently, with convenient short-hand quasi-theories that are known to be wrong, then the only way to know if the "incorrect theory" is nonetheless good enough for down-and-dirty policy making is by knowing in advance what the answers should be. Krugman is confident that he can do so. But here is where things become interesting, because Krugman here is relying on an argument advanced by Milton Friedman, the supposed bete noire of the orthodox left, who remains an icon of American and British conservatives, and who argued vigorously against government intervention to improve the economy.
Friedman was the consummate "modernist," arguing that his models do not need to make sense as long as they work. In some of his early work, he claimed to have found an "empirical regularity," on which he based a theory about monetary policy. When asked to defend why that empirical regularity would not change, or in other words, to offer a theoretical explanation that should give people confidence that the empirical regularity was not mere happenstance, the best he could do was to offer a theory that relied upon indefensible assumptions about the way people really think. Friedman defended himself by drawing an analogy to an expert billiards player, who consciously knows nothing about the the mechanics of rotation, force, momentum, drag, and so on, but who makes his shots as if he understands those things. It does not matter, Friedman said, what the man is thinking, so long as he achieves his goal.
As I mentioned in an earlier post, this theory has been severely attacked by post-modernists. Among many other things, Friedman makes his task far too easy by analogizing to a situation in which everyone knows how to observe success. What happens if there is debate over what counts as success in the first place? And more to the current point, what if the billiards table warps, but the player is not able to notice or adjust to the new contours of the game? We can simply assume that he is good enough to do that, one supposes, but since Friedman says that we are not supposed to care what he thinks or how he does what he does, we can only rely on his expertise in the future if we assume not just that he is good at playing on today's table, but that he can adapt to all plausible tables on which the game might be played.
To bring this back to economic policy in today's debates, I repeat that I generally agree with the Orthodox Left, mostly because the current situation is utterly lacking in nuance. When things are this bad for this long, and the other side is so consistently wrong, then it should not surprise anyone that Krugman can rightly claim a string of victories. Success and failure are easy to measure, and Krugman plays billiards on the current table quite well.
What "hangs up the heterodox" (to adapt Krugman's dismissive phrase), as Tom Palley's original post kicking off this debate so well described, is the longer-term strategy for improving economic outcomes. When people like Krugman (and Piketty) adopt an orthodox approach, including an explicit rejection of the correct outcome of the Cambridge Controversies -- and, per Palley, a willful ignorance about economic and social institutions -- then we can no longer be sure that the Orthodox Left will push us toward success. At the very least, there should be a vigorous debate about these things, rather than the continued marginalization of the one group of people who not only are right about current policy but who do not rely on a theory that they know to be wrong.
There is definitely more to come on these topics.