Friday, May 16, 2014

Some Policy Stakes in the Left-on-Left Brawl

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.


Jimmyd said...

"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."

That concedes the whole ball game because in the long run we are all dead. Two emergency doctors don't engage in protracted debates regarding the underlying dispute that lead to the patient being shot--they fix the wound. This is true even if the long run debate is critical to the health of the society they both live in.

As I asserted before, resolution of economic debates are only relevant if they imply two different political actions *now*. By agreeing to the fact that there is no immediate policy difference between the heterodox left and the orthodox left you have consigned the economic debate to political irrelevancy, and Krugman is right then to look at the heterodox left as insidious troublemakers.

Paul Scott said...

Several comments, in no particular order or relevance. Not all of these thoughts are contrary to your post.

1. Without comment to the underlying argument, that a "leader" concedes defeat is only evidence that such leader no longer asserts the position and not that the point is lost or wrong.

2. I think you badly mischaracterize Krugman's position re: "as long as the model works, who cares?" PK has often posted that the problem with models is people not understanding the truth of the assumptions. Ironically, he did so again today. What his oft repeated position on models has been is that one must understand what you are trying to predict to know whether the assumptions your model makes (which either may be wrong or in many cases are knowingly wrong) matter. Clarity on this point can be found in his defense of IS-LM.

I cannot speak for others on the OL, such as SW-L, because my daily read of such persons is limited to PK and House of Debt, but PK has always made this distinction clear and would never support the position of "if the model works, that's all you need to know."

3. Heterodox is exactly that. It is not a model itself, but is instead everything that is not Orthodox. It is equally Marxism (not used as a pejorative) as it is Neuroeconomics. It may be that some Heterodox Econ - such as Galbraith - predicted the Great Recession, but most did not (most, I would suggest, did not even have their eye on it). So I do not see this particular argument at all as being HE (because there is no one such thing) v. OE but instead to be a complaint from *some* economists that categorize themselves as HE that OE does not give sufficient respect. This is almost certainly true, since as PK himself has noted several times with disapproval, if you are not using rational expectations you are not getting hired and are not getting published.

4. The problem of not being hirable or publishable as HE might actually be understandable, but it comes first from understanding that Econ is not a science (more on that later). The problem can be analogized by the following: in biological sciences departments and journals over the last 200 years, you will find plenty of people hired and published that have disagreed with specific assertions or predictions made by Darwinian evolution. That is how things progress. What you will not find is anything about intelligent design even though you will find (unfortunately) plenty of religious persons hired and publishing. Why? Because those asserting ID are not using the scientific method. I'll suggest something like that is probably going on in economics. Rational maximizing is what currently *defines* the field - much in the same way that the scientific method defines science. That may independently be a problem (I suspect it is), but it is not a problem easily addressed by specific HE saying "let me in, I am right about this [one or many] issue[s]." Economics needs to define itself in some way and it can't just be "everything having anything to do with an economy," because that is too broad. Perhaps they have defined themselves too narrowly, but I would suggest that those invested in that debate need to put forth something cognizable and usable to replace the current definitions.

Paul Scott said...

5. Math <> Science. Some very small (pretty much negligible) publications from science are not science - at least so long as you recognize that Medicine, for example, is not science (even though a great deal of medical research is). If you do include hybrids, like Medicine, then you can get some fields where what is being published is about 60% science. What you will certainly get is a ton of publications of science in science that involve little or no math. Science understands that it is defined by the scientific method and not by its use of a particular tool.

6. Economics is not science. Some economics articles I have read (as well as some readings in other social "sciences") is actually science; but most of it is not. This is true even of economists like PK that I think are making meaningful/useful contributions to policy. It is really pretty straightforward. You apply the scientific method to your work and you are doing science; if you don't, then you are not. Almost by definition, all of economics is not science. It replaces explanation with correlation. At its very core it assumes things that it knows are not true. This does not make it bad or useless, it just makes it not science.

7. Redux. Since economics is not science, it needs to do something to define itself. It appears to have done so. Those objecting should present a coherent alternative.

Michael C. Dorf said...

There's a lot going on in Paul's point 4. Robert Post and (in different writings) Stanley Fish argue that the justification for academic freedom is that academics must have the freedom to follow the rules of their respective disciplines, rather than being governed by the general norms of freedom of speech. I think they are right--but only to the extent that the "rules of a discipline" are sufficiently corrigible to permit challenges to those rules themselves. E.g., a biology department should not be able to deny entry (as a student or a professor) to a Darwinian on the ground that this particular department is Lamarckian by definition.

Now Paul might say that that example only works because biology is a science. What about fields that are not sciences, like (in his view and Neil's) economics or (in the view of the economists) sociology? Even there, I think that disciplinary boundaries must remain at least somewhat permeable to unorthodox ideas in order to maintain their special claim to authority (and thus special privilege of a certain sort). Like the natural sciences, social science aims at uncovering facts about the world (even when performed by postmodern social scientists who argue that all factual claims are perspectival).

I'll bracket the humanities and philosophy, which I regard as sui generis. My bigger point is simply that the "disciplinary" solution itself is potentially quite problematic.

Neil H. Buchanan said...

I guess we've found a fundamental disagreement between Jimmyd and me (although we often agree on other matters). There's a long distance between "now" and "when we're all dead," and it matters to have an economic theory that is at least somewhat capable of dealing with matters that go beyond ER-doctor life-saving techniques. Knowing, for example, what effect fiscal deficits have on measured investment, GDP, etc. ten or twenty years out matters a lot. That does not matter NOW, in one sense, because no one is currently debating that question (although they presume that they know the answer). That there is no immediate policy difference re austerity does not mean that one side is merely troublemakers.

Neil H. Buchanan said...

Paul's comment #1 is true as an abstract matter, but in the Cambridge Controversies, it's not an accurate description of what happened. It's not that Samuelson gave up and others stepped in. Samuelson explained why his side was wrong, and no one on his side disagreed. Instead, they simply acted as if losing that debate was unimportant. They may have been right about that (although I don't think so), but they really, truly lost the original debate.

On Paul's other points, I too am convinced that Krugman is doing something more than Friedmanian positivism. (And I was pleasantly surprised to see him make that very point today on his blog.) I'm just struggling to understand how his pragmatism doesn't ultimately add up to: Trust me, I know what I'm doing. He chides other people for being atheoretical, and then chides other people for being married to bad theories, and then defends himself by saying that his bad theories are not bad in ways that matter. Maybe Paul Scott is right that there is a principled position hiding in there, but I am certainly troubled by what I'm seeing.

At the very least, I don't see why Krugman is so quick to dismiss Palley and Galbraith as grousing malcontents, if they agree with him on the merits. After all, if Krugman's is saying, "Don't attack me when I'm right," shouldn't he do the same for them?

Paul Scott said...

"At the very least, I don't see why Krugman is so quick to dismiss Palley and Galbraith as grousing malcontents, if they agree with him on the merits. After all, if Krugman's is saying, "Don't attack me when I'm right," shouldn't he do the same for them?"

He wasn't. He still hasn't wrt/Galbraith.

He and Palley were having a cordial, public exchange on their respective blogs. PK expressed agreements with Palley and sympathized with his frustrations. Then Palley got snarky and personal with this post: and the cordial discussion ended and the sniping started.

Could PK have ignored the pointless insults and stayed focussed on interesting issues in the debate? Sure, that would have been nice. Sometimes skins get thin and egos take over, but in the language of the playground "Palley started it."

Neil H. Buchanan said...

"Jerks to the right of him, jerks to the left," after all!

Jimmyd said...


In an ideal world I agree with you but what I would draw your attention to is the time horizons that are embedded in our culture--different political structures are responsive to different time horizons. On one hand we elect the House of Representatives every two years ("now") and yet Supreme Court justices serve for life ("till they are dead"). You are correct that there is a long distance between those two states when the average person lives into their seventies. But our political and market institutions are heavily biased towards the "now" side. President for 4 years, Senators for 6 years. In future markets one year is considered the long term. The average length of Congressional service is 10 years; this is contrasted to the 30-40 years an Article III judge might sit on the bench.

People who emphasis the now in economics are not doing so out of capriciousness; there are real cultural and structural forces that impinge upon their ability to focus on the long-term or even intermediate terms, 20 years out. If an economist wants to have influence on public policy he or she has to respond to the political imperatives. Trying to talk to people about a 20 year plan when your audience can be confident that they will not be around to give a damn is simply to fill their head with irrelevances. That's the truth. I'm sympathetic to the claim that this is an awful way to run a modern technological society but my sympathies do not change the facts. An economic theory doesn't need to address the impact of fiscal deficits on GDP twenty years down the line because the American political system is set up to make such economic questions otiose.

Peter Gerdes said...

Your apparent critique of the use of false simplifying assumptions in economics seems somewhat bizarre in light of the fact that any competent economist (heterodox or not) at least sometimes employs simplifying assumptions about consumer rationality.

Now, I agree that it's important to understand and recognize why (and when) it's acceptable to employ a simplifying false assumption. For instance, one should understand that the assumption of rationality often works well when one's goal is to determine how regulations will affect some commodityish market because as long as the customers are slightly more likely to make the rational choice (and their other preferences are independent of rationality) companies have the same (if weaker) `marginal' incentives to change their behavior. The importance of understanding this point is essential to understand why the conclusion that competition drives prices down to the lowest cost will apply perfectly to the gasoline market but not so well to boutique supermarkets like whole foods because many people shop at such stores precisely (if not consciously) to signal concern about what foods they eat as well as their financial success. It is preciscely the fact that a place like whole foods makes the same underlying product more exclusive that drives (some) of their customers to shop there and that undermines the reasons for accepting rationality as useful simplifying assumption.

Of course I simplify here, there are lots of other ways one can fit a rational behavior model to that of shoppers at whole foods, e.g., by including the benefits of signaling in such a model. There are also different reasons for the assumption of rationality in different realms, e.g., the financial markets.

Ultimately, however, the reason economics is so dependent on rational actor models is that there is no similarly useful alternative. Ultimately, while one can tweak one's assumptions about the preference function of individuals (say allowing it to reflect the benefits signaling) and still make coherent predictions it is still a rational behavior model and I know of no approach that is similarly effective but deals with the head on irrationality of individual preferences (e.g. accepts that preferences might be non-transitive... A > B> C> A).

Should someone come up with a different simplifying assumption that gives rise to the same level of useful (and indirectly verified) predictions it will meet resistance but likely support as well.

I expect the conclusion of the cambridge debates reflects a similar regularity. Yes, it's true that one can't measure capital in a coherent way but that in a wide variety of contexts assuming one can generates powerful and often valid (even the heterodox left doesn't disagree with the orthodox on most of these conclusions) and no effective alternative presents itself.

So ultimately, I agree that economists ought to pay attention to when such simplifying false assumptions will be valid. However, the mere fact that they continued to use an assumption after it was demonstrated to be false is unremarkable. Moreover, many economists may feel this is a debate they had at the beginning of grad school and thus appear less sensitive to these issues than you give them credit for.

Neil H. Buchanan said...

I've been thinking about how to respond to Jimmyd's last comment, and I've decided that this deserves more than a few words from me on the comment board. This is a post-worthy topic. Stay tuned for a response, probably next week.

I think Peter Gerdes's comment describes well the non-scientific reality of economics. He's right that you can start from a rational actor model and tweak it to fit any set of facts. That is both the strength and the weakness of modern economics, because its adherents can claim to explain anything they want, such that there is no danger that they're ever going to be proved wrong. As Paul Scott pointed out in his comment above, that's not science.

Even so, that is not the end of the story. As Bob Hockett's post last Sunday pointed out, and as Peter Gerdes also suggests, heterodoxy might just be "flexible orthodoxy," as it were. Although I disagree that most grad students ever thought about the Cambridge Controversies (or have ever been made aware of them), they might be able to say, "Well, it's OK just to act as if production functions work, if that gets me where I need to go." But then we're back in the difficult modernism question, because we need to know that there is something more than, "Trust me, I know what I'm doing," behind someone's claim that they have made simplifying assumptions that "don't matter."

In any case, I'm hardly tapped out on things to say about these subjects. I already have two more posts planned, to develop these ideas further (not even including my responses to Jimmyd's provocative thoughts in his comment above). Keep the good comments coming!

Evin Terna said...

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

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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.
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