The heterodox Swedish economist and gadfly Lars Syll had a blog exchange with Paul Krugman recently that reminded me of some thoughts I’ve been meaning to post about modeling in the social sciences. First, Syll accused Krugman of not being a “real” Keynesian, because Krugman subscribes to the model-driven, orthodox-economics “John Hicks IS-LM interpretation of Keynes,” not to the true Keynesianism that passed down through Syll’s heterodox mentor Hyman Minsky.
Krugman offered his usual responses, noting that “Keynes said a lot of things, not all consistent with each other,” and that in any case, the important thing in economics — as in any field hoping to be a science — is predictive power, not faithfulness to some oracular founder. Then Krugman offered a remarkably direct challenge:
And as I have often argued, these past 6 or 7 years have in fact been a triumph for IS-LM. Those of us using IS-LM made predictions about the quiescence of interest rates and inflation that were ridiculed by many on the right, but have been completely borne out in practice. We also predicted much bigger adverse effects from austerity than usual because of the zero lower bound, and that has also come true.
Now, what have those who declare themselves the true Keynesians had to offer? Has insisting that expectations are volatile and unpredictable been helpful in this context? Actually, if anything it lends support to believers in the confidence fairy. After all, if it’s all animal spirits, who are we to say they’re wrong?
Has declaring uncertainty to be unquantifiable, and mathematical modeling in any form foolish, been productive? Remember, that’s what the Austrians say too.
If you can show me any useful advice given by those sniping at me and other for our failure to be proper Keynesians, I’ll be happy to take it under consideration. If you can’t, then we’re just doing literary criticism here, and I’m not interested.
What surprised me — and I have to admit, disappointed me — was Syll’s response. He failed to offer any example of “useful advice” (good predictions) made by heterodox economists like Syll but overlooked by gadget-driven, orthodox “Keynesian” (i.e., not dogmatic right-wing neoclassical) economists like Krugman.
Syll seems to acknowledge that predictive power is the most important thing when comparing and choosing between approaches to economics, but offers no evidence for the superiority of his heterodox approach according to this criterion. Instead, he attacks “gadgets” like the IS-LM model for not being realistic enough — as though, despite what he said about prediction being the most important task, in the end Syll favors his heterodox approach not because of its predictive usefulness, but because of its realistic portrayal of the aspects of the economy that he cares most about:
No serious economist would question that explaining and understanding “what’s going on” in our economies is the most important task economists can set themselves — but it is not the only task. …
[I]t’s absolutely gobsmacking how Krugman manages to mix up the ontological question — is the economy permeated by calculable risk or by genuine and often uncalculable uncertainty — with the epistemological question — how do we manage to analyze/understand/explain/model such an economy. Here Krugman seems to say — much in the spirit of Robert Lucas — that if reality is uncertain and non-ergodic, well then let’s just pretend it’s ergodic and susceptible to standard probabilistic analysis, so that we can go on with our FORTRAN programs and mathematical models! In other areas of science that would rightfully be considered fraud, but in “modern” neoclassical mainstream economics it’s obviously thought of as an unprobematical and justified procedure…
(NB: I’m not sure that using unrealistic, simplifying assumptions to achieve increased predictive power would be considered “fraud” in any science… In fact, isn’t making unrealistic, simplifying assumptions how most sciences work? Isn’t economics just doing the usual thing that sciences try to do?)
… Being able to model a “gadget world” — a world that somehow could be considered real or similar to the real world — is not the same as investigating the real world. Even though all theories are false, since they simplify, they may still possibly serve our pursuit of truth. But then they cannot be unrealistic or false in any way. The falsehood or unrealisticness has to be qualified.
No matter how many convoluted refinements of concepts made in the gadget model, if the “successive approximations” do not result in models similar to reality in the appropriate respects (such as structure, isomorphism etc), the surrogate gadget system becomes a substitute system that does not bridge to the world, but rather misses its target.
(NB: Speaking of morphology, all of this is a little amorphous, isn’t it? Once we start choosing between our scientific theories based not on predictive usefulness but based on an — ultimately aesthetic? — evaluation of whether they remain faithful to the right aspects of reality, as we define “faithful” and “right,” who’s to say we shouldn’t choose Austrian over Minskian heterodoxy? After all, the Austrians certainly have the aesthetic virtue of simplicity…)
So — constructing gadgets like IS-LM macroeconomic models as “stylized facts” somehow “successively approximating” macroeconomic reality, is a rather unimpressive attempt at legitimizing using fictitious idealizations for reasons more to do with model tractability than with a genuine interest of understanding and explaining features of real economies. Many of the model assumptions made in IS-LM models and “New Keynesian” DSGE models are restrictive rather than harmless and could a fortiori anyway not in any sensible meaning be considered approximations at all.
Even if one were to say — fine, fine, those are all fair criticisms, as far as they go — Krugman, like those he critiques, is letting the availability of convenient mathematical gadgets shape his inquiry, rather than letting his inquiry determine his choice of tools (like the drunk searching for his keys under a streetlight) — still: what did Syll’s heterodoxy get right that Krugman’s textbook orthodoxy got wrong?
Krugman laid down a very direct challenge, and Syll seems not to have answered it.
I would have expected Syll to suggest that IS-LM and other orthodox gadgets may have been as good as anything at predicting the effects of monetary and fiscal policies over the several years since the financial crisis, but that the gadgets in the orthodox toolkit are weaker than heterodox approaches (such as Minsky’s) when it comes to predicting bubbles and crises themselves. Alternately, I could have imagined Syll making a broader historical point about the nature of money, or debt — the subjects of two provocative recent posts on the often heterodox INET blog — in order to suggest that orthodox gadgets may be adequate for predicting how things work under the current monetary set-up in nearly every country, but they fail to say much of anything useful about what might happen if monetary systems were restructured in various fundamental ways. The latter could be quite a significant limitation if such restructuring were feasible and advantageous.
In any case, the Syll-Krugman exchange got me thinking of something I’ve been meaning to post about for a while now — Thucydides, and his relation to rational choice theories in the social sciences… But that will have to wait for another post, hopefully soon.