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Gadgets, models and economic wonkiness

by Robert Teitelman | Published July 17, 2012 at 4:14 PM

Now for something a little out there. Economics these days finds itself in an odd position. On one hand, economic policies and their underlying theories lie at the very heart of most of the great questions of the day: job creation, austerity, the euro. On the other hand, economics as a discipline and as a set of doctrines has, in good measure because of those very crises, entered a period of fundamental rethinking. The trouble here--at least one of them--is that economics can be forbiddingly complex. But its policies work themselves out in an inevitably reductionist democratic context, whether in America, with its circuslike political campaigns, or in fractious Europe. This airing of technical disagreement, some of which is basic, increasingly takes place not just in seminar rooms or scholarly journals, but in more public venues, like newspapers and the Internet.

Last week Princeton's Paul Krugman wrote a post on his New York Times blog called "Gadgets Versus Fundamentals (Wonkish)." With the "wonkish" warning, Krugman was telling his many lay readers that he was heading into the deep weeds. Now Krugman, given his Times perch and his aggressive style of punditry, probably engages in more public polemics than any economist around. Last week I posted, for instance, on a column from Columbia University's Jeffrey Sachs that attacked (I thought unfairly) Krugman's position on short-term necessities and long-term policies. Of course, Krugman has friends. He uses his blog to fire back, and he has confederates--in campaign lingo they would be proxies--who regularly link to him and generally have his back, from Brad DeLong to Mark Thoma's Economist's View. But this "wonkish" post was a little different.

The post had a far deeper history than a superficial reading might suggest. Some of this history reveals various deep schisms in the field, which in turn produce tempests of often-passionate argument. Krugman was replying to a post by Oxford economist Simon Wren-Lewis in his "Mainly Macro" blog about the crisis and macroeconomics. Wren-Lewis, in turn, has been posting regularly on what might be described the state of macroeconomics and what he called, in one post, the "constant disagreement among macroeconomists." In a late June post, Wren-Lewis got this debate going when he argued, "Macroeconomic policy is highly political, with strong ideological implications. Ideology and politics distort macroeconomics as a science. Yet despite this, there is--and for many years has been--a substantial body of analysis that most macroeconomics [sic] would sign up to, and which has sound empirical backing." Sounds reasonable, no? Economics has some areas of disagreement, but there's a pretty sound methodological and empirical underpinning to the core. In a post the next day, Krugman generally agreed, but moved forward to argue that the brand of economics that was most open to evidence and thus the least ideological was his own--an updated "saltwater" New Keynesianism. Krugman contrasted that with classical, "freshwater" (meaning Chicago) equilibrium macro that he argues recent events have totally washed away. Although his blog is called "The Conscience of a Liberal," Krugman insisted that the politics and ideology resided on the free-market, classical side.

Now the debate took off, with Thoma, Noah Smith and Stephen Williamson weighing in, pro and con. Wren-Lewis replied by trying again to navigate a middle passage, avoiding the implication of Krugman that classical equilibrium economists are captured by a conservative politics. Wren-Lewis, in particular, attempted to draw a distinction between the use of various models as a research tool and the way economic policy is developed in the real world: "So that is how I can be both supportive of current academic macro, and believe that macroeconomic policy advice is contaminated by ideology."

Enter Lars Syll, an economist at Malmö University in Sweden who specializes in economic philosophy and methodology and seems to be a kind of Post-Keynesian, not a New Keynesian like Krugman and Wren-Lewis. Post-Keynesians have long tried to return to Keynes' original thought, particularly on uncertainty, and not on the disciples that followed. Syll went hard after Wren-Lewis' post with one of his own titled, "Wren-Lewis Drivelling on Macroeconomics." Syll does not mince words: "Again, this self-congratulatory attitude. All macroeconomists share the same (mainstream neoclassical) basic theory, so when we discuss and argue it's only about which policy and model to choose. All the more or less licensed and shared models and policies are already there on the shelf and we just have to decide which one to pick for today's problem solving." Syll declares a pox on both the Classical and the New Keynesians, both of which, he says, use unrealistic and unrepresentative models. Again, Krugman steps in to argue Wren-Lewis' point: In research, playing with models, even if they are unrealistic, can help clarify thinking. It's when you apply these models to policy issues that you usher politics into the game. Krugman makes the distinction between "gadgets," that is some "brilliantly silly" theoretical models he has found useful, and fundamentals. A gadget is an aid to thought; a "fundamental" is some inevitably inadequate representation of reality. Krugman ends with a sigh. "But I guess not everyone on the sensible side [his side, of course] of macro sees it that way. And that is a problem. A gadget is a gadget, and you should not let it define your field."

In a long post a day later, Syll describes himself as a heterodox economist (he now calls Krugman a "sort-kinda New Keynesian") who draws his inspiration from Keynes, but not from those who followed him and tried to formalize his thinking, like John Hicks and his IS-LM model, which Krugman defended as an aid in his work on liquidity traps. Again, it's all about the models--it's all about how we even begin to think about the foundations, or the microfoundations, of economics. "On most macroeconomic policy discussions I find myself in agreement with Krugman," writes Syll. "To me that just shows Krugman is right in spite of and not thanks to those models he ultimately refers to. When he is discussing austerity measures, ricardian equivalence or problems with the euro, he is actually not using those models, but rather simpler and more adequate and relevant thought constructions in the vein of Keynes. ...

"A gadget is just a gadget--and brilliantly silly models do not help us working with the fundamental issue of modern economics."

OK, for anyone without an economics degree, this back-and-forth may seem like the nattering of some lost tribe in the jungle: Hicks and Keynes; Lucas and Krugman; views of dynamic stochastic general equilibrium models or the Dixit-Stiglitz model of monopolistic competition; gadgets and fundamentals; New Keynesians and Post-Keynesians; and a dash of intertemporal optimization. Where will it all end? Again, while the debate gets quickly technical, the larger question is sitting right there. What kind of endeavor is economics? Is it a science like physics? What are its limits? Can we accurately model human behavior? How much certainty can we reasonably expect from economists? This is not just ivory tower philosophizing. We live in an age when economics, for better or worse, rules. Nations rise and fall because of economics. Elections hang on judgments of economists, and vast forces are either restrained or unleashed (look at British austerity policies). They are the technocratic agents par excellence; they even get op-ed columns in major newspapers. It is useful to recall these debates over methodologies (which continue unabated, with newish posts from nearly everyone) when economists declare this or that with ineffable certainty. It may be wonkish, but it may be the most important debate of all. - Robert Teitelman

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