Lars P. Syll — Paul Krugman — a case of dangerous neglect of methodological reflection

Alex Rosenberg — chair of the philosophy department at Duke University, renowned economic methodologist and author ofEconomics — Mathematical politics or Science of Diminshing Returns — had an interesting article on What’s Wrong with Paul Krugman’s Philosophy of Economics in 3:AM Magazine the other day. Writes Rosenberg:

Philosophers of economics get this. Keynes got it. Frank Knight got it. Post Keynesians and other heterodox economists get it. Other scientists get it. Financial professionals like George Soros get it.  

But it escapes conventional economists. Econometric models fail exactly where they are needed most. This is like "follow the trend" trading approaches that work until the trend changes, as it inevitably does. This is not to say that "follow the trend" is wrong or useless. It's just not enough to be useful  by itself. Formal modeling and heuristic gadgetry are useful in the study of economics, and are even necessary as tools of the trade, but they are not enough. What we are interested in is turning points and accounting for it based on "unforeseeable" external shocks is a cop-out, especially when others have foreseen reversal and warned about it.

Lars continues this train in taking Krugman's defense of gadget economics apart, pointing out that Krugman often comes to the right conclusions but provides no evidence that this was the direct outcome of using formal econometric models like DSGE or heuristic gadgets like IS-LM, or even what subsidiary role they played.

Lars: "I have noticed again and again, that on most macroeconomic policy issues I find myself in agreement with Krugman. To me that just shows that Krugman is right in spite of and not thanks to those neoclassical models — IS-LM included — 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 (even) simpler and more adequate and relevant thought-constructions much more in the vein of Keynes.

So the ball is back in Krugman's court. 

There's much more to the post. Well worth the read.

Lars P. Syll’s Blog
Paul Krugman — a case of dangerous neglect of methodological reflection
Lars P. Syll | Professor, Malmo University

(h/t Clonal in the comments)