There were several posts last week on the hypothesis that there's too much emphasis on mathematical modeling in modern economics. Most said yes (Dave Hendersen, Bryan Caplan, Noahpundit), though Krugman said no.
Krugman's experience is very pertinent as his Nobel Prize winning model on increasing returns to scale is a good example of obtuse economodeling: its thesis was known before being the basis of the centuries-old infant industry argument, and after Krugman it was no easier to apply. Consider Detroit, a popular application for regional increasing returns when applied to autos in the early 20th century: what were the key conditions that allowed it enjoy increasing returns to scale in the early 20th century, but then decreasing returns to scale later in the century?
Krugman responded that his theory changed the debate, because it showed--under certain parameterizations--that increasing returns to scale can be an argument for lower trade barriers! While true, this is a possibility, not a probability, and those who believe in increasing returns to scale invariably are more inclined to believe in selective tariffs. So, it hasn't changed the debate at counter to his assertion that his New Trade Theory is "probably the main story" in import-export arguments for decreasing trade restrictions; his new model has not changed the debate at all, merely added another obscure reference to the confabulators. Increasing returns to scale remains 1) a fringe argument and 2) used primarily to support trade restrictions, as it was in the 1900s before Krugman's New Trade Theory model.
Krugman is a very smart person, but the fact he can't see this highlights that the greatest lies we tell are the ones we tell ourselves, because he clearly has the capacity to see slight inconsistencies and flaws in others (he's a meticulous advocate against his opponents).
I think a lot of math in econ is like the cargo cult phenomenon, where people see correlations (planes and cargo) and suppose the essence of something is one of those correlations (eg, build models of planes, and cargo will show up). Thus, just as naive people think the essence of a good poem is rhyming, naive economists think that setting up a hypothesis as if one were deriving the Dirac equation or special relativity seems like the essence of a science. Unfortunately, economic equations rarely work out that way....MORE
Monday, August 26, 2013
"Economath and the Drake Equation"