A number of people are linking to this reprinted critique
of the work of the late Paul Samuelson. I could point out that the
critique thoroughly misunderstands what Samuelson was saying about
international trade, factor prices, and all that. But there is, I
think, an interesting point to be made if we start from this complaint:Can
it be “scientific” to promulgate theories that do not describe economic
reality as it unfolds in its historical context, and which lead to
economic imbalance when applied?Actually, there was a time when many people thought that institutional economics,
which was very much focused on historical context, the complexity of
human behavior, and all that, would be the wave of the future. So why
didn’t that happen? Why did the model-builders, led by Samuelson, take
over instead?
The answer, in a word, was the Great Depression.
Faced
with the Depression, institutional economics turned out to have very
little to offer, except to say that it was a complex phenomenon with
deep historical roots, and surely there was no easy answer. Meanwhile,
model-oriented economists turned quickly to Keynes — who was very much
a builder of little models. And what they said was, “This is a failure
of effective demand. You can cure it by pushing this button.” The
fiscal expansion of World War II, although not intended as a Keynesian
policy, proved them right.
So Samuelson-type economics didn’t
win because of its power to cloud men’s minds. It won because in the
greatest economic crisis in history, it had something useful to say.
In
the decades that followed, economists themselves forgot this history;
today’s equation-mongers, for the most part, have no idea how much they
owe to the Keynesian revolution. But in terms of shaping economics, it
was the Depression that did it.
Michael responded to Krugman's post with this reply which I share with you:
Krugman
criticized my criticism of Samuelson {1}, referring readers to the UMKC
reprint of my Counterpunch article. So I wrote this in response.I
have recently republished my lecture notes on the history of theories
of Trade, Development and Foreign Debt {2}. In this book I provide the
basis for refuting Samuelson's factor-price equalization theorem,
IMF-World Bank austerity programs, and the purchasing-parity theory of
exchange rates.These ideas were lapses back from earlier
analysis, whose pedigree I trace. In view of their regressive
character, I think that the question that needs to be asked is how the
discipline was untracked and trivialized from its classical flowering?
How did it become marginalized, taking for granted the social
structures and dynamics that should be the substance and focal point of
its analysis? As John Williams quipped already in 1929 about the
practical usefulness of international trade theory, I have often felt
like the man who stammered and finally learned to say "Peter Piper
picked a peck of pickled peppers", but found it hard to work into
conversation {3}.But now that
such prattling has become the essence of conversation among economists,
the important question is how universities, students and the rest of
the world have come to accept it and even award prizes in it!To
answer this question, my book describes the "intellectual engineering"
that has turned the economics discipline into a public relations
exercise for the rentier classes criticized by the classical
economists: landlords, bankers and monopolists. It was largely to
counter criticisms of their unearned income and wealth, after all, that
the post-classical reaction aimed to limit the conceptual "toolbox" of
economists to become so unrealistic, narrow-minded and self-serving to
the status quo. It has ended up as an intellectual ploy to distract
attention away from the financial and property dynamics that are
polarizing our world between debtors and creditors, property owners and
renters, while steering politics from democracy to oligarchy.Bad
economic content starts with bad methodology. Ever since John Stuart
Mill in the 1840s, economics has been described as a deductive
discipline of axiomatic assumptions. Nobel Prize winners from Paul
Samuelson to Bill Vickery have described the criterion for economic
excellence to be the consistency of its assumptions, not their realism
{4}. Typical of this approach is Nobel Prizewinner Paul Samuelson's
conclusion in his famous 1939 article on "The Gains from International
Trade":
In pointing out the consequences of a set of
abstract assumptions, one need not be committed unduly as to the
relation between reality and these assumptions. {5}This attitude did not deter him from drawing policy conclusions
affecting the material world in which real people live. These
conclusions are diametrically opposed to the empirically successful
protectionism by which Britain, the United States and Germany rose to
industrial supremacy.Typical of this now widespread attitude is
the textbook Microeconomics by William Vickery, winner of the 1997
Nobel Economics Prize:
Economic theory proper, indeed,
is nothing more than a system of logical relations between certain sets
of assumptions and the conclusions derived from them ...The validity of a theory proper does not depend on the correspondence or lack of it between the assumptions of the theory or its conclusions and observations
in the real world. A theory as an internally consistent system is valid
if the conclusions follow logically from its premises, and the fact
that neither the premises nor the conclusions correspond to reality may
show that the theory is not very useful, but does not invalidate it. In
any pure theory, all propositions are essentially tautological, in the
sense that the results are implicit in the assumptions made. {6}Such disdain for empirical verification is not found in the physical
sciences. Its popularity in the social sciences is sponsored by vested
interests. There is always self-interest behind methodological madness.That
is because success requires heavy subsidies from special interests who
benefit from an erroneous, misleading or deceptive economic logic. Why
promote unrealistic abstractions, after all, if not to distract
attention from reforms aimed at creating rules that oblige people
actually to earn their income rather than simply extracting it from the
rest of the economy?Michael Hudson
Links and Notes:
{1} http://krugman.blogs.nytimes.com/2009/12/18/why-economics-is-the-way-it-is/
{2} http://www.amazon.com/exec/obidos/ASIN/3980846695/counterpunchmaga
{3} John H Williams, Postwar Monetary Plans and Other Essays, third edition (New York: 1947), from page 134.
{4}
I have surveyed the methodology in "The Use and Abuse of Mathematical
Economics", Journal of Economic Studies 27 (2000):292-315. I earlier
criticized its application to international economic theorizing in
Trade, Development and Foreign Debt (1992; new edition, 2009),
especially chapter 11.{5} Paul Samuelson "The Gains from
International Trade", Canadian Journal of Economics and Political
Science, Volume 5 (1939), page 205.{6} William Vickery, Microeconomics (New York: 1964), page 5.
Michael's criticism is one that will strike a methodological note with
many economists who feel that the discipline has moved too far into the
realm of irrelevancy as economists look to formulate sound theorems
based on "mathematical rigor" instead of theories based on basic social
observations of human nature.
I believe that behavioral finance was a response to addressing many
gaps that we readily observe in economic theory. Having completed a
Master's in Economics at McGill University, I passed those mathematical
courses, but I was always attracted to questions of economic
methodology. My courses in philosophy taught me to question everything,
including economic theorems.
Economics is an evolving field. As
Isaiah Berlin would say, there is inherent beauty in diversity. Let
there be mathematical modeling but let there also be more open debates
on what is really going on in the economy.
My practical
experience in the investment world taught me to be weary of
quantitative models that claim to measure all risks. This is pure
nonsense. Just a few years ago, everyone was claiming we "tamed risk
once and for all", and then "BOOM!", 2008 humbled the sharpest minds on
Wall Street.
The economists who were tracking the bigger macro
trends - including the net issuance of CDOs and other securitized
products and the trillions flowing to hedge funds and private equity
funds - knew that the global financial system was heading for a hell of
a collision.
Wow are you out of touch! There is no "economics," only constructivist progaganda masquerading as "economics." If you knew anything at all about the most sophisticated economist, Sraffa (who got a real charge out of Poincare's utterly inept constructivist blather, Science and Hypothesis), you would know this is true.
But you know nothing.
Frankly, I'm partial to Schumpeter. His works were far more complete and covered a wider range of concepts.
Sraffa was a Marxist and neo-Ricardian. Which I find odd, but I suppose it can happen. His contributions to discussion are excellent. His theory of value, however, is incomplete.
I happen to disagree with your comment that it's constructivist propaganda. That, it seems, is a very Marxist concept. Marxism rests entirely on propaganda and getting people to follow a norm of behaviors essential to proper outcome of the whole. It's interesting that "to each according to their needs, from each according to their abilties" is a via positiva version of "if you don't work, you don't eat". Sadly, people react more to the negative than the positive. Marx's view creates too many free-rider opportunities. Thus, the reliance on propaganda.
Most market based economics don't require anything like this. You have to provide SOMETHING to get SOMETHING back. That's not propaganda, that's reality.
Krugman is lost in 1930's economics because he is, at heart, a fascist.
As a result, everything he does is couched in the concepts of the time which are outdated and have no bearing on today.
Frankly, he's a low grade moron who stumbled onto one good idea for which he won his award. He's done nothing of value since. Even a blind squirrel finds a few nuts would apply best to him.
2009 - The Rise of Micro-Economics.
Krugman .....has chnaged his colors...
Now he is a joke styled media hyper....
Just trying to attract numbers for any reason....
.........................................
Here is the REAL PROBLEM OF ECONOMIC....
ALL DATA SETS ARE INCOMPLETE....
THAT...IS THE BOTTOM LINE....
Krugman said:
"Samuelson-type economics didn’t win because of its power to cloud men’s minds. It won because in the greatest economic crisis in history, it had something useful to say."
And it lost because it had absolutely nothing useful to say in predicting the crash of 2008. It's really simple folks. Just ignore any Economist who absolutely blew calling the greatest crisis in his career. Hudson is absolutely right. If you're betting that Krugman and the rest of the mainstream frauds will get the next crash right, you'll lose a lot more money.
I'll add that it is completely shocking that the Macroeconomics field simply doesn't apply Mathematics which is taught in first year Physics and Math University courses (and some advanced High School classes these days).
If you don't believe me, check out:
http://www.debtdeflation.com/blogs/2009/12/16/circuit-theory-and-the-sta...
I'll stick with Hudson, and not the people who have been proven to be charletons in Economics.
It's a fine distinction, but I've seen it remarked that were Keynes to reappear today he'd have nothing to do with the Keynesians. In it's time and under the circumstances Keynes's analysis and policy recommendations were radical. And they worked. But economics isn't chemistry. Experiments aren't necessarily repeatable to verify theory because the subject gets wind of what's up and adjusts his behavior to maximize profit. When everybody ,knows that you're going to engage in massive deficit spending to prime an economy so that it will come out of recession, then the spending becomes nothing more than an exercise in moral hazard.
If people understood how utterly useless and disorganized economics was before Keynes perhaps they'd be a little less inclined to castigate him as if he were some huckster or blowhard. Keynes was truly a genius and he was one of the last of a class of aristocrats who understood their position and privilege as conferring upon them the highest of responsibilities to devote their lives to the improvement of their societies.
If we had economists of Keynes stature, brilliance, and commitment to public service around today this would all have been solved by now. They wouldn't have resorted to mindless application of 1930s provenance Keynesian stimulus because it was apparent to anyone who thought about it a little before application it wasn't going to work in today's world.
You're right, Keynes wouldn't.
Everyone should read about the ex-post ante theory of interest.
Anonymous 170441
http://en.wikipedia.org/wiki/John_Maynard_Keynes
"In 1931, he received considerable support for his views on counter-cyclical public spending in Chicago, then America's foremost centre for economic views alternative to the mainstream.
However, orthodox economic opinion remained generally hostile regarding fiscal intervention to mitigate the depression, until just before the outbreak of war. In late 1933 Keynes was persuaded by Felix Frankfurter to address President Roosevelt directly, which he did by letters and face to face in 1934, after which the two men spoke highly of each other.
However according to Skidelsky, the consensus is that Keynes efforts only began to have a more than marginal influence on US economic policy after 1939."
Thanks, Mr. K., for this stuff --- love it!
Krugman is always all over the landscape -- pushing the offshoring of jobs and "globalization" one year, then the next year posing as a "progressive" --- but always the Group of 30 dude!
Screw Krugman, he is a poseur of the first level.
Thanks Leo
I learned from your contribution
Granting Krugman a Nobel prize has been an outright crime against humanity, but just look at the company he gets to keep.
Krugman's corporatist hackery has become terminal, and I'm glad to see Hudson's vigorous response.
Did anyone notice how, after all his whining about being marginalized on Iraq, Krugman doesn't deign to even mention the name of a filthy hippie like Hudson, but just refers to some nameless "reprinted critique" which dares to criticize the great Samuelson and the august ideal of free trade?
So it's clear that, just as with the Iraq effect he accurately described, so Paul Krugman respectfully deals with everyone who's a Serious Member of the Establishment, even right wingers, but can only handle with gingerly disdain the nameless peasants who dare to throw their stink bombs at the Establishment itself.
I wish Krugman was aware enough to be a corporate hack. Then there would at least be the possibility of his becoming enlightened. But having read his column for years and followed his all too frequent of late public appearances to dispense Nobel prize certified orthodoxy to the economically unwashed masses, I long ago concluded that it's far worse than that. He's delusional, like most of those who claim to practice economic analysis.
So far he hasn't been so arrogant as to announce that he doesn't see any need for theory to accurately predict as long as it's internally consistent, like Samuelson, but maybe we should give him time. After all, he just got his Nobel prize a year ago.
Still everything he says or writes relies on that premise; Krugman is one of the most dogmatic of the new Keynesians.
Incidentally, Hudson is not by any means a nameless peasant. He's quite accomplished and recognized as such in the proscribed circles where he travels, but he lacks the instinct for self-promotion and the natural talent for celebrity than has come be associated with modern economists in the tradition of Roubini, Krugman, and the rest of the crew who seem to spend more time on the phone lining up television appearances than doing insightful thinking and analysis which might be useful in the current circumstances.
Sure, I know Hudson well. I've read lots of his stuff. I was referring to Krugman's failure to name him the way he always punctiliously names everyone else.
Failed Kenyesian economics turned the 29 crash into the great Depression. Parading out the fascist Keynes famous followers. In the middle of a do-over is HILARIOUS !!!!!