Why Krugman's Analysis of Economists Is Wrong

Paul Krugman’s New York Times Magazine article explaining the dismal state of the economics profession is itself an object lesson in what is wrong with the economics profession.

While Mr. Krugman is one of the most talented economists alive, this article isn’t an example of Mr. Krugman at his best. Instead of trying to figure out what is wrong with the training and reward system for economists, Mr. Krugman uses the New York Times article as a chance to implicitly disparage his critics while proposing a solution to the problem which, coincidentally, is to become a believer in his view of economic theory and public policy.

Mr. Krugman says that what economists need to do is to embrace modern Keynesian theory and admit that the Chicago School of free markets advocacy is wrong.

Sorry Mr. Krugman, that is not why almost all economists missed the Great Recession and it really has nothing to do with why the work at economics departments, for the most part, is irrelevant.

The reason that economists missed the largest economic event in 80 or so years isn’t because they weren’t Keynesian enough.

The problem is that most economists are out of touch with the realities of business, government and human behavior and they substitute mathematical models, statistical formulas and computer programs for the judgment that comes from actual experience and first hand field work. If economists want to restore their credibility they need to make their work reality based and stop rewarding economists for their mathematical prowess. There is another department that is supposed to reward great mathematicians and it is the math department.

The lack of real world experience and overreliance on mathematical and computer modeling causes economists to misunderstand how groups and individuals think and work in the real world. Economics is a social science but yet little time is spent by serious economists, or wanna be serious economists, doing hands on research.

And, virtually no one who is a serious economist has actually had a real job in a for profit business. Economists quickly learn that time spent outside of the ivory tower of a university, research institute or government post destroys academic careers. Economists are just like any other group, they feel comfortable with and promote individuals who are like themselves.

And, economists for the most part are professional researchers and reward a life dedicated to academic research and implicitly discourage real world experience.

One can quickly see the lack of diversity of experience by reading the bios of the faculty at Paul Krugman’s employer, the Princeton University Economic Department. I went onto the web site for the Princeton University Economics Department and wasn’t able to find a single tenured or tenure track faculty member who had a senior (or even middle level position) in a real business.

With more than 300 million Americans and 6 billion global citizens, it is unbelievable that Princeton University wasn’t able to recruit a single qualified person who spent time running an actual business that “made stuff” for real people. Obviously, there is a selection system at Princeton that has a bias against real life experience.

Unfortunately, Princeton University isn’t unique among economics departments.

When I was a young economics student at the University of Pennsylvania it was drilled into my head that the only economists who were going to be successful were economists that excelled at math and viewed economics as applied high level math.

Other social science departments, like sociology and psychology, were looked down upon as inferior because they didn’t use the tools of “hard science” which, seemed to me, exclusively to be mathematical, statistical and computer modeling.

When I suggested to my economics department advisor that I was considering a dual major in economics and sociology so that I would learn how to do field work to better understand how businesses worked as social units, he screamed at me for over an hour and told me that I was a failure and one of his greatest disappointments. I can only imagine what would have happened if I suggested that in order to understand business I thought working in business would be helpful.

My professor surely would have had a stroke on the spot.

I was told by more than one professor to forget about sociology, management, marketing or other of the soft economics sciences. It was clear that these disciplines were for the intellectual lightweights who couldn’t cut it in a rigorous economics program.

The economics profession got what they wanted; a generation of economists who have little connection to what makes people, businesses and society tick but are pretty decent mathematicians, statisticians and computer wonks.

Instead of questioning the correctness of the qualifications and value system of the economics profession (and Princeton’s Economics Department), Mr. Krugman says that the problem is his fellow economists relied upon the wrong mathematical and computer models.

Mr. Krugman states Keynesian theory is “the only plausible game in town” which of course has nothing to do with why economists blew it over the last decade. However, Mr. Krugman is a Keynesian economist who is constantly criticized by economists who believe in monetary and efficient market theories. So, his article on why economists got it wrong turns into a justification for why he is right and others are wrong.

But, if Mr. Krugman wanted to write an article saying why he is right and his critics are wrong, then he just should have written that and not wasted everyone’s time thinking he was actually trying to explain why the economics profession almost totally missed the “rumblings” of the biggest economic event since the Great Depression.

I am a big fan of Mr. Krugman and believe he is a better economist, writer and thinker than his article indicates. He would be better served trying to figure out whether or not the work being done at Princeton University has any relative value and relevance.

Merely saying “I am right and you are wrong” to people with whom he disagrees, no matter how many words he uses and where it is published, is beneath Mr. Krugman.

Comments

[John Galt:]

So basically what you are saying is that Economists are book smart but have no street smarts. Well... some of them, not the worthwhile ones.

The reason why they didn't see " the crash" is BECAUSE they were Keynsians, because our government is full of keynsians, and because we have lawyers, leeches and lobbists running our Federal Budget.

If more people were of the Chicago school Austrian school and Free market ( and we operated this way), then we'd be a lot better off.

In all reality, you could trace everything back to the Fed. How could you possibly say we have anything close to a free market when we have the government seeting the price and quantity of money? I mean, if those aren't the two of the most important things in an economy, I don't know what else to say.

I learned from great economists, some of the brighest people on the planet, some with book smarts, some with street smarts too.

Krugman is more concerned with using his power/soap box to push forth his social agenda.

Sep 08 09:42 AM

[ErnestJack:]

Dear Mr Sunshine,

I suggest that all your followers reading this article go to the New York Time website and read Paul Krugman's article. The reason I suggest that is because the article I read is entirely different than the one you are portraying. Did you read the same article? Or did you simply read the article you wanted to read?

At NO time does Krugman say that economists missed the crisis because they werent Keynesian enough. Rather he says, which you repeat as your own opinion is that ""economists, AS A GROUP, mistook beauty, clad in impressive-looking mathematica, for truth". Most of what you say for the reason this crisis was missed by the profession is just paraphrasing Krugman.

Yes, Krugman is a Keynesian, As is Bernanke and the rest of the Fed. That you dont agree with their way of thinking is obvious, but you should be ashamed of the way you portray his views.

Sep 08 09:49 AM

[elated7:]

Must be s Fresh-Water group. no?

Sep 08 10:25 AM

[E Thomas St.:]

Yeah, if only more Economists ran businesses themselves rather than studying them impartially as part of research projects...

Sep 08 12:28 PM

[conceptwizard:]

From Paul Krugman:

"As I see it, the economics profession went astray because economists, as a group, mistook beauty, clad in impressive-looking mathematics, for truth. Until the Great Depression, most economists clung to a vision of capitalism as a perfect or nearly perfect system. That vision wasn’t sustainable in the face of mass unemployment, but as memories of the Depression faded, economists fell back in love with the old, idealized vision of an economy in which rational individuals interact in perfect markets, this time gussied up with fancy equations. The renewed romance with the idealized market was, to be sure, partly a response to shifting political winds, partly a response to financial incentives. But while sabbaticals at the Hoover Institution and job opportunities on Wall Street are nothing to sneeze at, the central cause of the profession’s failure was the desire for an all-encompassing, intellectually elegant approach that also gave economists a chance to show off their mathematical prowess.

Unfortunately, this romanticized and sanitized vision of the economy led most economists to ignore all the things that can go wrong. They turned a blind eye to the limitations of human rationality that often lead to bubbles and busts; to the problems of institutions that run amok; to the imperfections of markets — especially financial markets — that can cause the economy’s operating system to undergo sudden, unpredictable crashes; and to the dangers created when regulators don’t believe in regulation.

It’s much harder to say where the economics profession goes from here. But what’s almost certain is that economists will have to learn to live with messiness. That is, they will have to acknowledge the importance of irrational and often unpredictable behavior, face up to the often idiosyncratic imperfections of markets and accept that an elegant economic “theory of everything” is a long way off. In practical terms, this will translate into more cautious policy advice — and a reduced willingness to dismantle economic safeguards in the faith that markets will solve all problems."

Sounds perfectly logical to me.

Sep 08 12:59 PM

[Whippet:]

Perfect comment; my thoughts exactly.
Keynesianism is purely "kick the dead skunk down the road" economics- it is choosing someone else's pain (debt, inflation) later in lieu of pain (slower growth, bumpier cycles) now . The theory of attempting to eradicate business cycles and bubbles has been proven absurd. The bubbles have only been worse. Only the free markets can efficiently decide which firms survive and which fail- this is the entire purpose of cycles, panics, recessions, and depressions. Reallocation of capital from the losers to the winners.
To say free markets have failed is to erase the first 150+ years of the nation's history (400 if you go back to Jamestown/Plymouth). When the government picks politically connected winners and losers, and reallocates capital from small firms to large firms (banking), the end is nigh. The government's role is to pass legislation that protects the playing field and enables the markets to do what they do. The Sherman Anti-Trust Act and Glass-Steagall were two intelligent ones that have been ignored and repealed, respectively. Recently, Sarbanes-Oxley was a complete joke.

Krugman is a tool. Yellowhoard has suggested a delicious disposition for him in previous posts...


On Sep 08 09:42 AM John Galt wrote:

> So basically what you are saying is that Economists are book smart
> but have no street smarts. Well... some of them, not the worthwhile
> ones.
>
> The reason why they didn't see " the crash" is BECAUSE they were
> Keynsians, because our government is full of keynsians, and because
> we have lawyers, leeches and lobbists running our Federal Budget.
>
>
> If more people were of the Chicago school Austrian school and Free
> market ( and we operated this way), then we'd be a lot better off.
>
>
> In all reality, you could trace everything back to the Fed. How
> could you possibly say we have anything close to a free market when
> we have the government seeting the price and quantity of money?
> I mean, if those aren't the two of the most important things in an
> economy, I don't know what else to say.
>
> I learned from great economists, some of the brighest people on the
> planet, some with book smarts, some with street smarts too.
>
> Krugman is more concerned with using his power/soap box to push forth
> his social agenda.

Sep 08 01:34 PM

[Mayascribe:]

Additionally, to all the nonsensical narcissistic nonsense Krugman promoted, I found near-hilarious the intra-article debate about the "Saltwater" versus "Freshwater" economists philosophies. To me, it's all brack-ish water. Since Keynes, Friedman and Galbraith so much has changed. USA Macroeconomics has gone global since I recieved my Econ degree when I tossed my mortor board into the air in '77.

Tax laws have drastically changed and will continue to do so. Financial investing strategies morphed to the point where the lack of transparency and oversight nearly blew up the world's economies, and still may yet. The drastic increase of how everything is electronically stored, conveyed, sold or bought, instantaneous trading, great financial social websites like SA--the herding mentality they create--and the obvoius, like the drug addict-like printing of money, the repeal of the Glass Steagle Act (thanks slick Willy for that one), how robots and cloud computing have taken jobs, outsourcing, CHINA, etc., I'm not sure any economist or W.H.O.P.P.E.R computer could predict the future using past theories and data.

I'm just waiting for the Google application that can predict the dreams (nightmares) we haven't yet had.

Sep 08 02:09 PM

[Pat C:]

I thought Krugman's article was pretty good considering his audience. It was a bit slanted but not unreasonable. We do need to open our minds to alternatives such as behavioral finance/economics which is how I read his conclusion.

Sep 08 06:59 PM

[TinyTim:]

"Other social science departments, like sociology and psychology, were looked down upon as inferior because they didn’t use the tools of “hard science” which, seemed to me, exclusively to be mathematical, statistical and computer modeling."

Unfortunately, economists are suckers for elegance and simplicity. This works for "hard" science like physics and chemistry, but not for a social science, even one which relies on numbers and statistics.

Until macroeconomists recognize they're each looking at pieces of the same elephant, get away from the fresh and salt water class warfare distinctions, realize how many relevant pieces are still missing (such as credit flow) and pursue them, an integrated theory will only recede in the distance because this social science evolves as it's being observed.


"forget about sociology, management, marketing or other of the soft economics sciences. It was clear that these disciplines were for the intellectual lightweights"

Pretty big-headed profs to consider mktg and mgmt as part of econ.

There's an idea floating around that "if you can't describe it with numbers, you don't really understand it". Many economists seem to feel that by describing it with numbers makes it and them correct.

Sep 09 12:06 AM

[ValFitzAndrew:]

Would this situation be better than when the "bean-counters" bubble up to the "top" and dehumanize the business. I DON'T THINK SO! :-(


On Sep 08 12:28 PM E Thomas St. wrote:

> Yeah, if only more Economists ran businesses themselves rather than
> studying them impartially as part of research projects...

Sep 09 08:23 AM

[Dirk McCoy:]

You don't have to be a genius to see that:

1. The results of the capitalism vs. communism experiments said capitalism was superior;
2. The results of the price controls and central planning experiments said they would, over time, create serious problems;
3. Controlling the money supply and targeting minor inflation yielded moderate growth;

What the geniuses haven't processed yet:

1. After communism was discredited, the addition of a couple billion Chinese, Indians, and Eastern Europeans to global labor markets created a massive labor shock;
2. Automation and this labor shock meant a lot of jobs were created in tech, but after the tech bust of 2001, housing was the main area of opportunity and growth in the US- requiring massive leverage;
3. The Fed rate increases (from 2% to 6%) caused the price of this leverage to go above what consumers and business people thought they could afford, and as rational actors, they stopped buying and started selling;
4. This started a negative credit cycle that is still proceeding globablly, creating massive deflation in housing and wealth that have supressed spending and created a depression.

A free market Austrian looks at 2 billion people still to be added to the global labor and consumer pools and technology and says a new business cycle will soon create strong growth. A monetarist looks at this growth and says money needs to be created to assure price stability so as to avoid money hording and foster investment.

But a political Keynesian like Krugemen figures there is a significant voting block that wants wealth redistribution now, and the levers of government must be applied via taxes and spending to accomplish these goals- markets be damned.

This is the same kind of politics-first thinking Leonid Brezhnev used to keep Soviets living in sub-par conditions, and the rest of the Communist world in abject poverty, long after the results of the central planning experiments were in.

Sep 09 09:07 AM

[E Thomas St.:]

Accountants are bean counters. Economists are bean scientists in many different arenas.


On Sep 09 08:23 AM ValFitzAndrew wrote:

> Would this situation be better than when the "bean-counters" bubble
> up to the "top" and dehumanize the business. I DON'T THINK SO! :-(
>

Sep 09 12:00 PM

[Kimball Corson:]

As both a lawyer and an economist, though now retired, I do believe you come fairly close to the mark, although Krugman has his points about behavioral economics. The problem is not models, math or the like, although they can be a seriously preoccupying distraction, the problem is economists lack of knowledge about the structure and operation of fianacial intitutions and instruments and how they impact the banks, the Fed and the economy. Too many don't know or pay attention in these quarters. Few economists can even identify two different types of derivatives or understand the impact and prospects of their use.

Sep 09 12:19 PM

[Kint:]

I'm not sure you understand Krugman's argument - what Krugman is arguing is, monetarists economists are the ones who live in a bubble. Their theory is based on numbers and math, and that capitalism is a perfect system. Krugman says monetarists argue that stock prices reflect all available information - the system balances itself, so very little regulation is required. The non-Keynesian view was there couldn't be a housing bubble, because markets are perfectly efficient - and only behaviorists and Keynesians saw the crisis coming. As we've seen in the CDS market, the one system with no regulation is the one that brought down the whole system. If you accept Krugman's premise, then his argument is perfectly valid.

Sep 09 12:55 PM

[globalizer:]

Being a Keynsian did not prevent Krugman from advocating stupid policies. I quote from his 2002 NYT column
"And to do that, as Paul McCulley of Pimco put it, Alan Greenspan needs to create a housing bubble to replace the Nasdaq bubble."

www.nytimes.com/2002/0...

What a jerk.

Sep 10 08:37 PM