Wednesday, August 21, 2013

Nancy Folbre pre-buts Paul Krugman on math and trade

- by New Deal democrat

Prof. Noah Smith writes a searing indictment of most macro economic theory, saying:
But macro was a different story [from physics].

In macro, most of the equations that went into the model seemed to just be assumed. In physics, each equation could be - and presumably had been - tested and verified as holding more-or-less true in the real world. In macro, no one knew if real-world budget constraints really were the things we wrote down. Or the production function. No one knew if this "utility" we assumed people maximized corresponded to what people really maximize in real life. We just assumed a bunch of equations and wrote them down....

In other words, the math was no longer real. It was all made up....

We were told not to worry about this. We were told that although macro needed microfoundations - absolutely required them - it was not necessary for the reality of any of these microfoundations to be independently confirmed by evidence. All that was necessary is that the model "worked" after all the microfoundations were thrown together. We were told this not because of any individual failing on the part of any of our teachers, but because this belief is part of the dominant scientific culture of the macro field. It's the paradigm.
To which Prof. krugman replies:
the main way (in my experience) that mathematical models are useful in economics: used properly, they help you think clearly, in a way that unaided words can’t.

Take the centerpiece of my early career, the work on increasing returns and trade. The models I and others used were, in a way, typical of economics: clearly untrue assumptions (symmetric constant elasticity of substitution preferences; symmetric costs across products!), and involved a fair bit of work to arrive at what sounds in retrospect like a fairly obvious point: even similar countries will end up specializing in different products, and because there are increasing returns in many sectors, this will produce gains from specialization and trade. But this point was only obvious in retrospect. People in trade were not saying anything like this until the New Trade Theory models came along and clarified our thinking and language.
Via Mark Thoma, Nancy Folbre of U Mass Amherst has in essence a perfect pre-buttal:
... Trade theory emphasizes that those who benefit from free trade should be able to compensate those who suffer, making everyone better off. What trade theory doesn’t explain is why the beneficiaries would offer such compensation unless they are forced to do so. ...
And there goes all of Prof. Krugman's eloquent math (which, to his credit, he has realized at least in substance in subsequent writings.). In the meantime, because Krugman and his cohorts' math was persuasive, hundreds of millions of workers around the world have suffered.

When Bonddad wrote last week that neither of us were "trained" economists, that wasn't entirely true. I took a year of graduate level macro at a School the name of which you would instantly recognize before leaving in disgust, for the exact criticisms made by Noah Smith. Nothing that has happened in the last 10 years has caused me to re-evaluate that opinion (although I greatly credit Thoma and DeLong, among others, for recognizing and trying to address the issue).

p.s. U Mass Amherst has really been kicking economist butt recently!