The distinction is usually referred to as saltwater vs freshwater economists (referring to the geographical location of the university's). Apart from MIT there is also Princeton and Stanford in the saltwater camp.
And Krugman is right that the saltwater economists were vindicated by the recovery from the GFC.
However Krugman is not a good spokesperson for saltwater economists. Most econ professors I know from saltwater university's say they cannot even understand his points (note that Krugman did not win his Nobel prize for macro, but for trade).
In particular he is wrong to bundle together views on debt crises, recessions, and general attitudes to the free market. By the time you are in a debt crisis, it's a bit late to stimulate the economy with even more government debt. At some point you actually have to figure out a way to pay money back.
We really need a way to simulate how the economy will react under certain policies. The current model is based on one hypothesis about how the economy works, when such policies may have been only tested once or twice before, AND when the test conditions were different in a lot of ways. Because of the complex nature of economic systems, prediction is extremely difficult.
We have yet to see if the monetary policies being used today will be a success or not. Many people point to signs of weakness and cracks in the economic foundation. Until interest rates are brought back to 2007 levels, we cannot say that the economy is stable. What happens to high levels of debt when interest rates begin to go up? People begin to default, credit is restricted, and spending drops. It will certainly bring higher volatility across the entire global economy, and the FED is nervous about how much.
While MIT might be today's most influential powerhouse of economic thinkers, we still don't know how successful they were at applying theory to practice. The debate about Keynes is still up in the air.
I don't see any fundamental difference between what your call simulation and what economists call models. The only difference is that your believe in the possibility of models so accurate that one could easily verify that they give correct predictions, as opposed to existing models which are subject to continual debate.
The reason it is so hard to stimulate the economy is that it represents the sum total of a large part of all human activity. So for example to test the impact of a particular kind of fiscal stimulus, you would have to accurately model the response of individuals to their new circumstances, as well as the response of markets (which involve individuals with conscious knowledge of the new policy, and thus their own beliefs about its effects). It is this last factor that makes the economy so hard to stimulate. You are not only simulating actions, but beliefs, and beliefs about beliefs, etc. It's ironic that economics is criticised for following physics to closely, when it is precisely this last factor that makes economics fundamentally unlike physics. The closest thing to modern macro if mean field theory.
> ...you would have to accurately model the response of individuals...
but macro and micro are two separate disciplines within economics because of the belief that large scale economic activity can be modeled without modeling the individual agent. it's more akin to newtonian physics where the model breaks down at small scales.
but i agree with your main point about why it's hard to model -- basically humans are wiley creatures who defy predictability, and observation itself creates a feedback loop that changes the model =)
Mathematical descriptions of large-scale static properties like equilibria are patently not the same as, say, dynamic discrete-time simulations with evolving state.
I don't think we have anything satisfyingly like the latter for economics, but to claim that there is no fundamental difference is just inaccurate.
I mean computer simulation. Something that you can test many, many times that accurately reflects (or at least within reason) the affects of tweaking the parameters. I understand it's a difficult problem, but there has been some success in this field, and with cheap computer power it becomes easier.
The difference between conventional models and the kind of simulation you would like to see lies in the kind of assumptions that are made about agents and the environment they operate in. What they have in common is that both try to simulate a world in which individuals act in response to their environment.
The simulation in your paper might be more complex, but that in no way guarantees not faithfulness to reality.
I would suggest your check out mainstream micro and macro, eg a first year graduate textbook. Then you will see that the "representative agent" models of economics are really just simulations based on a specific set of assumptions.
All computer simulations are models, but not all models are computer simulations. What's taught in graduate school are text-book models which are descriptive at best. I am arguing that more thought should be given to trying to develop computer simulated economies now that computing power is much cheaper. The paper I linked to you shows initial success is at least being able to describe how an economy behaves. It's worth exploring, especially when we have huge test data sets in the form of online gaming economies.
In graduate-level economics (got my masters) there is very little connection between the micro and macro world. Macro economic behaviors are emergent properties of the underlying agents who are guided by a set of incentives, and graduate economic programs generally teach a fractured system. You either apply steady-state models to the macro world or you run behavioral experiments. There is (or there was in 2010, anyway) very little emphasis on modeling both systems as one.
I'm a theoretic physicist who does computer simulations of laser plasma interactions. I'm just curious, how much of a scale difference (orders of magnitude) exist between your micro and macro worlds? We deal with femtosecond (1e-15 sec) and nanosecond (1e-9 sec) dynamics by using different simulations and feeding the short time sim results into the nanosecond ones. Is such a thing possible? I'd think doing something like that would be obvious, no?
You should take a look at the Open Source Policy Center: http://www.ospc.org/
We just released an application for predicting the effects of changes to the tax code.
On a tangential note, I ran across Dr. Hall's personal page[1] last night and learned (at least according to him) that he coined the "saltwater v. freshwater" classification in his 1976 essay.[2]
FWIW, it's refreshing to hear that eggheads can't follow Krugman. It puts me in good company!
The problem with Krugman is that he used a very "old school" Keynesian intellectual framework, while the rest of the field has moved on. The ideas of Keynes were not abandoned, but they were rendered in a form that is more consistent and coherent with neoclassical economics. Meanwhile Krugman has never been a prominent researcher in macroeconomics, but his Nobel prize and outspoken views on macroeconomics lead many people to that erroneous conclusion.
I've always wondered what would happen if we held important positions and decisions in the same regard we hold and review important economic theories, decide on climate change (IPCC panel), or choose among cryptographic hash functions (SHA competition) -- demanding each opinion be backed by a researcher well reputed in the relevant field, and overall statistical/theoretical justifications were demanded for each decision -- to try and make some provably or at least well supported significant decision in terms of optimality to reach certain clearly established goals.
I can't dig it up, but Sumner claimed it would not provided NGDP didn't fall (i.e., the fed caused a monetary offset). You'll never guess what happened next.
Not sure if there are any examples. Economists have never been very accurate because of the nature of economic systems. They are complex adaptive systems, which means that they are very sensitive to initial conditions. Because of the inherent unpredictability we have yet to discover an economic policy that works in the long-run.
A better question would be, "what predictions did Krugman make which disagreed with non-Keynesians that turned out right (or wrong)?"
Various ideological enemies of Krugman made these same predictions. All you are really saying is that Krugman, along with everyone else, gets the easy ones right.
Scott Sumner predicted the former as did most of the market monetarists.
Another great Scott Sumner prediction: fiscal austerity hurts if you lack an independent central bank, but not if you don't (directly contradicting new style Keynesians, e.g. Krugman). The results: http://www.themoneyillusion.com/?p=29692
Various ideological enemies of Krugman predicted the housing bubble, and far more clearly than Krugman; Ron Paul, for example, argued against the creation of a housing bubble in 2001. It's hardly clear to me that Krugman even predicted it. From your article: "To fight this recession the Fed needs more than a snapback...Alan Greenspan needs to create a housing bubble to replace the Nasdaq bubble." The wording is ambiguous, but to me it sounds less like a prediction and more like advocacy.
A few years back I was a solid structuralist, but the monetarists have a really good track record of disagreeing with other people and coming out right.
Calling the market monetarists ideological enemies of Krugman seems like an exaggeration. He's linked to and cited them favorably a lot (although he has basic disagreements with them.)
> Various ideological enemies of Krugman predicted the housing bubble, and far more clearly than Krugman; Ron Paul, for example, argued against the creation of a housing bubble in 2001.
I'm not qualified to adjudicate between Krugman and the market monetarists, but I feel it is important to realise that many (and many prominent) people did fail to make these predictions, and essentially all of them have kept their jobs and their status.
It's hard to take anything Krugman writes seriously. All his writing is so intertwined with his politics It's impossible to sort the factually sound parts from the rest and he has a track record of saying some truly wrong things with great conviction.
I always assumed that his Nobel prize was more due to the awarding committee wanting to support his political views rather than any real economic insight. Pretty much like how Obama was given the Peace Prize when the nominations were due when he had only been in office a few months. Politics, all politics.
It's hard to find anyone who doesn't think he earned that price, even among those economists who roll their eyes very hard at his current political writings.
He painted the Chicago Boys, who went back to Latin America and gave political cover to anti-communist dictators using death squads, as radicals.. Krugman has a lot of respect for Friedman's contributions to understanding stagflation and the development of monetarism.
The Krugman haters should find some nice balance in the above essay after Friedman's death where Krugman praises Friedman's economic chops but laments his looser standards when he gets too political.
By predicting the phenomenon of stagflation in advance, Friedman and Phelps achieved one of the great triumphs of postwar economics. This triumph, more than anything else, confirmed Milton Friedman’s status as a great economist’s economist, whatever one may think of his other roles.
Krugman used to think like a typical economist, but abandoned this approach and subsequently became a celebrated columnist. Ironically this was years after he wrote an essay complaining how the economists who became popular were rarely the ones who had a good understanding of economic theory:
Yes, I'm sure. He reminds me of Fox News which I also can't stand because their political commentary is so intertwined with the news that you can't sort out the facts.
Inflation did not remain low, it just went into the capital markets and luxury goods first because all the new money (~$3T so far) was effectively handed to big finance to buy their junk bonds above market prices. The wealthy can only consume so much in basic consumer goods (steaks, coffee, paper towels, soap, etc) so we wouldn't expect consumer prices to increase immediately, but we can expect them to increase inevitably. Had the newly printed money been sent to each citizen instead, consumer prices would have risen almost immediately.
Its interesting how his attitude as stated at the bottom of the piece is that they (the economists) were 'right'. Its so interesting because you would think that brilliant people would realize that their claims aren't falsifiable. There was no AB test for the recession and there are a ton of reasons that their decision could have had relatively little to do with anything.
Exactly this. I'm amazed he has the audacity to make such a claim. No sooner does he the make claim does he start attacking right wing politicians for not realizing it instead of making a reasonable effort to justify it.
Yeah, his problem is he's so lost in his own ego these days he's just a blatant ideologue at this point. He's uncharitable to his opponents, unwilling to acknowledge his own biases, and is more and more like the Bill O'Reilly of the left just better educated. His smugness and amazing ability to totally ignore any evidence to the contrary just makes me roll my eyes.
For context, MIT has had the consensus best overall economics program for the last ~30 years.
Harvard, Stanford, etc. compete closely with MIT in many fields, but MIT is still the most desirable destination for graduate students and assistant professors.
It's no surprise that MIT students achieve a lot, and it's not surprising they can't succeed when put in intractable positions.
The truth, although nobody will believe it, is that the economic analysis some of us learned at M.I.T. way back when has worked very, very well for the past seven years.
That makes me laugh. I wouldn't measure economic success over a period of 7 years. Yes, the economic policies seemed to have brought the US economy out of its slump. However, let's see how we do over the next 7 years.
The danger of "printing money" is not so much the printing, it's the pulling back once the economy recovers. Since the Fed will get a ton of crap for moving too fast and slowing down the recovery, it tends to err on the side of moving too slow.
The problem with that is a rapid increase in inflation, followed by a spike in interest rates.
Any idea what might happen to housing prices when interest rates jump from 4% to 10% (historically they floated around 6%)? Every increase in interest rates reduces the buying power of those looking for homes.
And what happens if they move way too late? Rampant inflation and an erosion of savings.
We're still not anywhere close to being out of the woods yet.
I started reading his blog about 8 years ago - thinking he was a flake. But over and over again he correctly predicted things that disagreed with everything I was seeing in the papers, and using a reasoning that everyone else was ignoring. So, yeah, I do take him seriously.
People replying to this article may do well to remember that Krugman also attended MIT to receive his PhD in economics.
It's quite unfortunate that the man chooses to intentionally disregard all he learned and espoused while attending such a massively well-respected institution.
And Krugman is right that the saltwater economists were vindicated by the recovery from the GFC.
However Krugman is not a good spokesperson for saltwater economists. Most econ professors I know from saltwater university's say they cannot even understand his points (note that Krugman did not win his Nobel prize for macro, but for trade).
In particular he is wrong to bundle together views on debt crises, recessions, and general attitudes to the free market. By the time you are in a debt crisis, it's a bit late to stimulate the economy with even more government debt. At some point you actually have to figure out a way to pay money back.