Peter Boettke's Economic Meta-analysis

Termite cathedral = spontaneous orderFrom Peter Boettke at the Coordination Problem blog:

I often use a 2 x 2 matrix to communicate to students the different schools of thought in economics.  The rows reflect the problem situation we are find ourselves in (simple or complex), the columns reflect the outcome of our interactions (order or disorder).  Neoclassical economics is found in the simple/order cell; Keynesian and market failure theory is found in the complex/disorder cell; Marxism and critics of economics are found in the simple/disorder cell.  What does that leave?  The complex/order cell and that is the intellectual home of the Classical economists such as Smith-Say, the Austrian school from Menger to Mises to Kirzner, and the New Institutional school of Alchian, Buchanan, Coase, Demsetz, North, Olson, Ostrom, Smith, Tullock and Williamson, etc.

The Austrians occupy a central place in this cell because they emphasize not only the cognitive limitations of man, but also the complications of uncertainty, time, and I think importantly modifications to our core understanding of money and capital.  Money is non-neutral, and the capital structure in an economy consists of combination of heterogeneous capital goods that multiple-specific uses.  Once these propositions are included in the analysis, along with other messy aspects of the real world, our understanding of market theory and the price system shifts drastically.  Nothing can be treated as given.  Everything must fall out of the analysis of exchange and production.  Economic analysis is about economic forces at work, not the analysis of situations after those forces have done their job.

The traditional perfect market versus market failure debate is stale --- the perfect market folks don't tell us how the story of the market unfolds, and the imperfect market folks stop the story short right when it is getting interesting.  Journalist can understand this simple characterization of economic ideas, but economists should know better.  Back in the late 1940s, Kenneth Boulding (John Bates Clark Medal winner in 1949) actually raised this issue in his review of Samuelson's Foundations in the JPE.  Boulding wondered if the flawless precision of mathematical economics would prove impotent in terms of dealing with the real world in comparison with the literary vagueness of classical economics and economic sociology.  Not many listened to Boulding, and instead of doing messynomics in the sense of complex/order cell, we got a stale debate between simple/order and complex/disorder. And it still is going on today.

Boettke's meta-analysis is a simpler version of what I learned as a student of the history of economic thought.  We studied the schools he mentions as well as the utilitarians, marginalists, mercantilists, mangerialists, physiocrats, and some other more obscure groups.  We also extensively studied how economics is represented and/or understood in the media, government, public opinion, and popular culture.  The consensus is as expressed in Boettke's last paragraph.  (I would add that this generally takes place as the WSJ editorial page vs. the NYT editorial page.)  

Joe asked me once why I seem to hate Paul Krugman so much, and I think Boettke's analysis of the methodological debates within the economics discipline sums up why.  As a professional economist, Krugman must know:

(1) that debate within the economics profession and within the academy rages on vigorously (as if the unpredicted, unresolved current financial crisis weren't indication enough!); AND

(2) that the media and general public has a necessarily oversimplified understanding of this debate; AND

(3) that a significant proportion of the media and general public's understanding of economics comes from Paul Krugman; THEREFORE

(4) Paul Krugman can control the terms of the debate; THEREFORE

(5) Krugman can control the policy outcomes favored by the public.

The reason why I find Paul Krugman the human being personally distasteful is that he could use his position of influence to elucidate the complexity of modern economics, to explain an otherwise complex and all-encompassing discipline to a curious and eager public, or to teach the masses that the differences between Keynesians such as himself and neoclassical, Austrian, or Marxist theorists are in their worldviews and values.

If Krugman really wanted to be aggressive with his column, he could say, for example (1) "the neoclassical economists's failure to predict our current recession indicates that their models are not robust enough to be taken seriously and should be discarded in favor of competing models which did predict the recession or fine tuned to a degree with some verifiable predictive power"; or (2) "the current recession is indicative of math intensive macroeconomics not being powerful enough to predict or manage large scale macroeconomic phenomena, and we should closely examine the microeconomic assumptions which produced such models"; or (3) "we should focus instead on research and institutions that will more efficiently match consumers and producers instead of relying on unfalsifiable and inaccurate central management models which anyways provide dubious returns" (But those examples are of Austrian positions, so obviously Krugman wouldn't say any of that.) Instead, Krugman says, "reality has a Keynesian bias" (tribalism), and "I regard (the Austrian theory) as being about as worthy of serious study as the phlogiston theory of fire."  (Yes, Paul, you're right, emergence, which is the basis of Austrian theory, is a totally childish and uninteresting phenomenon unworthy of serious study.)

Krugman has so much power, and he abuses it by sowing dishonest straw caricatures of positions with which for whatever reason he disagrees.  Krugman routinely casts himself and his ideology as the only acceptable option, dismissing members of other schools as fringe lunatics.

Specifically, I have a huge problem with Krugman's blatantly false views on the Lost Decade in Japan.  I have a lengthy post coming later this week on all things the Japanese economy, but the short version is that Krugman insists that the Japanese government stimulus measures throughout the nineties were timid and weak.  This must be something like an Orwellian sick joke, because in fifteen years the Japanese government went from running a surplus to having the second largest public debt in the world (to Zimbabwe) because of the failures of classic fiscal stimulus, this all while experiencing zero or negative average growth over the period.  For proof, go look at the paved-over Japanese countryside, the coast lined with tetrapods to "prevent beach erosion", literally purposeless museums and halls for small towns and farming villages, and all sorts of other dig-holes-and-fill-em classic Keynesian stimulus pork.  Thanks to pundits like Krugman, not only is Japan's economy ruined, but so is its environment and soul.  (What Japan should have done - and still should do - is both end its system of national champions and float the yen, but more on that later this week.)

I could speculate and chalk it up to misinformation that "we aren't all Austrians now.", but since I value heterodoxy, I'm content if serious study is confined to those who recognize the negentropy of human civilization so long as the sky doesn't fall as a result of the hubris of the information collectors.  

Moving briefly to "ought", Austrian economics is something that should be not only acceptable, but preferred by those who claim to be "liberals".  It is the only mainstream school of economics that sees economic actors as complicated, ideosyncratic ends in themselves, as opposed to mere statistics AND recognizes that those actors tend to produce value through uncoerced voluntary cooperation.  For people who are truly against planned economies and societies, Keynesian economics should be particularly distasteful, since it's kind of weasil planning.  A Keynesian economist will tell you he believes in the free market while at the same time advocating for policies which aim to produce specific, desired economic numbers.  I really can't resolve this paradox.