Monday, December 10, 2018

22 Days in Paul Krugman's Masterclass (Day 20) (A Very, Very Bad, Inconsistent, Methodological Perspective)

Lesson 20 in Paul Krugman's Masterclass is 11 minutes and 27 seconds long.

In this class, Krugman begins by discussing methodology and correctly points out that the world is too complex to run experiments the way you can in the physical sciences. Though he continues to express things in an unclear manner and doesn't put things as succinctly as I have in the above sentence.

But then he goes haywire.

After saying the world is too complex, he claims that you can find "natural experiments." Thus reaching the absurd conclusion that the world is too complex to make cause and effect experiments but yet at the same time they do fall from heaven, so to speak, as "natural experiments" from time to time.

This does nothing other than prove that Krugman doesn't understand the fundamental problem with cause and effect experiments in the social sciences. That is, it doesn't matter if the experiments are designed by humans or fall naturally, the world is too complex to determine general rules out of such experiments.

He fails to understand what the great Austrian school economists have taught us, that in economics, to determine general principles, deductive methods must be used from very basic principles. Economics is never a science of tests and measures.

To show the absurdity of Krugman's  "natural experiments" thinking, he uses the example of the minimum wage where he claims "natural experiments" show that an increase in the minimum wage does not cause unemployment.

Of course, he can only make this preposterous claim because the "natural experiments" he is considering do not take into consideration all the complex factors beyond what are included in the data.

Then Krugman launches into the "Paradox Of Thrift" which was popularized by John Maynard Keynes. It claims that individuals may save at times, which leads to a fall in aggregate demand and hence in economic growth.

Of course, this is nonsense and leads us full circle to where in an early lesson (lesson 4), he implicitly denies basic supply and demand economics. You can't have a fall in aggregate demand that would slow growth in the economy, prices would simply adjust to a new price level based on the money actively operating in the economy--and this is only in a period when individuals are desirous of holding more cash.

If individuals choose to save more, that is where they desire to put funds into the investment stream, this results in more capital investments---again supply and demand will, via interest rates in the case of savings and investment, cause the savings and investment markets to clear. There is never a clearing problem. The "Paradox Of Thrift" does not exist.

Keynes (and thus Krugman) is really a mess on this. As Henry Hazlitt put it in The Failure of the "New Economics":
I find it impossible to follow his distinctions, oscillations, reverses and contradictions.
Krugman then mentions data sources he uses:

For US data from the St. Louis Fed, Federal Reserve Economic Data, known as "FRED"

And three sources for glocal data:

The Organisation for Economic Co-operation and Development (OECD) data

World Bank data

and International Monetary Fund (IMF) data


Links to discussions of all Krugman's Masterclass lessons are here.

1 comment:

  1. I wonder if Krugman would ever consider as valid "natural experiments" the dividing of Berlin into two cities, and the dividing of Korea into two countries, which resulted in very different economic outcomes while holding culture as constant as one possibly could. They might be "inconvenient truths" for him, Ocasio-Cortez, and others in his posse.