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Tuesday, September 26, 2006

The Method of Economics

Following "Ricardo's Difficult Idea" and "'Deconstructing' Hostility to Economic Ideas," here's one last Krugman piece on economic models:

Why I'm an Economist, by Paul Krugman, August 1999: Writing an introductory textbook has some perhaps unexpected side effects. By forcing you to go back to basics - to explain to an audience of young people why economic theory is useful and important - it also makes you think about why you yourself went down that path. And so the other day I found myself in a reverie about the choices I myself made, all those years ago. (Was I also trying to avoid working on the task at hand? Of course). As an undergraduate, I wasn't especially interested in economics per se: I was interested in History, in understanding the fate of empires and the destiny of kings. But I settled for something far narrower. Why?

I asked myself this slightly rueful question while revising my exposition of the Ricardian model of land rent. Every economist knows it: peasants cultivate the best land first, then the next best, and so on. Competition among the landowners ensures that each peasant gets no less than what he could grow on the best uncultivated land; competition among the peasants [ensures] that he gets no more. It's a beautiful example of economic reasoning in action.

But as I was rewriting the chapter section, I had a sudden fantasy vision of a bright but cynical undergraduate declaring that this was nonsense, that the landowners would conspire to keep the peasants down. And that undergraduate would, historically, often - but not always - have been right. Indeed, my old teacher Evsey Domar wrote a classic paper arguing that serfdom and slavery often were the response of ruling classes to labor shortage. Thus Russia imposed strict restrictions on the mobility of peasants from the late 16th century onward, precisely because the availability of rich new farmland on the expanding frontier would otherwise have increased their bargaining power against landlords. (The frontier expansion itself was probably the result of the growing effectiveness of firearms, which turned the military balance against the steppe nomads; so gunpowder, which contributed to the rise of the bourgeoisie in the West, created serfdom in the East). And, of course, slavery - which, along with serfdom, had died out in the West during the labor-abundant high Middle Ages - was reintroduced in the land-abundant conditions of the New World.

On the other hand, of course, it has not always worked that way. England's peasants were not reenserfed after the Black Death drove up their wages; attempts to build a system of indentured white servitude in America failed; slavery was abolished; and in the modern world wages do more or less reflect marginal productivity.

Now suppose I were to ask the question, why does a labor shortage sometimes lead to a rise in wages, sometimes to political action by the ruling class to keep the lower orders in their place? And I won't be satisfied with a narrative about what happened in some specific case: I want a widely applicable model, like Ricardo's model of land rent. That is, I want a framework that is more than an after-the-fact rationalization of what we already know happened.

But of course there is no such model. Worse yet, not only don't I know of any such model, I don't even know how one might begin to create one. My perplexity is not, I believe, a reflection of my ignorance of political science, or sociology. Economists may make lots of bad predictions, but they do have a method - a systematic way of thinking about the world that is more true than not, that gives them genuine if imperfect expertise. (That is also, of course, why lay commentators and other social scientists tend to hate them). Other social sciences haven't yet found anything remotely equivalent. Oh, there are bits and pieces, and some of them are very exciting; try taking a look at Robert Axelrod's stuff. But basically when it comes to most of the questions that I am really interested in, one man's view is as good as another.

When I was young and naive, I used to imagine that my career as an economist could eventually branch out into one as a general social scientist. And I still love to read and think about the broader questions - a book like Jared Diamond's Guns, Germs, and Steel can keep me happy as a clam for weeks. But the clarity and power of economic analysis can spoil you: once you have a taste of what it means to have a really insightful model, you tend to be inhibited about looser speculations.

The truth is that other social sciences are still waiting for their Adam Smiths. Someday they will find them; as Colin McEvedy wrote in his introduction to the Penguin Atlas of Ancient History, "History being a branch of the biological sciences, its ultimate expression must be mathematical." But for the meantime I guess that I am stuck with my day job.

If you want more, try "The Accidental Theorist," which begins:

The Accidental Theorist, by Paul Krugman: Imagine an economy that produces only two things: hot dogs and buns. Consumers in this economy insist that every hot dog come with a bun, and vice versa. And labor is the only input to production.

OK, timeout. Before we go any further, I need to ask what you think of an essay that begins this way. Does it sound silly to you? Were you about to turn the virtual page, figuring that this couldn't be about anything important?

One of the points of this column is to illustrate a paradox: You can't do serious economics unless you are willing to be playful. Economic theory is not a collection of dictums laid down by pompous authority figures. Mainly, it is a menagerie of thought experiments--parables, if you like--that are intended to capture the logic of economic processes in a simplified way. In the end, of course, ideas must be tested against the facts. But even to know what facts are relevant, you must play with those ideas in hypothetical settings. And I use the word "play" advisedly: Innovative thinkers, in economics and other disciplines, often have a pronounced whimsical streak.

It so happens that I am about to use my hot-dog-and-bun example to talk about technology, jobs, and the future of capitalism. Readers who feel that big subjects can only be properly addressed in big books--which present big ideas, using big words--will find my intellectual style offensive. Such people imagine that when they write or quote such books, they are being profound. But more often than not, they're being profoundly foolish. And the best way to avoid such foolishness is to play around with a thought experiment or two...

    Posted by on Tuesday, September 26, 2006 at 12:15 AM in Economics, Methodology | Permalink  TrackBack (0)  Comments (10)

          

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