I of course read Krugman’s article in the NYT magazine on how economists got everything all wrong. It was somewhat interesting, though not incredibly so; his arguments are either a rehash of what’s been out there in other sources for a while or kind of wrong. I’m not an economist, so I certainly don’t know how in thrall economists are to mathematical perfection over ideas (though having worked in econometrics I can say, at least in the private sector, it’s not very much). I have a hard time with Krugman because even though I tend to agree with him politically, he’s kind of an asshole and a demagogue when he writes. But I read the article not as a very good attack on modern economics per se, but as a good attack on the dangers of groupthink.
A few people have offered rebuttals; some, like John Cochrane, appear more like bitter responses than substantive. He clearly misunderstands a lot of what Krugman wrote and offers plenty of incorrect assertions about how a Keyenesian would or would not act – though he is correct that Krugman doesn’t offer compelling evidence as to why Keyenesianism is the optimal model as opposed to the nine billion other ones.
Robert Levine offers alternative explanations for the crisis that Krugman should have considered, namely innovation and oil shocks. More interesting is Ben Gordon’s discussion of modern macroeconomics. He criticizes “modern macro”, here dynamic stochastic general equilibrium (DSGE), and compares it with 1978-era theories. Both Gordon’s and Levine’s criticisms seem similar, to me, though I don’t know enough about DSGE to really evaluate them.
How we model the economy is an important question. Krugman mentions behavioral economics (TED video here). Frankly, the thing that shocks me the most about academic economics is that it didn’t incorporate psychological and sociological research one hundred years ago when they were becoming ‘sciences’. Talk about groupthink! If we don’t understand how even small groups make economic decisions, how do we know how to generalize it? That’s what we call science. I would say the way forward in economics is behavioral economics combined with agent-based economics. Then, you derive laws from there.
Anyway, it looks like quants are doing something like that already. Here’s your bonus article with cool pictures of world trade links – though I’m not sure I’d agree with the cause they propose for the lack of links to certain countries.