
Two ways of thinking about economics - shawndumas
http://econlog.econlib.org/archives/2015/03/ways_of_thinkin.html
======
furyg3
Watching economists claim to be amoral is amusing when they so transparently
have moral beliefs they refuse to acknowledge.

Valuing unregulated markets over other priorities is a moral philosophy, one
that is meaningless since there is no such thing as a completely free market.
Claiming you know what the result of a huge national policy like raising the
minimum wage based on the extremely limited data of the field is disingenuous,
at best.

Krugman is interesting because he appears to have given up on the amorality
angle. This does not make him a traitor to the field, this simply acknowledges
that the field is not impartial.

The questions that economists should answer in a political context is not "why
is regulation bad/good?" but instead "What is the best policy given that my
values are x,y,z?"

~~~
UK-AL
It's not really amoral views. Take minimum wage. If they genuinely believe
that minimum wage increases unemployment. Then they have taken the moral view
that less unemployment, is better than better pay for the workers that stay in
work. Most people would agree.

~~~
skwirl
The problem is that there is no data that has shown this to be true for the
types of minimum wage increases that are commonly considered. I think the
actual moral view is that the government should not restrict the freedom of
employers and employees to enter into whatever voluntary agreements they want,
regardless of the outcome. Most people would disagree.

~~~
Chinjut
If you want to toss some bucks my way on a whim, and/or I want to toss some
labor your way out of the goodness of my heart, no one objects.

It's when you draw up an employment contract and expect the government to
enforce it that, well, the government begins to consider what kinds of
contracts it will lend its enforcement to.

------
bsbechtel
Given he's an economist, I wish the author would consider the microeconomics
surrounding Krugman's shift in viewpoints. Krugman has gained considerable
influence and wealth by promoting left-wing economic ideas in his NYT column.
While Krugman may have genuinely changed his mind, writing about ideas that
speak to the hearts of millions of readers each week and make you lots of
money will influence your writing, even if you're not consciously aware of it.

~~~
auntienomen
Krugman's gained influence and popularity by writing for the NYTimes, yes, but
I doubt the gig pays him more than Princeton did.

~~~
saosebastiao
I would be willing to bet a newspaper pays dearly for the prestige of having a
Nobel Laureate on its staff.

~~~
auntienomen
That is also true of a university.

------
bandrami
Isn't Krugman just being scientific here? ie, "We had this model for a long
time, but the empirical data don't back it up anymore so it's pretty silly to
stick with it, and we should find a better model."

~~~
cromwellian
If only the Chicago and Austrian schools would change their minds when data
supporting their propositions are weak or of low confidence. I used to be a
hardcore libertarian, but all of the horrors I used to believe over marginal
tax rates or regulation didn't materialize, moreover the blatant market
failures and externalities both positive and negative are too hard to ignore.

When you are a hard core Libertarian or Objectivist even a modest tax increase
or bump in CAFE standards seems like creeping communism to be resisted at all
costs.

When I started looking at actual data across many countries I really couldn't
see a correlation between my beliefs and the outcomes I desired. Many
countries economic success or failures seem related to other factors outside
the tax or regulatory regime.

E.g. Silicon Valley is a bastion of innovation but also high is costs, taxes,
and regulations, with a politics structure that is essentially a basket case.
That's because the nexus of people and network effects and culture are more
important than the tax regime unless said regime is crazy bad.

Ergo, Krugman is somewhat right -- it's about people and structure (his work
on international trade and industrial nexii).

Too much obsession over taxes and regulation "amount" rather than on what's
contextual right is what's wrong with economic debate today.

~~~
logicchains
>If only the Chicago and Austrian schools would change their minds when data
supporting their propositions are weak or of low confidence.

Many classical and neoclassical economic propositions are of a fundamentally
epistemological nature, not strictly positivist. Such as the reasoning that,
if without interference person A does action X at time T, X may be taken as
the action they most preferred to do at time T, as if it wasn't then why would
they have done it? In which case any interference with their taking of action
X necessarily produces an inferior outcome in terms of their preferences at
time T, as they're forced to take an action other than their most-preferred
action. In this sense a person's preference for an action is defined by their
taking of that action over all other possible ones when not interfered with,
and as a definition its validity is a matter of epistemology, not something
subject to empirical analysis. The Austrian school uses this ordinal form of
utility as its basis, building upon the idea that interfering with someone's
free action is the one thing that can clearly be shown to be undesirable as
above.

The Chicago school, on the other hand, also incorporates a quantitative form
of utility, to allow for interpersonal utility comparisons. This requires some
epistemological assumptions, for instance that preferences don't change over
time or their rate of change follows a particular mathematical function, or
that if someone buys 3 apples for $30 they value each at $10, rather than e.g.
the first at $13, the second at $2, and the third at $15. Austrians dispute
the validity of any such assumptions, and hence reach different conclusions.

These epistemological foundations are matters of logic/philosophy, and hence
no more amenable to empirical analysis than a proposition like 'abortion is
immoral'.

Modern economics tends to ignore epistemological issues, and instead focuses
on finding the best way to maximise particular empirical metrics, without
going into detailed study of the epistemological and philosophical validity of
the metrics in question. So it's important to distinguish between economics as
a tool for predicting and assessing the effects of particular phenomena on
particular metrics (econometrics) and economics as an epistemological
approach.

~~~
cromwellian
>Such as the reasoning that, if without interference person A does action X at
time T, X may be taken as the action they most preferred to do at time T, as
if it wasn't then why would they have done it?

I'm well aware of the differences between the Chicago and Austrian schools,
but I think this quote is a dubious assumption because it assumes human beings
are primarily rational creates that act according to rules and reason. It's
actually possible for people to take actions which they don't prefer to take.

Praxeology IMHO is thoroughly unscientific, contradicts modern neuroscience
and psychology with many of its assumptions about people, and a dubious
exercise, and its use by Austrians to argue against public policy actions
extremely weak.

To me the purpose of economics is to study the real world as close as you can,
and make predictions that can be used to not only understand our condition or
future problems, but to make adjustments so as to create better outcomes.

It is not to provide an ideological, philosophical basis for those actions, or
for no actions at all. It's the difference between Medicine and Bioethics.

Both the Chicago school and the Austrian school start out with assuming the
outcomes -- a free market s what's desired, and produced the best outcomes.
They they work backwards using different methods to justify their conclusions.

I prefer not making the assumption that the unfettered free market produces
the best outcome always. For example, when externalities are not priced in for
things human beings care about in the abstract but not in their day to day
preferences, like the long term ecosystem, or the health and welfare of future
generations, I prefer a system of economics that works on a case by case
basis, looking at problems, and figuring out experiments to run or course
corrections.

If economics is unpredictable, or the consequences of actions unknowable it
also means the consequences of inaction or the 'free market' are unknowable,
but that's no basis for siding against government action. We live in a complex
evolutionary system, and it may be the only way to get out of local optima is
to run lots of experiments that fail, including government intervention.

That's why I think a mixed economy is a more evolutionary stable strategy than
a pure free market or marxist one.

I also think it's more moral than either of those.

~~~
xixi77
"It's actually possible for people to take actions which they don't prefer to
take." \-- ??!!

Perhaps you might mean that a person's preferences might change over time and
depending on the situation (e.g. I might prefer today that I save more money
tomorrow than I would actually feel like saving tomorrow, or I would prefer
not to become a heroin addict, etc.) -- but I can't see how a person can take
a decision that is not preferred at the moment s/he is taking it (except
perhaps in the case of being indifferent and picking a decision at random)?

~~~
kd0amg
People often don't take the time to fully think through the ramifications of
each option they consider or even figure out what all their options are
(actually, just this morning, the news mentioned a study that found economists
are much more likely to cite papers listed near the top of a randomly-ordered
weekly digest than papers listed further down).

------
quadrangle
FWIW, minimum wage could be shown to be basically positive and not cause all
the unemployment people speak of and _still_ be problematic. The issue with
minimum wage isn't that it rejects supply-and-demand (that's simplistic
thinking), it's that it is means-tested. Minimum wage doesn't directly help
independent contractors or self-employed folks…

We need a Universal Basic Income and then to get rid of welfare and minimum
wage and such.

But seeing as that won't happen soon, there's a very interesting positive
aspect to minimum wage: People working for only social reasons such as
volunteers or unpaid apprenticeships have a different psychosocial
relationship to their situation than those who are paid an hourly wage. It's
far better to be paid nothing than to be paid 10¢ an hour. Paid nothing means
_everyone_ acknowledges that you are volunteering your time, and it doesn't
mean you are worthless. Paid 10¢ means you are worth 10¢. This has been
studied by folks like Dan Ariely.

So, a minimum wage requires that people's time have a dignified enough value
put on it, and anything less you must work with them on a volunteer, social
basis.

I still think it has problems and UBI is better, but this issue of dignified
pay should be appreciated.

------
dimitar
Is this post really about two ways of thinking or is it about the complex
feelings Sumner has for Krugman?

Sumner doesn't seem consider how the minimum wage interacts with Earned Income
Tax Credit and that the minimum wage is essentially unchanged since that era -
what was high then could be low now. "How much?" matters.

There is also new theory since then, much more empirical evidence than the few
flawed studies, and of course it is OK to change your mind.

~~~
ArkyBeagle
I am pretty sure that Sumner has stated a preference for the EITC over a
minimum wage over time. As I understand it, that's from a purely control-
theory perspective - a lower bound on wages may or may not reduce actual
employment so much as it causes a loss of resolution in price signalling. I
personally find the whole question gloriously undecidable. Minimum wage exists
as a sort of "dead band" in labor markets.

I suspect the debate ( such as it is ) between the Monetarists and... whatever
Krugman is now is the most productive thing in economics. It's about what and
how we measure.

The last sentence is the money shot. "Krugman is...the economist for people
who hate economics". Just my guess here, but I think that has much more to do
with whether or not the Efficient Markets Hypothesis holds over what domains.
In a post-Lehman world...

~~~
AnimalMuppet
I believe that Krugman's position is "market monetarism", but I could easily
be mistaken...

~~~
ArkyBeagle
I have read both Sumner ( who is Mr. Market Monetarism ) and Krugman somewhat
extensively, and Krugman has only very, very elliptically commented on it.

My interpretation of Krugman's interpretation ( see the error bars grow
without bound in _this_ sentence ) is "won't happen."

Krugman's narrative is ( and it is correct in his dimension ) that the
privileged _want_ poor policy for reasons of epistemic closure or something
like religious ( deontological ) reasons. This provides an 'oppressor'
platform for the polemics, which is what makes him famous.

All in all, not a bad suite of tradeoffs.

Couple 'a $500 words there but space is limited... they are also hard to
substitute for, and they're precise.

------
metapattern
The author suggests that Krugman has "changed the way he thinks". I would like
to suggest instead that his perspective of the world around him may have
changed.

For instance if he previously saw the liberals holding a disproportionate
amount of power to sway public opinion, he may have attempted to re-balance
the situation.

More recently, he may see conservatives using economic rhetoric to push their
own agendas, and follows his previous pattern of re-balancing the playing
field.

In both cases, he may be subtly promoting his own view, just in response to a
changing audience.

Of course my opinion is just a projection of my own perspective.

------
bko
Modern economics seems to be relying on more and more empirical data rather
than theory. I think this is unfortunate. If you throw a pebble into the
ocean, you cannot measure that this pebble increased the water level but no
one would argue otherwise. No empirical data necessary and it would be silly
to argue anything else. Similarly, artificially increasing the cost of hiring
labor will decrease the quantity demanded.

Put another way, if one were to ask an economist how does the price
artificially increasing the price of X affect the quantity demanded of that
product, an economist would easily be able to answer without much hesitation
or inquiry into the product X. I think a higher burden of proof should be
placed on those claiming that artificially increasing the cost of labor
doesn't affect quantity demanded. Since there are never any real controlled
experiments in economics (states or municipalities all have their own history
and other factors at play), you have to rely on theory.

Someone can agree for an increase in the minimum wage, but at least be honest
about it being based on a moral trade-off between decreased employment
opportunities for those whose labor is not above the current clearing rate and
the benefit to others who would keep their jobs and enjoy higher pay.

~~~
gjm11
It's true that economics is not amenable to experiments as reliably
informative as those of, say, physics. And it's true that, all else being
equal, the less reliable your experiments the less weight their results should
get relative to theoretical predictions.

But it isn't only the experiments that are less reliable in economics than in
physics. The theory is less reliable too. (For two reasons. Firstly, _because_
it's so hard to do experiments whose results you can trust, the evidential
basis for the theory is weaker. Secondly, because people are more complicated
than, say, electrons.)

How does this cash out in the case of the minimum wage? We have some empirical
evidence suggesting that minimum wage increases don't increase unemployment
much if at all, but we can't trust it too much for the usual reasons (not
enough data, too many confounding factors, small effect sizes). And we have
some simple theoretical arguments suggesting that minimum wage increases
should increase unemployment quite a bit (supply and demand from Econ 101),
but _we can 't trust those much either_ because the real people involved in
the labour market are not the perfectly rational perfectly selfish perfectly
spherical agents with which Econ 101 is concerned. It simply _isn 't true_
that increasing cost always reduces demand: there are multiple mechanisms by
which in particular circumstances it can do the reverse. It simply _isn 't
true_ that the labour market behaves exactly like the market for, say, corn.
People are complicated.

So I don't agree with what I take to be your argument about the minimum wage,
namely that because we don't have great empirical evidence we must rely on
theory and firmly believe that increasing the minimum wage will severely
increase unemployment, and that this means that an _honest_ supporter of
minimum wage increases is obliged to accept that their preferred policy will
increase unemployment substantially.

Incidentally, I'm not even so sure about that pebble thrown into the ocean.
The sea-level rise is a tiny effect, after all, so we can't just ignore other
tiny effects. For instance: a slight variation in the shape of the earth, with
less mass on land and more on the ocean bottom; a tiny change in ocean
currents, which might change erosion patterns and change the volume of the
oceans one way or another; maybe some funny effect via disturbing local
ecosystems and ultimately affecting human food supplies a little. These are
all _really small_ , but so is the obvious effect of throwing the pebble in.

For that matter, if you're on a boat when you throw the pebble in, the pebble
goes from displacing its own _mass_ of water (thank you, Archimedes) to
displacing its own _volume_ of water, which is smaller, so the immediate
first-order effect is that the water level goes down.

------
calibraxis
Transparently fake duality: "economic theory" vs "hating economics". When
obviously there's many kinds of economic theories he decries. (Many of which
are no doubt better at understanding/predicting than the ones he espouses,
because his "theories" are required to serve certain sectors of power.)

------
dimitar
Scott Sumner and other monetarists generally like Krugman for his view on
monetary policy. They even co-star in comics by fellow blogger David
Beckworth:

[http://3.bp.blogspot.com/-4xn6oZYpEMI/VYLQtGGFhiI/AAAAAAAASZ...](http://3.bp.blogspot.com/-4xn6oZYpEMI/VYLQtGGFhiI/AAAAAAAASZ0/ySq4fG6IIVc/s1600/duda%2Bcartoon.png)

[http://4.bp.blogspot.com/-zvNRPOtoIjM/VYLQ1-n-CAI/AAAAAAAASZ...](http://4.bp.blogspot.com/-zvNRPOtoIjM/VYLQ1-n-CAI/AAAAAAAASZ4/7ZNrn_kKUTs/s1600/yellen_shotgun.jpg)

------
kephra
I wonder, why he is ignoring the iron law of wages: Under free market
conditions, wages tend to the minimum necessary to sustain the life of the
worker.

When free market is interrupted by state, union power or lack of workers with
a special skill, the nominal wages rise. But the situation for the workers
will stay same, because of the Iron Law of Wages constrain. There will still
be some days left end of the month, when he runs out of money. Because when
wages rise at a local market, the housing cost will rise next at this market.

This can be seen best in Switzerland where wages, taxes, and housing costs
differ in every canton. Similar if you compare housing costs and wages in
upper state New York, and in NYC. Housing costs and taxes will rise, if wages
rise. Pushing those with the lower wages out of the market of better housing.

So if a state wants that minimum wages or unconditional income grants have a
positive effect on the people, then the same state must invest in social
housing first, to lower the housing costs, before raising wages.

~~~
federicobond
Iron law of wages? I thought that debate was over a hundred years ago,
together with all the Malthusian doomsday predictions. I guess I was wrong.

------
lumberjack
Will there ever be an article on econlib.org that says "free markets are not
very competitive in such and such cases and maybe regulation is needed in such
and such markets"?

I don't want to be inflammatory but pretty much all economic blogs are
intellectually dishonest junk where economists, Nobel Prize winners and all,
write simplistic pop-economics supporting the political leanings of whoever
funds their research.

I'm somewhat bothered that these blogs, make it to the top of HN. Surely smart
people should be bothered by the intellectual dishonesty, even if it might
reaffirm their beliefs.

~~~
kfk
What an arrogant way to see things. All bloggers economists write
"intellectually dishonest junk" now. And talking about simplistic, isn't your
comment too simplistic? It puts together everything and everybody in 1 box,
you can't go more simplistic than that.

------
netcan
I am almost certainly missing important nuance as an outsider. One thing I
find interesting about US right wing politics (the US right, is I think a more
uniquely American camp, then the left) is the way "rhetoric" is possible more
accurate than policies.

Economically, the US right is very vocal and ideologically clear about its
beliefs, economic liberalism. The politicians, pundits and supports cite
fundamentals quite a lot. The efficiencies and incentives of free markets,
with policies relating fairly directly to economic textbooks (of agreeable
persuasions).

I don't want to stigmatize by calling it "economic ideology" as this implies
an irrationality that I don't mean to imply, but ideology is more or less what
I mean, sans value judgements. Its unfortunate that has become a bad word.

This writer is calling it "economistic" and means a strong expectation that
the basic economic models like supply and demand are predictive of the real
world effects. So, he expects the minimum wages to result in unemployment.
This may be the real rationale for him, but I think the wider political weight
of this is only there because it dovetails with other (US-sh) freedom
concepts. IE, I think the idea that two people can decide on a wage contract
without outside intervention has an appeal beyond just it's economic effects
to many in that political camp.

In any case, my point is that this kind of theoretical grounding and economic
_fundamental_ ism (again sans-value judgment, I just mean they often tie
policies to theoretical fundamentals) is something in recession in other
places and political camps. The big examples are the bastard descendants of
communism, arguably the most confidently touted and complete economic-
political big-T Theory in history.

For example, take "labour-socialism" the big central-left camp in europe. Once
upon a time, they believed in labour unionism a variant of socialism. Not just
as a means to an end, but as a fundamentally grounded ideology. The way to
make industry thrive, create prosperity for workers, etc. It still exists as a
real-politic hodgepodge of policies and rhetoric roughly espousing old labour
values, but not really labour unionism ideology. It's not comparable to the
economic liberalism of the US right.

The Chinese communist party was once… communist. 5 year plans. means of
production, the whole shebang.

The remaining left in Europe and elsewhere is very non theory based. The have
strong a social and economic goals and values, but not really a big theory
about how everything works best. There is no consistent, underlying economic
theory like the US right has. It still holds a lot of socialist values and
even

We get back to words like idealist or fundamentalist that have negative
connotations, an interesting thing in itself. I think that's what this article
is arguing for, essentially. Fundamentals say minimum wage increases yield
unemployment. Trust in the fundamentals.

