Krugman's attack on my review of Samuelson

December 20, 2009
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I have recently republished my lecture notes on the history of theories of Trade, Development and Foreign Debt {2}. In this book I provide the basis for refuting Samuelson’s factor-price equalization theorem, IMF-World Bank austerity programs, and the purchasing-parity theory of exchange rates.

These ideas were lapses back from earlier analysis, whose pedigree I trace. In view of their regressive character, I think that the question that needs to be asked is how the discipline was untracked and trivialized from its classical flowering? How did it become marginalized, taking for granted the social structures and dynamics that should be the substance and focal point of its analysis? As John Williams quipped already in 1929 about the practical usefulness of international trade theory, I have often felt like the man who stammered and finally learned to say “Peter Piper picked a peck of pickled peppers”, but found it hard to work into conversation {3}. But now that such prattling has become the essence of conversation among economists, the important question is how universities, students and the rest of the world have come to accept it and even award prizes in it!

To answer this question, my book describes the “intellectual engineering” that has turned the economics discipline into a public relations exercise for the rentier classes criticized by the classical economists: landlords, bankers and monopolists. It was largely to counter criticisms of their unearned income and wealth, after all, that the post-classical reaction aimed to limit the conceptual “toolbox” of economists to become so unrealistic, narrow-minded and self-serving to the status quo. It has ended up as an intellectual ploy to distract attention away from the financial and property dynamics that are polarizing our world between debtors and creditors, property owners and renters, while steering politics from democracy to oligarchy.

Bad economic content starts with bad methodology. Ever since John Stuart Mill in the 1840s, economics has been described as a deductive discipline of axiomatic assumptions. Nobel Prizewinners from Paul Samuelson to Bill Vickery have described the criterion for economic excellence to be the consistency of its assumptions, not their realism {4}. Typical of this approach is Nobel Prizewinner Paul Samuelson’s conclusion in his famous 1939 article on “The Gains from International Trade”:

In pointing out the consequences of a set of abstract assumptions, one need not be committed unduly as to the relation between reality and these assumptions. {5}

This attitude did not deter him from drawing policy conclusions affecting the material world in which real people live. These conclusions are diametrically opposed to the empirically successful protectionism by which Britain, the United States and Germany rose to industrial supremacy.

Typical of this now widespread attitude is the textbook Microeconomics by William Vickery, winner of the 1997 Nobel Economics Prize:

Economic theory proper, indeed, is nothing more than a system of logical relations between certain sets of assumptions and the conclusions derived from them …

The validity of a theory proper does not depend on the correspondence or lack of it between the assumptions of the theory or its conclusions and observations in the real world. A theory as an internally consistent system is valid if the conclusions follow logically from its premises, and the fact that neither the premises nor the conclusions correspond to reality may show that the theory is not very useful, but does not invalidate it. In any pure theory, all propositions are essentially tautological, in the sense that the results are implicit in the assumptions made. {6}

Such disdain for empirical verification is not found in the physical sciences. Its popularity in the social sciences is sponsored by vested interests. There is always self-interest behind methodological madness. That is because success requires heavy subsidies from special interests who benefit from an erroneous, misleading or deceptive economic logic. Why promote unrealistic abstractions, after all, if not to distract attention from reforms aimed at creating rules that oblige people actually to earn their income rather than simply extracting it from the rest of the economy?

Links and Notes:
{1} http://krugman.blogs.nytimes.com/2009/12/18/why-economics-is-the-way-it-is/
{2} http://www.amazon.com/exec/obidos/ASIN/3980846695/counterpunchmaga
{3} John H Williams, Postwar Monetary Plans and Other Essays, third edition (New York: 1947), from page 134.
{4} I have surveyed the methodology in “The Use and Abuse of Mathematical Economics”, Journal of Economic Studies 27 (2000):292-315. I earlier criticized its application to international economic theorizing in Trade, Development and Foreign Debt (1992; new edition, 2009), especially chapter 11.
{5} Paul Samuelson “The Gains from International Trade”, Canadian Journal of Economics and Political Science, Volume 5 (1939), page 205.
{6} William Vickery, Microeconomics (New York: 1964), page 5.

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