Krugman why economists

To be fair, Krugman has been forthright in recent years in second-guessing his earlier assertions about the effects of open trade. But the economists have barely begun to clean up the mess they left behind, as a conference on inequality at the Peterson Institute for International Economics in Washington, organized by Rodrik and former International Monetary Fund IMF chief economist Olivier Blanchard, made clear last week.

The U. It led us somewhat blithely into a non-negligible policy disaster AKA the China Shock and provoked a public backlash that has rendered free trade toxic in the U. Others would disagree. Krugman was one of them, adopting by and large the free trade position, which was ironic considering that his Nobel-winning work in economics was far more nuanced than his books and columns and actually helped lay the intellectual foundations for smart strategic trade policy.

This idea also was anathema to Krugman. Professor McCalman says the US is a much harsher place for people who lose their jobs than Australia. Australians leading the way Professor Krugman reflected on the fact that, from the s through to the s, the field of international trade economics was dominated by Australians and Canadians. Professor McCalman agrees. The working assumption of Williams and most other evolutionary theorists, at least as far as I can tell, is that we should model the natural world not as being on the way but as being already there.

The most telling example of this preference is the widespread use of John Maynard Smith's concept of "evolutionarily stable strategies". An ESS is the best strategy for an organism to follow given the strategies that all others are following - the strategy that maximizes fitness given that everyone else is maximizing fitness, with each taking the others' strategies into account.

Does this sound familiar? It should: the concept of an ESS is virtually indistinguishable from an economist's concept of equilibrium. And by the way: Maynard Smith's textbook is explicitly skeptical of claims that evolution is necessarily an ongoing process, let alone that it need have any particular direction. Not only do the models normally settle down to an equilibrium; so do experiments, for example with RNA evolution.

And any evolutionist has got to be aware that life appears to have stayed happily single-celled for several billion years before something led to the next big step. Now you can understand why I say that a textbook in evolution reads so much like a textbook in microeconomics. At a deep level, they share the same method: explain behavior in terms of an equilibrium among maximizing individuals. But why does evolutionary theory in practice fail to take advantage, if we can call it that, either of the myopia or of the dynamics inherent in any evolutionary story?

What I have argued to this point is that even though evolution is a theory of gradual change, of myopic dynamics, in practice most evolutionary theory focusses on the presumed end result of such dynamics: an equilibrium in which individuals maximize their fitness given what other individuals do.

Why should the theory have taken this turn? The answer is surely the ever-present need to simplify, to make models that are comprehensible.

The fact is that maximization and equilibrium are astonishingly powerful ways to cut through what might otherwise be forbidding complexity - and evolutionary theorists have, entirely correctly, been willing to adopt the useful fiction that individuals are at their maxima and that the system is in equilibrium. Let me give you an example. William Hamilton's wonderfully named paper "Geometry for the Selfish Herd" imagines a group of frogs sitting at the edge of a circular pond, from which a snake may emerge - and he supposes that the snake will grab and eat the nearest frog.

Where will the frogs sit? To compress his argument, Hamilton points out that if there are two groups of frogs around the pool, each group has an equal chance of being targeted, and so does each frog within each group - which means that the chance of being eaten is less if you are a frog in the larger group. Thus if you are a frog trying to maximize your choice of survival, you will want to be part of the larger group; and the equilibrium must involve clumping of all the frogs as close together as possible.

Notice what is missing from this analysis. Hamilton does not talk about the evolutionary dynamics by which frogs might acquire a sit-with-the-other-frogs instinct; he does not take us through the intermediate steps along the evolutionary path in which frogs had not yet completely "realized" that they should stay with the herd. Why not? Because to do so would involve him in enormous complications that are basically irrelevant to his point, whereas - ahem - leapfrogging straight over these difficulties to look at the equilibrium in which all frogs maximize their chances given what the other frogs do is a very parsimonious, sharp-edged way of gaining insight.

Now some people would say that this kind of creation of useful fictions is a thing of the past, because now we can study complex dynamics using computer simulations. But anyone who has tried that sort of thing - and I have, at great length - eventually comes to realize just what a wonderful tool paper-and-pencil analysis based on maximization and equilibrium really is. By all means let us use simulation to push out the boundaries of our understanding; but just running a lot of simulations and seeing what happens is a frustrating and finally unproductive exercise unless you can somehow create a "model of the model" that lets you understand what is going on.

I could multiply examples here, but I think the point is clear. Evolutionary theorists, even though they have a framework that fundamentally tells them that you cannot safely assume maximization-and-equilibrium, make use of maximization and equilibrium as modelling devices - as useful fictions about the world that allow them to cut through the complexities.

And evolutionists have found these fictions so useful that they dominate analysis in evolution almost as completely as the same fictions dominate economic theory.

I just said that these fictions dominate economics. But the question in economics is whether we understand that they are fictions, rather than deep-seated truths. For there, perhaps, is where economists have something to learn from evolutionists. In economics we often use the term "neoclassical" either as a way to praise or to damn our opponents.

Personally, I consider myself a proud neoclassicist. By this I clearly don't mean that I believe in perfect competition all the way. What I mean is that I prefer, when I can, to make sense of the world using models in which individuals maximize and the interaction of these individuals can be summarized by some concept of equilibrium.

The reason I like that kind of model is not that I believe it to be literally true, but that I am intensely aware of the power of maximization-and-equilibrium to organize one's thinking - and I have seen the propensity of those who try to do economics without those organizing devices to produce sheer nonsense when they imagine they are freeing themselves from some confining orthodoxy.

That said, there are indeed economists who regard maximization and equilibrium as more than useful fictions. They regard them either as literal truths - which I find a bit hard to understand given the reality of daily experience - or as principles so central to economics that one dare not bend them even a little, no matter how useful it might seem to do so.

To be fair, there is some justification in the insistence of some economists on pushing very hard on the principles of equilibrium and in particular of maxmization.

After all, people are smarter than genes. If I offer a model in which people seem to be passing up some opportunity for gain, you may justifiably ask me why they don't just take it.

And unlike the case of genes, the argument that the alternative is quite different from what my imagined agent is currently doing is not necessarily a very good one: in the real world people do sometimes respond to opportunities by changing their behavior drastically.

In biology purely local change is a sacred principle; in economics it has no comparable justification. And yet I think that despite the differences, it would be better if economists were more self-aware - if they understood that their use of maximization-and-equilibrium, like that of evolutionary biologists, is a useful fiction rather than a principle to be defended at all costs.

If we were more modest about what we think our modeling strategy is doing, we might free ourselves to accommodate more of the world in our analysis. And so let me conclude this talk by giving two examples of how a more relaxed, "evolution"-style approach to economics might help us out. As you know, one of my areas of research has been the study of economic geography. Indeed, great business executives often seem to do themselves harm when they try to formalize what they do, to write it down as a set of principles.

They begin to behave as they think they are supposed to, whereas their previous success was based on intuition and a willingness to innovate. One is reminded of the old joke about the centipede who was asked how he managed to coordinate his legs: He started thinking about it and could never walk properly again. After all, what the president of the United States needs from his economic advisers is not learned tracts but sound advice about what to do next.

Because, in short, a country is not a large company. Many people have trouble grasping the difference in complexity between even the largest business and a national economy. The U. Yet even this to-1 ratio vastly understates the difference in complexity between the largest business organization and the national economy.

A mathematician will tell us that the number of potential interactions among a large group of people is proportional to the square of their number. Without getting too mystical, it is likely that the U. Moreover, there is a sense in which even very large corporations are not all that diverse. Most corporations are built around a core competence: a particular technology or an approach to a particular type of market.

As a result, even a huge corporation that seems to be in many different businesses tends to be unified by a central theme. The experience of a successful wheat farmer offers little insight into what works in the computer industry, which, in turn, is probably not a very good guide to successful strategies for a chain of restaurants. How, then, can such a complex entity be managed? A national economy must be run on the basis of general principles, not particular strategies.

Consider, for example, the question of tax policy. Responsible governments do not impose taxes targeted at particular individuals or corporations or offer them special tax breaks. In fact, it is rarely a good idea for governments even to design tax policy to encourage or discourage particular industries.

Instead, a good tax system obeys the broad principles developed by fiscal experts over the years—for example, neutrality between alternative investments, low marginal rates, and minimal discrimination between current and future consumption.

Why is that a problem for businesspeople? After all, there are many general principles that also underlie the sound management of a corporation: consistent accounting, clear lines of responsibility, and so on. But many businesspeople have trouble accepting the relatively hands-off role of a wise economic policy-maker.

Business executives must be proactive. It is hard for someone used to that role to realize how much more difficult—and less necessary—this approach is for national economic policy. Consider, for example, the question of promoting key business areas. But should a government decide on a list of key industries and then actively promote them? At various times, governments have been convinced that steel, nuclear power, synthetic fuels, semiconductor memories, and fifth-generation computers were the wave of the future.

Of course, businesses make mistakes, too, but they do not have the extraordinarily low batting average of government because great business leaders have a detailed knowledge of and feel for their industries that nobody—no matter how smart—can have for a system as complex as a national economy. The same syndrome is apparent in some business leaders who have been promoted to economic advisers: They have trouble accepting that they must go back to school before they can make pronouncements in a new field.

The general principles on which an economy must be run are different—not harder to understand, but different—from those that apply to a business.

An executive who is thoroughly comfortable with business accounting does not automatically know how to read national income accounts, which measure different things and use different concepts. Personnel management and labor law are not the same thing; neither are corporate financial control and monetary policy. A business leader who wants to become an economic manager or expert must learn a new vocabulary and set of concepts, some of them unavoidably mathematical.

That is hard for a business leader, especially one who has been very successful, to accept. Imagine a person who has mastered the complexities of a huge industry, who has run a multibillion-dollar enterprise. Is such a person, whose advice on economic policy may well be sought, likely to respond by deciding to spend time reviewing the kind of material that is covered in freshman economics courses? Or is he or she more likely to assume that business experience is more than enough and that the unfamiliar words and concepts economists use are nothing but pretentious jargon?

Of course, in spite of the examples I gave earlier, many readers may still believe that the second response is the more sensible one. Why does economic analysis require different concepts, a completely different way of thinking, than running a business? To answer that question, I must turn to the deeper difference between good business thinking and good economic analysis.

The fundamental difference between business strategy and economic analysis is this: Even the largest business is a very open system; despite growing world trade, the U.

Businesspeople are not used to thinking about closed systems; economists are. Let me offer some noneconomic examples to illustrate the difference between closed and open systems.

Consider solid waste. Every year, the average American generates about half a ton of solid waste that cannot be recycled or burned. What happens to it? In many communities, it is sent somewhere else. My town requires that every resident subscribe to a private disposal service but provides no landfill site; the disposal service pays a fee to some other community for the right to dump our garbage. For an individual town, that choice is feasible.

But could every town and county in the United States make the same choice? Could we all decide to send our garbage somewhere else? Of course not leaving aside the possibility of exporting garbage to the Third World.

The country can make choices about where to bury its solid waste but not about whether to bury it at all. That is, in terms of solid waste disposal, the United States is more or less a closed system, even though each town is an open system. Here is another, perhaps less obvious one. Unfortunately, the garage was not large enough. It consistently filled up, forcing late commuters to continue driving all the way to work.

I soon learned, however, that I could always find a parking space if I arrived by about