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."
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.
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.
Polemicists have the job of explaining meaning to others while persuading them. I will show you various pieces of data supporting my thesis and my thesis will give you understanding of how and why things work. If you write an opinion column, this is your job.
This is not the same at all as trying to minimize assumptions and simply show relationships.
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.
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)?
It doesn't assume any of these things. It defines preference based on the action an individual takes when not interfered with, and builds a value system based around taking this form of preference as a "good". You're assuming the existence of some absolute concept of "rationality" by actions may be judged; Austrian economics does not make this assumption.
>It's actually possible for people to take actions which they don't prefer to take.
Not if you define preference as what is demonstrated by people's action at a given point in time when not interfered with. Which is what the Austrians do. If you want to give a different definition of preference, that's fine, but the issue of what definition of preference forms the best basis for a value system is a matter of philosophy, not science.
>Praxeology IMHO is thoroughly unscientific, contradicts modern neuroscience and psychology with many of its assumptions about people
Praxeology treats the acting individual as just that: an individual, a black box. Not a collection of competing mental components. Which model of the mind to use is a matter of philosophy. We could for instance treat the mind as nothing more than a deterministic product of atoms, neurons and the like, but then we'd have to make our models much more complicated. It's a matter of philosophical debate which part of the brain and its experience constitutes the mind, and the Austrian approach is to sidestep this issue by just treating the person as a black box.
>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
This is simply not correct. They work forward from first principles to reach the conclusion that a free market produces better outcomes, because how they define "better outcomes" is based on the first principles they have chosen. An Austrian thinks a free market is good because a free market minimises interference with people's freedom of exchange, and Austrians define interference with freedom of exchange as a fundamental negative. A socialist may think a free market is bad because it leads to unequal distribution of wealth, and the socialist views unequal distribution of wealth as a fundamental negative. The issue of who is right about free markets, the socialist or the Austrian, cannot be settled by empirical methods, as it's a matter of philosophy: the Austrian and the Socialist have fundamentally different notions of what is morally good/bad.
>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
The importance of the condition of future generations is again a matter of philosophy. For an Austrian, its importance is determined by the consideration for it that is implied by the actions of the current generation. For an extremely passionate environmentalist, the living conditions of generations thousands of years in the future might be viewed as more important than the preferences of the current generation. These valuations are based on the philosophical underpinnings of the belief systems of the individuals in question, not on propositions subject to empirical verification.
>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.
The use of ordinal forms of utility in economics is meant to account for this. E.g. if an economist argues that action Y is bad by virtue of stopping person P from doing action X, which they'd otherwise do, then it doesn't matter what the consequences of action Y is, as their argument against Y is not based upon its predicted consequences.
>I also think it's more moral than either of those.
This is almost tautologically true. Unless you have the same moral foundations as a pure free marketer or a Marxist, you're not going to view their approaches to economics as more moral than one based on your own moral and epistemological foundations.
This definition of "preference" and the assumption that it is equivalent to "good" is essentially just recasting the rational actor model from a (demonstrably failed) empirical model into a moral axiom; that is, rational choice model posits that there is an underlying utility function that people efficiently maximize through their uncoerced choices, whereas your description of the Austrian school's position takes this demonstrably disproven, though in some conditions still useful empirical model, inverts it by assuming, whether or not they are maximizing any utility function, that people's uncoerced choices define a good, and proceeds from there.
While I think this is certainly accurate of some Austrian, it takes those who follow it out of the domain of economics-as-a-science and into the domain of a particular moral philosophy detached from science.
> An Austrian thinks a free market is good because a free market minimises interference with people's freedom of exchange
Actually, by your definition, an Austrian holds, as a first principle, the free market as a good. There can be no "because" there, it is simply a moral axiom for Austrians that the behaviors that people make in free market conditions define what good is.
I believe many/most/all Austrians would agree that economics IS detached from science.
http://www.nobelprize.org/nobel_prizes/economic-sciences/lau...
That's exactly my point! Which is why arguing against an Austrian position (or for that matter a Marxist one, or one from any economic school based around a specific moral system) can only be done philosophically, not empirically, as their core tenants are moral axioms, not testable empirical propositions.
Both Krugman's quoted passages acknowledge that conventional economic theory would tend to suggest that minimum wages reduce the size of the work place, but both labour economists' theories of labour supply and some empirical work suggests that this isn't universally the case, especially where increases are small. Neither say very much on the subject.
But the 1998 one is attacking a book which (according to Krugman) suggests that compelling employers to pay more - 57% more in the example - will reduce welfare costs and have no adverse effect on employment
The recent article attacks a more general view that wage reduction is essential to get the nation's economy out of a rut, and is particularly approving of quasi market-based mechanisms to raise minimum wages (trade unions and Walmart's justification in terms of efficiency wages)
It's the political line of argument rather than the use of economic theory that has changed (and given that Krugman doesn't exactly pull his punches, it's not surprising that one article reads almost like an attack on the other). He's not having to turn his back on economic theory to argue that the US would be better off if minimum wages were a little higher, and it wasn't slavish devotion to economic theory that caused him to contest what he described as a "moral" argument for wage regulation over redistribution from Pollin and Lice.
Then economics absolutely needs to stop being called a "science".