Meditations on the Politics of Limited Knowledge

Ideas Have Consequences: The Education of Paul Krugman

In Current Events, Economics, Politics on March 9, 2010 at 2:29 pm

Paul Krugman fumed as he read audacious remarks the CEOs of JPMorgan Chase and Goldman Sachs made in testimony before the United State’s Congress:

Dimon had commented that financial crises were just things that happened every few years; Blankfein had compared the crisis to an act of God, like a hurricane. Krugman was curious to know whether these giants of Wall Street understood what they’d done wrong.

But only gradually has Krugman himself come to understand what can go wrong when reductive economic thinking is applied to the real world — and even he has a way to go. An excellent profile by Larissa MacFarquhar in the March 1, 2010, issue of The New Yorker (citations to hardcopy pages follow), traces Krugman’s own consciousness of politically embedded economic knowledge in a way that reveals much about the epistemic stance of the discipline vis-à-vis practical action in the world.

[The following is another long post, derivative of the New Yorker article, but hopefully with ample value-added. It puts a lot of issues on the table that are very salient for my project on epistemic humility with respect to social knowledge. I should say from the start that I like Paul Krugman, and if anything my sympathies for his politics and respect for his intellectual integrity draw me to an investigation of both the merits and limits of his thinking.]


The financial crisis that has plunged our economy into its current recession poses a deep challenge to the self-confident economic models that had driven and legitimized policy under Clinton and Bush II demanding financial deregulation. (Not to mention the related matter of broader market deregulation ushered in by Carter and Reagan.) Material interests clearly drive this policy trajectory and underlie laissez-faire ideology, but ruling-class intellectuals drank the cool-aid. Knowledge failed to provide a check on material power, indeed it was complicit in its ravaging of the economy. Alan Greenspan believed that financial firms would regulate themselves in the absence of the “visible hand” of the state. In congressional hearings after the 2009 financial collapse, Greenspan wore his rattled faith on his sleeve:

Alan Greenspan said out loud, “I have found a flaw.” Congressman Henry Waxman pushed him, responding, “In other words, you found that your view of the world, your ideology, was not right; it was not working.” “Absolutely, precisely,” Greenspan said. (Stiglitz, Vanity Fair)

If only all subscribers to that ideology were willing to admit its failure. Of course Greenspan could stand to look a bit deeper into the shaky foundations of his politico-intellectual agenda. I draw attention to his exchange with Waxman not to reveal some redemption, but to underscore the air of disturbing disbelief. He had actually believed his ideas about self-regulating markets would play out as elegantly in the real world as they did on paper. Useful ideas from the discipline of economics became dogmatic guides for action — in this case, willful collective inaction — in the real world. He had seen the world through the distorting lens of free-market fundamentalism, and tried to create an economy in the image of his idolatrous faith. By framing itself in terms of giving free reign to natural forces, free-market fundamentalism masks its own nature as ideological will to social determination.

The attraction of this view of the world is powerful. Within the analytical walls of the discipline, economic thought appeals strongly to the mind. One of the shocking revelations in the profile of Krugman is just how invested he was in the conservative (anti-Keynesian) conventional wisdom: “Until the late nineties, when he became absorbed by what was going wrong with Japan, he believed that monetary policy, rather than government spending, was all that was needed to avoid recessions: he agreed with Milton Friedman that if only the Fed had done its job better the Great Depression would never have happened.” (40)

Paul Krugman was a free-trade monetarist! How is that possible? Well, he was an academic economist enamored with the beauty of economic models. “For the first twenty years of Krugman’s adult life, his world was divided not into left and right but into smart and stupid. ‘The great lesson was the low level of discussion,’ he says of his time in Washington.” (40) As he is fairly forthright about in The New Yorker interview, his position was shockingly unreflective with respect to real-world implications. It wasn’t until he was finally confronted with apparent anomalies like the Japanese economy on the one hand, and the inescapable fact of inequality, on the other hand, that he started to question how all of this plays out in the real world. By Fall 2009, he was blasting his colleagues for getting things so wrong with respect to the financial crisis by “mistaking beauty for truth.”

“They were so enamored of the elegance of their models and the consistency of their logic, he wrote, that they had come to believe that assumptions that were originally adopted merely as tools (perfectly rational individuals, efficient markets) by Milton Friedman’s generation were so sacrosanct that economics wasn’t economics without them…” (47)

Krugman’s diagnosis comes out of his own experience. Not only had he himself been drawn to the beauty of economic models, he was apparently uniquely gifted at crafting such beautiful models. Indeed, Harvard economist Kenneth Rogoff call his work “poetry.” (45)


From the very start Krugman was drawn to the discipline by its attractive simplification of the world. As an undergrad he “felt that history was too much about what and not enough about why, so he ended up in economics. Economics, he found, examined the same infinitely complicated social reality that history did but, instead of elucidating its complexity, looked for patterns and rules that made the complexity seem simple.” (43) In contrast to the messiness of historical accounts of changes in society dealing with such factors as culture and politics, economics provides a powerful analytical frame for talking about historical change, e.g. ephocal changes in societies like the collapse of feaudalism… “Suddenly, a simple story made sense of a huge and baffling swath of reality, and Krugman found that enormously satisfying.” (43)

This was, he discovered later, a development that Keynes had helped to bring about. In the nineteen-twenties and thirties, economics had been more like history: institutional economics was dominant, and, in opposition to neoclassical economics, emphasized the complicated interactions between political, social, and economic institutions and the complicated motives that drove human economic behavior. Then came the Depression, and the one question that people wanted economists to answer was “What should we do?” “The institutionalists said, ‘Well, it’s very deep, it’s complex, I mean, you just talk about what happened in 1890,’ ” Krugman says. “Keynesian economics, which was coming out of the model-based tradition, even if it was pretty loose-jointed by modern standards, basically said, ‘Push this button.’ ” Push this button—print more money, spend more money—and the button-pushing worked. Push-button economics was not only satisfying to someone of Krugman’s intellectual temperament; it was also, he realized later, politically important. Thinking about economic situations as infinitely complex, with any number of causes going back into the distant past, tended to induce a kind of fatalism: if the origins of a crisis were deeply entangled in a country’s culture, then maybe the crisis was inevitable, perhaps insoluble—even deserved. (43)

Of course, the choice is not between infinite complexity and reduction to economic simplicity. And the business of “button pushing” must proceed in the gray middle area that takes account of what we do and do not know — the conclusions of our models and the implications of the fact that they don’t tell us everything and what they do tell us is contingent and hence uncertain to some degree. The buttons being pushed are in the real world, occurring through real institutions and mechanisms and interacting with an “infinitely complex” social system. Policy decisions cannot exclude this complexity, even if they cannot model it.

The problem is less with the truth-value of economic models than with their presumed relevance for making decisions outside the neat constraints of the model. The irony is that models are better at guiding decisions to a definitive outcome. And if the conditions of the real economy sufficiently match those of the model then they can produce extremely useful prescriptions. This seems to be the case with Keynes and “stimulating” our way out of the Depression as Krugman has demonstrated — and advocated that we do to a far greater degree than we have in the current recession. Not only did Keynes’s model tell decision-makers what button to push: when they pushed that button, the real economy seemed to respond in the desired manner.

While push-button models can be useful they have two serious liabilities than seem ironically contradictory: (1) By reducing the complexity of the real economy to components that can be effectively modeled, a tremendous amount of information is lost. And (2) when the model fails – if the failure is big enough – because of its incomplete fit with reality, it may be abandoned in whole and fuel a paradigm shift to a very different model that hooks onto the fabric of reality at different points and loses other connections that pinned down the old model.

(1) As suggested above, the power of Keynesian economics displaced institutional economics. Mainstream academic study of the economy gradually stopped digging into the structures of power that have such a profound effect on economic outcomes — and, crucially, which fuse economic power to political power in a manner that undermines democracy (along with equality, liberty and community). The obsession with neat models has impoverished academic study of economic phenomena embedded in politics, culture, history, etc. While it is understandable that policy looked to the models on hand that worked (putting aside Roosevelt’s dangerous flirtation with deficit reduction at the beginning of his second term), it is deeply regrettable that the structures of the academy (itself a political economic institution!) abandoned the pursuit of knowledge that is vital for long-term rational policy-making and informed political debate.

(2) Ironically, once Keynesianism became the only game in town, the study of social complexity vital for refining it and adapting it to changing global economic circumstances, fell by the wayside. Then stagflation hit in the 1970s. Keynesian policy makers kept pushing the magic button hoping to stimulate the economy, but found it backfiring and leading to increasing inflation without economic growth — a scenario that was not supposed to be possible according to the model. This crisis opened the way for Milton Friedman’s radical model to shift the paradigm. Over the course of a couple decades it became the orthodoxy of academic economics leaving no room for either the Institutionalists or the Keynesians in the discipline. A new elegant model — totally at odds with the preceding Keynesian model, and likewise dispensing with inquiry into the complexities of institutional power — became the new sheriff in town. And budding economists with a taste for kool-aid perpetuated the model propounded by the elders who advised them and made decisions about their tenure. The Friedmanites could not have defined the new paradigm if their ideas didn’t have a huge amount analytical power. But powerful interests (corporations and concentrated class of wealth-holders) and an emerging conservative political movement assured that they became dogma — the only game in town, the “Washington Consensus,” etc — in politic0-academic discourse about what we should collectively do to assure optimal economic outcomes. [Curiously, few would agree that the financial crisis and Great Recession are an optimal outcome.]

In graduate school at M.I.T., Krugman found himself drawn to international trade: “There was this kind of platonic beauty to the whole thing.” (44) The sirens of simplicity continued to call along his intellectual course. But Krugman had the ability to bring greater complexity into the models without throwing them out. In this case, he “realized that trade took place not only because countries were different but also because there were advantages to specialization…” (44) That is to say that the comparative advantage model of Ricardo and Smith was wrong to assume that advantages are inherent to countries, due only to intrinsic factors like the terrain, climate, etc. In an industrial age, if a country develops an industry to the point that economies of scale are achieved (local supply chain, local knowledge base and technological education, etc.) they will have an advantage compared to firms in other countries trying to engage in global trade in that industry.

One implication of Krugman’s theory was that, contrary to economic orthodoxy, industrial policy might have its benefits… But Krugman tried to discourage industrial strategists who cited him. For, while in principle industrial policy could be helpful, in practice, he believed, it was so difficult to determine which industry should receive government help, at the expense of all the other—so difficult to predict an industry’s future, and so difficult to determine merit when powerful interests would be trying to influence that determination—that in the end industrial policy would be likely to benefit mostly the owners of a few businesses and hurt everybody else. (44-5)

The ideological assumptions of the paradigm were revealed by a willingness to use the complexity of reality against attempts by the government to foster better social outcomes, but an unwillingness to impugn the model itself for not accounting for this complexity. Industrial policy was surely for the hubristic ignoramuses ruling soviet-bloc command economies. While Krugman’s concern is no doubt correct — consider the contemporary bailouts of some banks and not others — a problem arises when the liabilities of government action are taken to imply the default to government inaction. The challenge is for the public to act on limited knowledge in a responsible way. To ignore epistemic limits can lead to Stalin’s 5-year plan; to nihilistically take epistemic limits as a bar to action leads to a “free” market with social destructive consequences.

Krugman subsequently turned to a similar question of economic geography. Likewise here, he discovered the importance of history and accident. Rather than deterministic outcomes modeled from fixed premises, there was tremendous contingency at work in the emergence of particular economic activity in particular localities (e.g. dot coms in Silicon Valley).

Again, as in his trade theory, it was not so much his idea that was significant as the translation of the idea into mathematical language. “I explained this basic idea”—of economic geography—“to a non-economist friend,” Krugman wrote, “who replied in some dismay, ‘Isn’t that pretty obvious?’ And of course it is.” Yet, because it had not been well modelled, the idea had been disregarded by economists for years. Krugman began to realize that in the previous few decades economic knowledge that had not been translated into models had been effectively lost, because economists didn’t know what to do with it. His friend Craig Murphy, a political scientist at Wellesley, had a collection of antique maps of Africa, and he told Krugman that a similar thing had happened in cartography. Sixteenth-century maps of Africa were misleading in all kinds of ways, but they contained quite a bit of information about the continent’s interior—the River Niger, Timbuktu. Two centuries later, mapmaking had become much more accurate, but the interior of Africa had become a blank. As standards for what counted as a mappable fact rose, knowledge that didn’t meet those standards—secondhand travellers’ reports, guesses hazarded without compasses or sextants—was discarded and lost. Eventually, the higher standards paid off—by the nineteenth century the maps were filled in again—but for a while the sharpening of technique caused loss as well as gain. (45)

The parallel to colonial cartography is enlightening. The first thing to note is this was a project of instrumental knowledge in the service of colonization of people’s and territories by foreign states. Knowledge can be put to imperialist uses. But as long as your ideological predilections make room for a state taking non-imperialist socially beneficial action, we can bracket that warning and focus on the instrumental use of knowledge. This creates a drive for pragmatic development of knowledge: ideas that “work” are perpetuated. We must be vigilant to what end. The second thing to note is that “the higher standards paid off” eventually in terms of creating more useful knowledge. The implications for economics are that rigorous quantitative models may pay off over time — as long as they are open to the infusion of complicating factors such as Krugman’s economic geography. The final thing to note is that there is an indefinite interim period in which we must make decisions regarding policies that effect economic outcomes. And we can expect crisis to ensue if we delude ourselves into thinking that we are working with complete, certain, practicable knowledge during that interim.

Krugman’s past academic work proved useful for the discipline and garnered him a Nobel Prize last year in 2008.

“Translating unmappable facts into economic discourse, it turned out, was what Krugman was better at than anyone else: he could take an intriguing notion that had come up in real-world discussions, pare away the details (knowing just what to take out and what was essential), and refine what was left into a clean, clever, “cute” (as he liked to put it), and simple model. “It’s poetry,” Kenneth Rogoff, an economist at Harvard, says. “I mean, you go back to his first book and there was this beautiful chart about what the Volcker contraction did to output that swept aside so much—he just drew this little graph which really cleared the air. I’ve heard economists use the word ‘poet’ in describing him for decades.” (45)

The irony is that these incremental improvements reinforce the underlying paradigm. Challenges to the details leave the overall picture in place — now ostensibly clearer than ever.

Krugman’s theories of trade and economic geography are still taught everywhere. “I think there’s a pretty good case to be made that the stuff that I stressed in the models is a less important story than the things that I left out because I couldn’t model them, like spillovers of information and social networks,” he says.

This finally raises a key reason why quantitative models distort the real dynamics of social systems: they can only incorporate measurable quantities. This may be the greatest bias at work in economics and other quantitative social sciences. They can be extremely powerful for understanding the dynamics of measurable quantities, but what if some of the most important aspects of the system are left out?

But failure to represent reality accurately is rarely a fatal flaw in an economics model—what’s valued is the model’s usefulness as an analytic tool. The most successful paper Krugman ever wrote was about target zones, and it was completely wrong. In the years before Europe adopted the euro, it was thought that establishing something between floating exchange rates and fixed ones—a “target zone” within which a currency would be allowed to float—might reap some of the advantages of each. He estimates that by the time the paper was officially published, in 1991, some hundred and fifty derivative papers had already appeared. “Empirically, it doesn’t work at all,” Krugman says. “People loved it as an academic thing, but it had some very strong predictions about interest rates inside target zones. Those predictions all turned out to be wrong. But nobody attacked me for that. I was showing that if target zones worked the way that people say they’re supposed to work, then this is how it would play out.” (45)

The norms of the discipline, the standards by which ideas and their creators get ahead, encourage theoretical elegance at the cost of empirical failure. Again, while this may pay off analytically in the long term, it leaves a huge gap in our knowledge base while urgent questions of economic policy need answers now.


The New Yorker profile also offers some interesting background in the basic substance of contemporary economics. Krugman lays out two stories at the heart of what it means to “do economics”:

“One is the story of the old economist and younger economist walking down the street, and the younger economist says, ‘Look, there’s a hundred-dollar bill,’ and the older one says, ‘Nonsense, if it was there somebody would have picked it up already.’ So sometimes you do find hundred-dollar bills lying on the street, but not often—generally people respond to opportunities. The other is the Yogi Berra line ‘Nobody goes to Coney Island anymore; it’s too crowded.’ That’s the idea that things tend to settle into some kind of equilibrium where what people expect is in line with what they actually encounter.” (43-4)

Microeconomics attempts to model these phenomena at the level of individuals and firms competing in the marketplace. You end up with the supply-and-demand curves familiar to any Econ 101 student. Macroeconomics tries to account for more systemic phenomena occurring throughout the economy, e.g. unemployment, inflation, growth. Krugman’s wife and collaborator, Robin Wells, whose work focuses on microeconomics comments that: “You have to be more tolerant of ambiguity in macro than in micro.” (47)

“In micro, the rules of the game are clear,” Krugman says. “Of course, you can do stuff that involves people not being fully rational, but the bulk of it is the full neoclassical thing, rational individuals interacting with markets that are either perfectly competitive or imperfectly competitive in well-defined ways, whereas macro tends to be a lot of ad-hoc stuff. You say, ‘I have to make this assumption about what’s going on, which I can’t fully justify in terms of the micro foundations, but I’ll make it anyway, because it seems to fit what happens.’” (47)

That character of macroeconomics may make the assumptions more explicit in a way that emphasizes the contingent, limited nature of the knowledge it produces — a healthy notion. But at the end of the day micro and macro are investigating economic activity in the same social system. The macro-level effects of that economy are the aggregated result of all of the micro-level activity. Apparently a key split in the discipline comes from how strictly one insists that macro-models derive from micro-models. And the split is characterized by a sort of intellectual geography:

Freshwater economists—who live near lakes, particularly at the University of Chicago, but also in Rochester and Minneapolis—are more likely to insist that macroeconomics be based on microeconomic foundations, which is to say that one should study large phenomena like recessions and inflation as functions of the behavior of many perfectly rational individuals. (47)

Saltwater economists—who are to be found in coastal areas, especially at M.I.T., Harvard, and Berkeley—are more likely to allow that, at this stage of our understanding, it is excusable to study some macro phenomena without giving a complete account of their causal logic. Saltwater types are also more likely to include irrationality or other market imperfections in their models: they believe, for instance, that since it is clearly the case that prices do not fall immediately following a decline in demand but tend to be “sticky,” you should incorporate this fact, even if you haven’t yet got an account of why it should be so. (47)

In demanding rigorous modeling of macroeconomic activity, the freshwater economists insist on consistency with microeconomic models, giving analytical priority to the latter even though it does not (yet?) offer certain conclusions let alone determinate connections to macro models. There is a crucial caveat. “It isn’t that freshwater types believe that actual people are perfectly rational—they just believe that making that assumption enables a more rigorous economics than is possible without it.” (47) But together with the considerations above we must wonder how this ‘rigorous knowledge’ can be harvested and supplemented in order to be acted on in the present and until (if ever) the rigor promises to pay off in terms of more useful knowledge.

Given that the macro-level activity is in some complicated sense the result of many micro-level activities and that the microeconomic models display mathematical elegance and explanatory power, it makes sense that microeconomics might provide the sturdiest foundation for macroeconomics in a more perfect knowledge situation in which the models were both integrated and robustly representative of real world phenomena. Be we cannot assume that we are in such a perfect knowledge situation – in fact it is manifestly not the case – as evidenced by the widespread failure to anticipate the financial crisis and recession.


Academic discourse will progress as it will, and commitments to internal rigor may be useful in the long run. But what of the broader public discourse on economic policy? What sort of interfaces can optimize the translation of rigor-contingent academic knowledge into publicly useful premises for debate? Part of what makes Krugman interesting as an economist to profile is that he is most widely know for his popular New York Times Op-Ed column. His identity and outlook have been substantially shaped by his role in a public conversation about social knowledge and social policy… and politics.

Over the years Krugman has come to appreciate the need to roll up one’s sleeves and get one’s hands dirty when engaged in the politics of knowledge. Because it is political not ideal-academic (distinguished from real-academic which involves its own politics). This did not at all come naturally to Krugman, but was forced upon him by the exigencies of the conversation in which he found himself prominently engaged. MacFarquhar takes a useful digression to Krugman addressing a Sci-Fi convention. “Sitting up onstage at the science-fiction convention, Krugman looked happy to be there. It seemed that these were, in some worrying sense, his people.” (43)

“If you read other genres of fiction, you can learn about the way people are and the way society is,” Krugman said to the audience, “but you don’t get very much thinking about why are things the way they are, or what might make them different. What would happen if ?” (43)

One can ask “what would happen if?” from a purely academic stand point. But there are powerful people asking everyday “what do I want to happen?” — and they are deeply invested in the answer often with little regard for how others would answer. And the next question is not “how do I model that?,” but “how do I exercise power to make that happen?” It is indicative of the mindset of an academic economist that for the bulk of his career Krugman was unaware of power problems (I doubt he has come to terms with the depth of the power problem).

Krugman’s tribe was academic economists, and insofar as he paid any attention to people outside that tribe, his enemy was stupid pseudo-economists who didn’t understand what they were talking about but who, with attention-grabbing titles and simplistic ideas, persuaded lots of powerful people to listen to them. He called these types “policy entrepreneurs”—a term that, by differentiating them from the academic economists he respected, was meant to be horribly biting… He thought of himself as a liberal, but he was a liberal economist, which wasn’t quite the same thing as a regular liberal. (40)

Firmly entrenched in the academy — both in terms of internalized psychology and institutional incentives — Krugman did not take easily to the notion of writing a pop econ column.

“We economists thought that we were doing substantive work and the rest of the world was dross.” Krugman cared about his academic reputation more than anything else. If he started writing for a newspaper, would his colleagues think he’d become a pseudo-economist, a former economist, a vapid policy entrepreneur like Lester Thurow? Lester Thurow had become known in certain circles as Less Than Thorough.”(41)

What apparently changed Krugman’s mind was his glacially gradual recognition of the importance of politics for social outcomes.

Krugman found Reagan comical rather than evil. “I had very little sense of what was at stake in the tax issues,” he says. “I was into career-building at that point and not that concerned.” He worked for Reagan on the staff of the Council of Economic Advisers for a year, but even that didn’t get him thinking about politics. “I feel now like I was sleepwalking through the twenty years before 2000,” he says. “I knew that there was a right-left division, I had a pretty good sense that people like Dick Armey were not good to have rational discussion with, but I didn’t really have a sense of how deep the divide went. (40)

“The problem is finding things to say. Supply-siders never tire of proclaiming that taxes are the root of all evil, but reasonable people do get tired of explaining, over and over again, that they aren’t.” (41)

Certainly until the Enron scandal, Krugman had no sense that there was any kind of problem in American corporate governance. (He consulted briefly for Enron before he went to the Times.) Occasionally, he received letters from people claiming that corporations were cooking the books, but he thought this sounded so implausible that he dismissed them. “I believed that the market was enforcing,” he says. “I believed in the S.E.C. I just never really thought about it. It seemed like a pretty sunny world in 1999, and, for all of my cynicism, I shared a lot of that. The extent of corporate fraud, the financial malfeasance, the sheer viciousness of the political scene—those are all things that, ten years ago, I didn’t see.” (41)

It is a stunning confession – admirable for its honesty and epistemic humility – but disturbing given how much influence one can have with such a thin grip on reality. It took what Berkeley economist Brad Delong aptly calls the “collapse of reality-based Republicanism” (41), to shock Krugman’s Conscience of a Liberal.

“During the campaign, he perceived the Bush people telling outright lies, and this shocked him. Reagan’s people had at least tried to justify their policies with economic models and rationalizations. Krugman hadn’t believed the models would work, but at least they were there.” (41)

Over the course of the stupefyingly stupid Bush Administration, Krugman found his political voice. By 2008 was deeply invested in electoral politics and charged up in his commentary of the Democratic primary.

He hated that Obama was out there saying nice things about Reagan when what Democrats needed to do most was debunk the persistent myth that Reaganomics had been good for America. He thought Obama was completely wrong to believe that the country’s problems were due largely to partisan nastiness, and ridiculously naïve to imagine that he could bring together Republicans and insurance companies to reform health care. “Anyone who thinks that the next president can achieve real change without bitter confrontation is living in a fantasy world,” he wrote in 2007. (41-2)

Krugman is right to denounce such a fantasy, but he maintains his own fantasy as long as he thinks the politics of economic knowledge is purely cognitive. Obama was appealing to civic feeling — I think in good faith — and fostering a humble posture with respect to factionalism and discordant political nostalgia (people love Reagan for his leadership more than his policy). My hopes were higher for Obama’s ability to balance this public ethic with bold leadership for a pragmatic agenda featuring many important progressive aims. Wells challenges the hope of Obama supporters:

“People were so upset and angry after Bush, they had taken leave of their senses. They wanted to give themselves over, and they resented people like Paul who said, ‘No, don’t give yourselves over, think about what’s going on.’ They wanted to feel that they were being redeemed, and this is what Obama was offering, but he doesn’t have the right or the ability to redeem people; that’s not appropriate.” (42)

I did not have unrealistic hopes that he would be the champion of all of my political dreams. But I did believe that he would at least be the champion of his own progressive pragmatism. Ironically, I felt that it was Krugman who seemed too rigidly dogmatic in his commentary and oddly worked-up criticism of Obama during the primary. He was obsessed with the minor differences between Obama and Clinton’s health care plans. He couldn’t shake his inner wonk, or even recognize that his inner wonk shouldn’t have been so worked up over a single policy difference: the lack of an individual mandate for health insurance in Obama’s proposal. (Note: it is in the legislation his administration backs – though without a public option, it means a mandate to purchase insurance from private profiteering corporations.) Krugman was right to critique Obama’s bipartisan fetishism. Many progressives – including me, to a certain extent – did not take kindly to his criticisms. “But by the anniversary of Obama’s Inauguration Krugman felt unhappily vindicated…Why wasn’t he more aggressive…?” (42) As I said, I was hopeful that he would not let either the rhetoric or the good faith offering of cooperation tie his hands like he has on healthcare. The next couple weeks may determine whether or not he can make up for lost time and seal a deal on a Democratic healthcare reform bill.

Krugman was wrong to assume that his ear for politics was as good as Obama’s. I can’t believe I find myself agreeing with Larry Summers: “Paul’s great strength is his pellucid clarity,” Summers says delicately. “The other side of it is that there’s a degree of complexity in the world that a President has to deal with that he sometimes misses in his search for clarity.” (42) ““I was actually in the room when many of the final negotiations”—over the stimulus package—“were done, and there was no way that a larger package would have gotten sixty votes,” an Administration official says. “Regardless of whether he is academically correct, it just wasn’t in the cards.” (42) Where I diverge from Larry and his cabal and sympathize with Krugman is that you have to constantly work on moving the goal posts to line up with your “pellucid clarity.”

Progressive pragmatism must not resign itself to the present structure of possibility. While striving for what is possible in the present, it must build the foundations that change what will be possible in the future. On this score, I would dig my heals in far deeper than Krugman and fellow liberals nostalgic for post-War liberalism. Progressive politics will continue to flounder if it does not simultaneously pursue incremental progress and systemic change. Globalized corporate capitalism will not allow for the progressive policy success on the order needed. For the economic analyst, recognition of the importance of political power is only the first step toward realism. One must go back and deeper to recognize how the material structures of the economy drive and constrain that political power. It does not suffice to figure out ideal economic models in an outcome and then try to fight out the politics. The assessment of economic models must take into account their effect on our aspiring democracy from the beginning if they are ever to be made manifest.

“When Robin and I started writing about health care, single payer was clearly the way to go. And then bit by bit you start saying, ‘O.K., you take what you can get.’ There’s a trap I’ve seen some people fall into—you let your vision of what should be get completely taken over by what appears possible right now—and that’s something I’m trying to avoid.” (38)

But does Krugman fully appreciate why even he can fall into this trap? It is not enough to bolster the strength of one’s liberal convictions and insist on integrity and bold leadership. One’s politics needs to account for how it can change the conditions for its own possibility. That means taking on corporate capitalism, not just appealing to “The Conscience of a Liberal.”

Again, with admirable honesty Krugman concedes the limits of his evolving perspective:

“Now that we have people whose goals I share in power, I’ve seen what it actually takes to make policy change happen,” Krugman says. “It’s pretty revelatory.” It’s one thing to do opinion pieces about the way things ought to be; it’s another thing to think about, O.K., given the makeup of the U.S. Senate, given the difficulties of getting people on board and of communicating stuff to the public, what can you actually do?” (42)

What remains to be seen is whether Krugman will come to grapple with the structural, systemic, material roots of these proximate political hurdles. Of course, when we inquire into the role of knowledge in the public sphere there may be different roles for purveyors of knowledge. Krugman plays the role of frustrated liberal economist with a tremendous amount of integrity and insight. The hurdles that stand in the way of his idealized proposals would not appear as such without his advocacy.

Why was it so politically difficult to reregulate the banks? he wondered. Why couldn’t the Administration harness the populist outrage? What good had Wall Street ever done for America? “There must be something useful in there, but it is really hard to see what,” he says. “That’s everybody’s challenge: come up with a clearly beneficial example of financial innovation without mentioning A.T.M.s, and no one can do it.” (48)

He is clear-headed as ever about the rationality of ideal policy choices, but hasn’t come to terms with the deep blocks to the politics he advocates. Maybe radical realism just shouldn’t be part of his schtick. But it should be for academic economists, in their roles as academics.


Has the financial crisis shaken the faith of academic economists and introduced a dose of radical realism? It remains to be seen, but the initial indicators are discouraging.

As I stated at the outset, I maintain that epistemic hubris was an important root of the financial crisis. The dogma of free-market fundamentalism drove economic policy in a way that totally failed to recognize the limits of our working knowledge of how complex economic systems actually work.

Freshwater types, in particular, had forgotten the Depression, forgotten what Keynes had said about the resemblance of financial markets to casinos. So attached were they to the idea that markets always got things right that some actually suggested that unemployment must be a consequence of workers’ choosing not to work. Saltwater economists were less blinkered in their view of markets and the rationality of investors, Krugman wrote (Larry Summers, a saltwater type, once began a paper on finance by declaring “THERE ARE IDIOTS. Look around”), and had retained a Keynesian view of recessions as crises of insufficient demand. But even saltwater models had no room for such wild imperfections as bubbles and banking-system collapse. “Economists will have to learn to live with messiness,” Krugman concluded. (47-8)

The financial crisis and ensuing recession should have been a rude awakening. The sooner such social pain can inspire the cultivation of epistemic humility, the sooner we can have political deliberation about economic policies that deliver the social outcomes the public actually desires, in lieu of close-minded attempts to mirror supposedly infallible models. Alas, Not only did epistemic hubris lead us into crisis, but it persists in its wake.

The crisis should have been a lesson to people not to rush into investments that they didn’t understand, but Krugman suspects that it wasn’t. “It hasn’t been the searing experience,” he says. “A lot of people got burned, but I’m not sure that they’ll remember. You really have to have a Depression mentality to say, ‘I’d rather have cash or Treasury bills that yield almost nothing, rather than this product that my banker assures me is perfectly safe and yields two per cent.’ So, unless there’s a lot more regulation, we could do this again.” (49)

Krugman and Wells had the sober sense to pull all their investments out of the stock market ten years ago! But the market is not attentive to long-run systemic rationalities. If we cannot learn — that is collectively respond to experience by embedding wisdom into cultural norms — then our system will continue to operate pathologically. Learning the hard way may be our only chance. But bear in mind the implications that this recession apparently wasn’t hard enough.

Reactions to his article were quick and outraged. “Who are these economists who got it so wrong?” a Washington University economist, David Levine, wrote. “Speak for yourself kemo sabe. . . . It makes me feel physically ill that a distinguished economist could be so ignorant of his own profession.” “How sad,” John Cochrane, of the University of Chicago, wrote. “Don’t argue with them, swift-boat them. Find some embarrassing quote from an old interview. Well, good luck, Paul. Let’s just not pretend that this has anything to do with economics.” Levine and Cochrane maintained that the fact that freshwater economists had failed to predict the financial crisis was not an embarrassment to their theories but a confirmation of them: “The central empirical prediction of the efficient markets hypothesis is precisely that nobody can tell where markets are going—neither benevolent government bureaucrats, nor crafty hedge-fund managers, nor ivory-tower academics,” Cochrane wrote. If professional economists failed to predict or understand the crisis, how could it make sense for Krugman to argue that bureaucrats would do a good job of curing it?” (48)

Neoliberalism tries to claim the mantle of epistemic humility on behalf of the market. According to this view command economies fail because centralized decision-makers do not have the knowledge to efficiently (or even adequately) allocate resources. But the “efficient markets hypothesis” is a knowledge claim as well – and an audacious one at that. By taking such notions as dogmatic reasons for public resignation to market outcomes, we enslave ourselves to an ideology that can be incredible destructive of life, liberty and property — and particularly their just distribution. If this recession is not hard enough to make the powers that be recognize the limits of the knowledge they deploy to legitimize market fundamentalism, it will only get harder.

As for Krugman, he has come to discover that ideas have consequences, knowledge is limited in the public sphere, and rationality will not secure optimal political outcomes.

“I think he’s happy,” his friend Craig Murphy says. “A much happier person now than when we first met him. He feels like he’s done good things, and they’re greater than what he expected when he was young. If there is sadness in him at all, I think it is a tiny core of profound sadness of the kind that the Buddha understood—that we probably can’t use human rationality to make the world all better, and it would be really nice if we were able to.” (49)

Hopefully we as a people will recognize we are responsible for our destiny and that we must make use of limited knowledge – recognized as such – to better, if not perfect, our world.

  1. Great article Dave! Congrats! I enjoyed it very much!

    Speaking of Consequences of ideas, Paul Samuelson is a much more profound figure than (and revered teacher of) Krugman. A couple of UMKC professors publicly debated Krugman on whether Samuelson deserved the professional honors he had (and whether he even qualified for being a true “Keynesian” — indeed, Joan Robinson called the so-called saltwater theory “bastard keynesianism”).

    Check out these links for the debate:

    I love Prof. Krugman though. He’s become really close to a true Keynesian and Minskyan.

    By the way, there’s absolutely no “button-hitting” in Keynes or any genuine Keynesian theory! Keynes’s all about “targeted AND sufficient demand”; “automatic stablizing mechanisms”; and NOT simply “aggregate demand”…

    Here’s THE paper you should read to understand the crucial differences:

    Click to access wp_542.pdf

    You also have to read Hyman Minsky’s 1986 book “Stablizing an Unstable economy”. Prof. Krugman read and gave a speech at LSE about it (google it!). As soon as you read the General Theory and the Minsky 1986 book, you’d know much more than most “saltwaterers”!

    Keep up the great work buddy! — VZ

  2. DailyKos has a diary today that resonates with Krugman’s mulling over the legacy of Reagan:$50,-Reagan-on-the-National-Debt

    Particularly see the chart of national debt as percentage of GDP under each presidential administration:

  3. The problem with Progressives is that most seem to have never heard of the quote, “perfect is the enemy of good”

    Their pursuit of a perfect utopian society only leads to greater tyranny.

    Napolean and Hitler are good, if rather extreme examples.

    The problem is the type of personality that seeks power.

    A recent article in Science News profiled a longitudinal study that attempted to find the traits found in children that lead to wealth and success in society.

    After analyzing multiple traits over many years in individuals from child to adulthood only one trait stood out in children that later achieved great success –

    The ability to lie convincingly at an early age.

    Have you noticed that almost every historical figure referred to as “Great” caused the death of at least several hundred thousand people during their time in power?

    They were great con men without conscience who only cared for themselves.

    Their evil genius lay in their ability to convince masses of people that they were behaving altruistically while doing the exact opposite.

    Liberty is essential because it allows natural selection to work on both ideas and actions.

    If you haven’t noticed, natural selection is the governing principle of the universe.

    If people do not face the consequences of their actions, they will not change their behavior for the better.

    The best we can do is to help knock the the sharp corners off of Darwinism, offer our fellow human beings a helping hand to get on their feet when they are knocked down, but never carrying them and especially never rewarding incompetence, stupidity, or ignorance of reality.

    Progressivism results in progressively more control of everything with devastating results for all that are not part of the elites. Venezuela under Chavez and Cuba under Castro are what you get.

    Progressives are the biggest liars of all.

  4. Stumbled across this completely by chance and found it a very engaging read. As an aspiring economist with many questions about the profession your article made me think a lot about the difference between academic economics and what policies are actually practical in the real world. There are a lot of hard, important questions to be answered–and I hope over my lifetime economists will find ways to make economic theory more readily applicable to the world we live in.

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