Economics as a complex systems science
An interesting interview of Paul Krugman by Edward Hugh is on A Fistful of Euros:
E.H. : The late Sir Karl Popper used to contrast what he regarded as science with ideologies like Marxism and Psychoanalysis, because there seemed to be no way whatever of consenually agreeing with their practitioners a series of simple tests which would enable their theories to be falsified. Some critics of neoclassical economics – including Popper’s heir Imre Lakatos – have expressed similar frustrations. Do you think we economists are, as a profession, up to the challenge of formulating testable hypotheses in such a way that the public at large might come to have more confidence in what we are up to, or are we a lost cause?
P.K.: I really don’t think that’s a helpful way to pose this question. Economics is about modeling complex systems, and as such the models are always less than fully accurate. What economists do need, however, is some demonstrated ability to get big things right. They had that after the Great Depression, when Keynesian economics clearly made sense of both the depression and the wartime recovery. But now the profession needs to get back on track.
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Interesting quote, indeed.
I am an avid follower of Krugman’s ideas, but I am a little critical of his use of the term ‘complex’ systems here, not to mention his overall evasiveness.
Krugman’s research, and perhaps 99% of economics and finance research, uses idealized linear models that make no claims to be able to model ‘complexity’ as it is typically defined. Other research fields contribute to understanding complexity. But not economics.
The exception is Mandelbrot, of course, but he is hardly considered mainstream.
Of course, if the purpose of economic theory is normative (to instruct about what should be) then it matters little that economic models are untestable, overly simplified and frankly unsubstantiated.
But there is a price to pay. As a science, economics remains ‘dismal’.
Interesting since Paul recently dismissed institutional economics as a pre-depression relic with no explanatory power. Institutionalists like Coase, North and Ostrom work to expand economic models to better explain complex human and ecological interactions.
Of course, Paul is stuck on reviving Keynesian models that, contrary to what he says, have little explanatory power when applied to history. I find his his non-academic writing to clearly fall under Popper and Lakatos criticism of being un-testable, which is perhaps why he dodges the question.
I agree with him about the profession needing to get back on track, but not about what “back on track” means.