Tuesday, February 23, 2010

New Yorker Profile: Paul Krugman

A nice feature in the New Yorker begins as a fluff piece but eventually turns into a very lucid examination of contemporary economics. I particularly liked this explanation of "freshwater" versus "saltwater" economists, which I always thought was an interesting and convenient way to divide the field.
To some extent, this difference [micro vs. macro] also maps onto the divide between the “freshwater” and “saltwater” schools of thought in macroeconomics. 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. A freshwater economist might argue, for instance, that debt-financed government spending to stimulate the economy won’t have a significant effect, because people will realize that they will have to pay off that debt with higher taxes in the future, and so will save more in anticipation, leaving net spending essentially unchanged. 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. 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. After all, while there is only one way to be perfectly rational, there are an infinite number of ways to be irrational, and how do you choose? It all begins to look awfully arbitrary.
That last sentence does an excellent job summing up my frustration with the study of economics. Mapping out intersections of supply and demand curves can be satisfying for some, but those results always felt fraudulent to me.

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