[overpaidgoogler]

The distinction is usually referred to as saltwater vs freshwater economists (referring to the geographical location of the university's). Apart from MIT there is also Princeton and Stanford in the saltwater camp.

And Krugman is right that the saltwater economists were vindicated by the recovery from the GFC.

However Krugman is not a good spokesperson for saltwater economists. Most econ professors I know from saltwater university's say they cannot even understand his points (note that Krugman did not win his Nobel prize for macro, but for trade).

In particular he is wrong to bundle together views on debt crises, recessions, and general attitudes to the free market. By the time you are in a debt crisis, it's a bit late to stimulate the economy with even more government debt. At some point you actually have to figure out a way to pay money back.

[washedup]

We really need a way to simulate how the economy will react under certain policies. The current model is based on one hypothesis about how the economy works, when such policies may have been only tested once or twice before, AND when the test conditions were different in a lot of ways. Because of the complex nature of economic systems, prediction is extremely difficult.

We have yet to see if the monetary policies being used today will be a success or not. Many people point to signs of weakness and cracks in the economic foundation. Until interest rates are brought back to 2007 levels, we cannot say that the economy is stable. What happens to high levels of debt when interest rates begin to go up? People begin to default, credit is restricted, and spending drops. It will certainly bring higher volatility across the entire global economy, and the FED is nervous about how much.

While MIT might be today's most influential powerhouse of economic thinkers, we still don't know how successful they were at applying theory to practice. The debate about Keynes is still up in the air.

[overpaidgoogler]

I don't see any fundamental difference between what your call simulation and what economists call models. The only difference is that your believe in the possibility of models so accurate that one could easily verify that they give correct predictions, as opposed to existing models which are subject to continual debate.

The reason it is so hard to stimulate the economy is that it represents the sum total of a large part of all human activity. So for example to test the impact of a particular kind of fiscal stimulus, you would have to accurately model the response of individuals to their new circumstances, as well as the response of markets (which involve individuals with conscious knowledge of the new policy, and thus their own beliefs about its effects). It is this last factor that makes the economy so hard to stimulate. You are not only simulating actions, but beliefs, and beliefs about beliefs, etc. It's ironic that economics is criticised for following physics to closely, when it is precisely this last factor that makes economics fundamentally unlike physics. The closest thing to modern macro if mean field theory.

[clairity]

> ...you would have to accurately model the response of individuals...

but macro and micro are two separate disciplines within economics because of the belief that large scale economic activity can be modeled without modeling the individual agent. it's more akin to newtonian physics where the model breaks down at small scales.

but i agree with your main point about why it's hard to model -- basically humans are wiley creatures who defy predictability, and observation itself creates a feedback loop that changes the model =)

[pekk]

Mathematical descriptions of large-scale static properties like equilibria are patently not the same as, say, dynamic discrete-time simulations with evolving state.

I don't think we have anything satisfyingly like the latter for economics, but to claim that there is no fundamental difference is just inaccurate.

[overpaidgoogler]

DSGE models are precisely "dynamic discrete-time simulations with evolving state" and they are the workhorse of modern macro.

[washedup]

I mean computer simulation. Something that you can test many, many times that accurately reflects (or at least within reason) the affects of tweaking the parameters. I understand it's a difficult problem, but there has been some success in this field, and with cheap computer power it becomes easier.

Check out this paper: http://arxiv.org/ftp/arxiv/papers/1412/1412.6924.pdf

[overpaidgoogler]

Economic models are computer simulations!

The difference between conventional models and the kind of simulation you would like to see lies in the kind of assumptions that are made about agents and the environment they operate in. What they have in common is that both try to simulate a world in which individuals act in response to their environment.

The simulation in your paper might be more complex, but that in no way guarantees not faithfulness to reality.

I would suggest your check out mainstream micro and macro, eg a first year graduate textbook. Then you will see that the "representative agent" models of economics are really just simulations based on a specific set of assumptions.

[washedup]

All computer simulations are models, but not all models are computer simulations. What's taught in graduate school are text-book models which are descriptive at best. I am arguing that more thought should be given to trying to develop computer simulated economies now that computing power is much cheaper. The paper I linked to you shows initial success is at least being able to describe how an economy behaves. It's worth exploring, especially when we have huge test data sets in the form of online gaming economies.

In graduate-level economics (got my masters) there is very little connection between the micro and macro world. Macro economic behaviors are emergent properties of the underlying agents who are guided by a set of incentives, and graduate economic programs generally teach a fractured system. You either apply steady-state models to the macro world or you run behavioral experiments. There is (or there was in 2010, anyway) very little emphasis on modeling both systems as one.

[noobermin]

I'm a theoretic physicist who does computer simulations of laser plasma interactions. I'm just curious, how much of a scale difference (orders of magnitude) exist between your micro and macro worlds? We deal with femtosecond (1e-15 sec) and nanosecond (1e-9 sec) dynamics by using different simulations and feeding the short time sim results into the nanosecond ones. Is such a thing possible? I'd think doing something like that would be obvious, no?

[afarrell]

You should take a look at the Open Source Policy Center: http://www.ospc.org/ We just released an application for predicting the effects of changes to the tax code.

https://github.com/OpenSourcePolicyCenter/webapp-public

[digi_owl]

http://www.debtdeflation.com/blogs/minsky/

May be of interest.

[DanielBMarkham]

We also could use a way to simulate how the various stock and commodity markets will perform in the future.

This is just the same problem, looked at from a different angle.

[caminante]

On a tangential note, I ran across Dr. Hall's personal page[1] last night and learned (at least according to him) that he coined the "saltwater v. freshwater" classification in his 1976 essay.[2]

FWIW, it's refreshing to hear that eggheads can't follow Krugman. It puts me in good company!

[1] http://web.stanford.edu/~rehall/

[2] http://web.stanford.edu/~rehall/Notes%20Current%20State%20Em...

[overpaidgoogler]

The problem with Krugman is that he used a very "old school" Keynesian intellectual framework, while the rest of the field has moved on. The ideas of Keynes were not abandoned, but they were rendered in a form that is more consistent and coherent with neoclassical economics. Meanwhile Krugman has never been a prominent researcher in macroeconomics, but his Nobel prize and outspoken views on macroeconomics lead many people to that erroneous conclusion.

[darkmighty]

I've always wondered what would happen if we held important positions and decisions in the same regard we hold and review important economic theories, decide on climate change (IPCC panel), or choose among cryptographic hash functions (SHA competition) -- demanding each opinion be backed by a researcher well reputed in the relevant field, and overall statistical/theoretical justifications were demanded for each decision -- to try and make some provably or at least well supported significant decision in terms of optimality to reach certain clearly established goals.

[guelo]

How is trade not a big part of macroeconomics? That's a dumb thing to says.

On your debt crisis points, it makes all the difference if the debt is denominated in the country's own currency or not.

[DavidHm]

His prize was for research on international trade and globalization.

This is a very very narrow field, which is dwarfed by the reach of macro economics.

In short, his credibility about macro, especially in regards to the effects of debts and deficits, is questionable.

[eutectic]

Can you give specific examples of other economists making better predictions than Krugman by avoiding the mistakes you claim he makes?

[yummyfajitas]

Scott Sumner's been pretty spot on.

Krugman predicted austerity of 2013 would hurt. It didn't.

http://krugman.blogs.nytimes.com/2013/04/28/monetarism-falls...

http://econlog.econlib.org/archives/2014/01/the_parrot_is_s.... http://econlog.econlib.org/archives/2015/01/the_cbos_foreca....

Krugman predicted the sequester would cost 700,000 jobs.

http://www.nytimes.com/2013/02/22/opinion/krugman-sequester-...

I can't dig it up, but Sumner claimed it would not provided NGDP didn't fall (i.e., the fed caused a monetary offset). You'll never guess what happened next.

[washedup]

Not sure if there are any examples. Economists have never been very accurate because of the nature of economic systems. They are complex adaptive systems, which means that they are very sensitive to initial conditions. Because of the inherent unpredictability we have yet to discover an economic policy that works in the long-run.

[overpaidgoogler]

First, can you describe what the predictions were and what you consider their significance to be?

[eutectic]

The economic slowdown could last 5-10 years and cost trillions of dollars (June 2009):

http://news.bbc.co.uk/1/hi/business/8081813.stm

Semi-prediction of a housing bubble (August 2002):

http://www.nytimes.com/2002/08/02/opinion/dubya-s-double-dip...

Inflation and interest rates will remain low in in spite of stimulus and QE (many times).

A diagnosis of potential problems with the euro, many of which have come to pass (2001):

http://web.mit.edu/krugman/www/euronote.html

This is by no means an exhaustive list, but it is quite hard to find a major misstep that he has made as a direct result of his Keynsian beliefs.

[yummyfajitas]

A better question would be, "what predictions did Krugman make which disagreed with non-Keynesians that turned out right (or wrong)?"

Various ideological enemies of Krugman made these same predictions. All you are really saying is that Krugman, along with everyone else, gets the easy ones right.

[pessimizer]

> Inflation and interest rates will remain low in in spite of stimulus and QE (many times).

You're actually aware of a non-Keynesian who predicted this?

> Semi-prediction of a housing bubble (August 2002)

> The economic slowdown could last 5-10 years and cost trillions of dollars (June 2009)

And your claim is that these were easy predictions that everyone got right? I can accept that they were easy predictions...

[yummyfajitas]

Scott Sumner predicted the former as did most of the market monetarists.

Another great Scott Sumner prediction: fiscal austerity hurts if you lack an independent central bank, but not if you don't (directly contradicting new style Keynesians, e.g. Krugman). The results: http://www.themoneyillusion.com/?p=29692

Various ideological enemies of Krugman predicted the housing bubble, and far more clearly than Krugman; Ron Paul, for example, argued against the creation of a housing bubble in 2001. It's hardly clear to me that Krugman even predicted it. From your article: "To fight this recession the Fed needs more than a snapback...Alan Greenspan needs to create a housing bubble to replace the Nasdaq bubble." The wording is ambiguous, but to me it sounds less like a prediction and more like advocacy.

A few years back I was a solid structuralist, but the monetarists have a really good track record of disagreeing with other people and coming out right.

[eutectic]

I'm not qualified to adjudicate between Krugman and the market monetarists, but I feel it is important to realise that many (and many prominent) people did fail to make these predictions, and essentially all of them have kept their jobs and their status.

[BurningFrog]

I think Krugman is best understood as a pundit these days.

That's his main job now, and he does it very well. But good punditry is often bad science, and vice versa.