Krugman takes a counterintuitive approach to thinking about development economics. The background and history of development economics is useful to provide context for where he is coming from. Krugman’s criticism of Hirschman for getting development wrong in "The Strategy of Economic Development" seems harsh, as Hirschman was merely trying to address development in the context of where main stream academic culture was going. While Krugman is quick to criticize the muscular pragmatism Hirschman and Mydral advocated for, empirical evidence and time has shown that the high development model has also failed to be extremely successful. . The fact that there are still underdeveloped countries in 2012 indicates economists are still looking for the answer to development.
Hirschman’s paper turned away from the economies of scale and positive feedback approach put forth by Rosenstein Rodan’s high development idea in 1943. Krugman argues that Hirschman turned away from high development because of pressures from mainstream economics and an inability to capture economies of scale in models. While Krugman is correct in noting the benefits of high development theory, he ignores the merits of the pragmatic linkages approach Hirschman proposes. Linking industries together in developing countries and between developed and developing countries is an essential part of economic success, which can then lead to social and political development. Thinking about development outside the world of models may have been useful to those like Hirschman who struggled with thinking about development strictly in terms of mathematical arguments and economies of scale.
Krugman accurately notes the complexities of reality and social science. Any model may simply be good if it succeeds in explaining or rationalizing some of what you observe in the world in a way that may not have been anticipated. Any good economist, particularly development economists, must always be cognizant of the fact that models are merely tools to help map reality, rather than reality itself. The Big Push Model is an example of when and how a model can be helpful, even if it appears to be too simple. The model appears simple but produced conclusions that were not obvious to many people, including those specializing in development. Amidst all the analysis of varying approaches to development economics one thing seems clear, there is no easy answer to development economics and no model that captures all variables and works in every development situation; rather over time some models have been developed to assist in our thinking of what contributes to successful development.
I believe that the thesis of Krugman’s paper is initially one of regret: he does his best to reconcile the inspiring ideas of Albert Hirschman and his contemporaries within a more legitimate and widely recognized context of conventional economics. His main objective was to incorporate the main ideas of high development theory, which reigned in the 1940s and 1950s, into the sphere of mainstream economics to better portray their validity. These topics include the ideas of modernization breeding modernization (i.e. the “virtuous circle”), self-reinforcing growth, economies of scale, and dualism. The main issue of high development theory, Krugman explains, is that economies of scale are difficult to introduce in formal economic models.
Interestingly, Krugman dives into the complexities and contradictions of the social sciences. He explains the precarious balance between the coveted simplicity of an adaptable model and the complex detail lost through its simplification. For this reason, against the ideals of mainstream economics, development economists such as Hirschman and Myrdal refused to formalize their ideas in models. As admirable as that may have been, Krugman argues, their lack of formal expression caused their insights to die out because they were difficult to adapt and teach. Ultimately, Krugman explains, “there is no alternative to models.” Those who try and avoid models rely on metaphor and other similar techniques, which in themselves are innately models.
Krugman, et. al.’s adaptation of the high development idea of the “Big Push” into a formalized model brings the entire concept into clearer view. As Krugman states, his model “makes one want to go out and start measuring” instead of lulling a reader into a sense of rhetorical reassurance of truthfulness without empirical evidence. It also trims down the idea to its core and avoids the confusing “rich interdisciplinary stew of effects,” allowing the logic of the high development story to be adapted and utilized with more freedom by others in the field. In the end, Krugman’s point that there is no creditable replacement for a well-designed model rings true.
Overall, Krugman does a good job of proving his thesis that although development economics faced difficulties for years about methodization and was behind many other sciences, recent economists have been able to find a place for the high development theory in mainstream economics. The ability to do so came from fitting development economic scenarios into models.
Krugman spends a significant portion of the paper discussing the reasons modeling is necessary in not only just economics, but in all social sciences. His reasoning for not supporting Hirschman’s work is because Hirschman relied on metaphorical and thus abstract writing, which was nonetheless convincing and believable at the time. Even before Krugman explains Hirschman’s studies, he traces the path development economics took in order to get to where it is today. Although there are more questions to be asked and few definite solutions to global issues, development economics has come a long way since the 1940s.
Krugman’s main point during this section shows that development economics moved back before it could move forward. With the map of Africa analogy, Krugman stated that more knowledge and improved technique actually led to a loss of accuracy and understanding. The field of mainstream economics was raising its standards and becoming based on models and mathematics more and more. However, the only known models described situations with perfect competition, which would not fit an economy for a developing country where monopolies and oligopolies hold most control through economies of scale. Since the 1970s, though, development economists have gotten around this mathematical dilemma by making assumptions that allow for a model to be built, including breaking down economies to the most basic components. These models allow us to fully see and understand the circular process taking place in developing countries that makes growth difficult and forces them to remain in economic distress.
In the end, Krugman gives an example of a development economic model and explains what we can learn from it. The major aspects to note are that developing economic situations can be broken down into rigid models, the reasoning of developing economic issues can be seen even in a simple setting, conclusions in models are significantly more sensitive than those in metaphorical or written examples, and finally development economic issues must be approached with an open mind because although the answers might seem simple, many mechanisms from the “tool box” must be used.
“It is said that those who can, do, while those who cannot, discuss methodology.” This quote represents many modern-day economist point of view towards modeling. This macho, I can make concepts more complicated than you attitude towards teaching and modeling has most definitely set economics back many years. Krugman echoes this sentiment when he says that the work that Hirschman’s paper could have just as easily been presented in 1989 as 1950. One economist after another has come along and tried to reinvent the wheel. Adding new shifts, curves, models, and most notably, assumptions. Economist should accept the graphs they learn in principles of Micro and Macro and build their theory from there.
Modeling and methodology have a place in an economics classroom, but it is important to note that the world does not go on in a classroom. Most graphs start with the economist writing down a list of assumptions that include: zero unemployment, perfect information, returns to scale, and a perfectly competitive market. This is a society that does not exist. Most professors I have had say “This model is an unrealistic scenario but it is important to understand the building blocks of economics.” This is a solid point, and should be taught but new economist should stop trying to reinvent the wheel or complicate the model. New economist should build off the building blocks and give their students and readers some new theories after we have established the fundamentals of economics.
I was particularly intrigued by Krugmans’s analysis of the weather-dishpan. Krugman states, ”What did one learn from the dish-pan? It was not telling an entirely true story: the Earth is not flat, air is not water, the real world has oceans and mountain ranges and for that matter two hemispheres. The unrealism of Fultz's model world was dictated by what he was able to or could be bothered to build -- in effect, by the limitations of his modeling technique. Nonetheless, the model did convey a powerful insight into why the weather system behaves the way it does.” This is exactly the way economics should be taught. At a fundamental level, the models should be diagramed for students and readers. Models give us a basic understanding of the principles of an economy. But once the groundwork has been laid it is time for us to explore the oceans and mountain ranges, if you will.
It is not accurate to say that those who cannot model, as if the actual application of the science is not relevant and in some way rudimentary. From my studies this is in fact the opposite of the truth. What happens to wages when prices rise, in a fictional economy, is much easier to understand (black and white) than the theoretical questions asked in the gray world we actually live in. The fictitious modeling world is one with little to no consequences or ramifications. In my opinion, the quote should be “those who cannot graph, those who can, graph, discuss, and theorize."
“The Fall and Rise of Development Economics” describes the evolution of the study of economic development. The early phase of study was characterized by the High Development Theory imbedded in the Rosenstein-Rodan Big Push Model and ended around the time of Hirschman’s “Strategy of Economic Development”. As students of modern day development theory, we must be cautious to denounce the older narrative expressions as being too informal and not mathematically on par with other branches of economics because the generation that followed the Big Push Model did just that in the 1950s. Mr. Krugman compares his synopsis of the redemption of economic development theory back into the limelight of society against the evolution of maps of the African continent. African maps dating back to the Middle Ages were filled with details, but naturally all the landscapes were inaccurate and many were untrue, but explorers were able to relate some the geographically information back to European map makers, who were able to construct a rough estimation of the interior and coastline. Centuries of accumulated research allowed the densely populated coastal cities to be extremely critiqued, while interestingly the details from the less observed interior disappeared almost completely. Mr. Krugman notes that in a way Europeans became less informed and more ignorant about Africa than generations previous. The cause of this progressive lack of information was due to the fact that improved standards of map making invalidated prior data from being included in the new maps; eventually however, modern cartography filled out the African interior. Krugman illustrates a similar phenomenon occurring in economic development theory. In the mid 20th century, rising technological and conceptual standards of economic modeling blacked out prior theory that was considered unfounded. This summary describes the fall out of the mainstream of economic development theory prior to the second coming. This rise occurred in the 1980s when rigorous models appeared, explaining the Big Push Theory in “three pages, two equations, and one diagram”. Murphy, Shleifer, and Vishny were responsible for this reinstatement of development economics into mainstream economics. Their re-engineering of the Big Push was able to reformulate and mathematically model the estimated literature of the original modelers. The lesson I took away from this reading was that literary approximations of economical models is important, but policy makers are looking for models that they can use to discern appropriate solutions to economic problems. Therefore, the analysis must be applicable to actually be taken seriously in mainstream economic discussion, going beyond the realm of generalizations and observations into the world of observational study and experimentation.
Overall "The Fall and Rise of Development Economics" was very interesting. At first it was tough for me to see where Krugman was going, but as the article unfolded it began to make more sense. I thought it interesting how Krugman compared the map-making of Africa and the dish-pan meteorology example to explain how sometimes models can progressive and regressive at the same time. While one seemingly expands their knowledge in the creation of a model, they also neglect important details that are essential to understanding the greater concept. My only issue with Krugman is that I feel that in a lot of ways you can learn just as much from metaphors as you can from models. He even says that models are a gross simplification of how the world actually works because you leave out crucial details. Why was Hirschman's way of explaining high development theory so inferior? He may have not been able to model his claim but a model that leaves out the role of human and physical capital is still a gross assumption. I understand that the route that economics was taking during Hirschman's era was not aligned with his way of defending ideas, however he was still correct all along, just not for the right reasons. I guess what I'm trying to say is that it is annoying that models are the only way to make a legitimate economic claim because they generally leave out such significant factors. It bothers me that someone as brilliant as Hirschman is essentially left out of history books because he didn't feel that oversimplifying the economy to make a model work correctly was the only way to prove a correct point. Unfortunately for him, that's how the world works.
Krugman's "The Fall and Rise of Development Economics" echoes some very similar ideas to a paper I read for Macro Theory last week, "Hip Heterodoxy" by Christopher Hayes. Both papers examine the conflict of trying to fit creative economic theories into a formalized model. Unlike Hayes who leans mostly towards the more "radical" economists, Krugman takes a middle of the road approach by acknowledging that models can hinder new theories and research but that "the insistence on modeling is basically right". I found it refreshing that Krugman chose to examine both sides of the argument and critiqued the expectations that surround modeling. By using the global weather system as an example, Krugman conveys that any model is "to some degree a falsification". Nothing can be an exact replica of reality, and acknowledging that fact puts formalized models into perspective. As we've discussed in class, models provide insights, not answers. Accepting this means we can step beyond the literal representation of a model and extrapolate likely outcomes and policy applications in the real world. Krugman puts a large emphasis on a supposed loss of knowledge during the evolution of ignorance and its effect on development economics. Personally, I felt that he was harping way too much about lost decades when economists had to narrow their frameworks and tools in order to fit into classical models. He himself says that "models are maps" so my take on those decades in the dark is that there was no road to allow economists to reach the broader horizon and it took a few years to establish the infrastructure to get beyond their limited scope. Once they did, however, an economical renaissance occurred. One matter not addressed by Krugman in terms of economic ignorance is whether or not this is a cyclical trend. Was the time from 1940-1970 the only age of ignorance or are we due for another installment sometime in the future? According to Krugman this would be the worst thing that could happen. He makes a bold claim that we will never know to what extent development economics could have flourished if not for those dark decades where “great minds retreated to the intellectual periphery”. This is a bold claim. It is here that he reconnects with Hayes, but in an opposing manner. Hayes recounts an economics symposium where the neoclassical economists are showered with fanfare where as those that are deemed “radicals” that stray away from classical models. Hayes represents these radicals as the future of economic progress. However, Krugman pleads for those who want to deviate from formal modeling to reconsider and stick to the norm. While those that deviate are often brought back into the fold after failing to provide adequate framework for their visions, I believe their breaking off, while it may cripple development economics’ growth in the short run, provides applicable insights into how the formalized tools and frameworks can evolve in the long run. I feel there is trade off between steady long run evolution and a fall and rapid rise progression. Ultimately, I think we end up in the same place.
In “The Fall and Rise of Development Economics,” Krugman presents an interesting story of economic theory over the 20th century. His focus is on two themes: a set of ideas that seeks to explain what development is about and that he has coined “high development theory,” and the issue of methodology within the field of economics. Although there are certainly plenty of critical aspects to his writing, his paper does not solely serve as a critique. He critiques and applauds both high development theory and the emphasis on models prevalent beginning in the 1950s. He criticizes the lack of any empirical proof or modeling in high economics, but applauds the sense of high economics arguments. He does not dismiss the ideas of high economic writers, but only their method of doing so. And even here, he concedes that the only reason high economic ideas were so non-mathematical was the total lack of knowledge at the time of how to put economies of scale into a formal model. Likewise, although he is a strong supporter of using models, he critiques the tightly specified models of the ‘50s and beyond and the way economists of that time simply overlooked any ideas difficult to quantify and formally model.
In light of these praises and criticisms, Krugman then offers up a compromise of both schools of thought on modeling. As he explains, in order to pull out the truth of high economic ideas, it is necessary to “do violence to the richness and complexity of the real world in order to produce controlled, silly models that illustrate key concepts.” No model can ever be completely correct. This is simply a fact with which economists must come to grips. As long as a “silly,” simplified model can demonstrate some basic truths, it is worthwhile. As we see in the article, the rigorous model of the Big Push Theory still produces the same conclusions as high economic theory without models did. The important thing is that models are created initially. Once this occurs, such models can be tested and then improved, no matter how much they simplify the complexities of reality. It is much easier to go out into the real world and explore the accuracy of a model than to explore the veracity of a purely verbal argument. Economic theory is constantly being modified and updated, just as high economic theory has now been reconciled to appropriate modeling that can be accepted into mainstream economics.
In the "Fall and Raise of Development Economics", Paul Krugman offers a "meditation on economic methodology". He does so by reviewing the history of development economics and providing the example of the "Big Push". Krugman's main point revolves about the idea that economic models serve to provide good insight and understanding of a larger and more complex system. He goes on to provide an example of an economic model. Krugman described the Rosenstein Rodan Effect or the Big Push. As Krugman argues, this model provides useful insight on the pros and cons of simultaneous or coordinated industrialization versus individual and uncoordinated industrialization. Economists like Acemoglu and Robinson might argue that this is not a good depiction of development because it does not account for "political losers"; however, as Krugman said, "economic theory is a collection of models" or following his example of the weather, the only complete model is the system itself.
I found reading this paper extremely gratifying for several reasons; but mainly because today, the importance of economic models are being questioned everywhere. GDSE Models failed at predicting the market meltdown. Therefore, people started to question what are economists doing. Jonathan Schlefer wrote "The Assumptions Economists Make", in there he reproaches at economist for trying to create economic models that are too simple. However, I think that Krugman's point here will help him understand that the most simple model may provide valuable insight to the bigger picture and save economists a whole lot of time.
First, let me just say that it’s a nice break to read an economics paper written in such a conversational style. I could almost see this in condensed form as one of Krugman’s New York Times columns, minus the equations and graphs. With his own metaphors and comparisons, he lays out the history of “high development theory,” from its roots to its current state. The insights he provides in the paper are mostly a collection of interesting thoughts and then a little advice on how economics should be done. He spends most of the paper defending “high development theory” as brilliant but tragically misguided in its early days because its advocates engaged in what Professor Goldsmith would call “musing.”
Hirschman and his “high development theory” comrades bucked the mainstream trend toward specific mathematical models and instead argued their ideas verbally and with metaphors. Krugman uses his own metaphors to explain why this led to their downfall, comparing their fall and rise to the evolution of ignorance in maps of Africa. The reason for their rejection of formalized models, besides the lack of necessary background models such as one for economies of scale, seems to be an unwillingness to simplify our complex world. Krugman says that such simplification would naturally seem silly to an economist focused on the intricacies of life. But you’ve got to start somewhere. Just like we all had to start with ECON 101 and a bunch of assumptions that make no sense in the real world, so does a new economic theory have to start with a simple model and add nuances from there.
Krugman is clear that he thinks models are the foundation of economic theory, but he qualifies this by saying they can create blind spots. An economist loses something in the paring down of reality into something manageable. What then needs to happen is an acknowledgement of a model’s limitations, an honest discussion of the assumptions made, and then any ideas that cannot be incorporated into the model should be marked for later review, instead of dismissed outright. Krugman takes “high development theory” and reviews it, successfully explaining it through a formal model, something early advocates of the theory refused to do.
In connection with themes that we have been discussing in class the past several weeks, Paul Krugman takes a look at how development economics has tried to fit in with the greater field of economics and makes a comment on the general methodology of economics through this. As we started off discussing in the beginning of class, when looking at low-income countries there are many more complexities than we are used to when looking at high-income countries. To some extent, it seems hard to identify the typical formal models economists have developed to explain how rational individuals act. For example, when we examined the “Economic Lives of the Poor” we saw that households spend little money saving and accumulating capital, even though in high-income countries it is easy to see the relationship between investing in capital and higher incomes, and it easy to model that though a simple production function.
Krugman argues that development economics was generally discredited for these reasons. Development economists, Hirschman for example, could not put simple models to their ideas at a time when mathematical models were taking over. Economics has tried to position itself on the top of the social sciences pyramid by relying heavily on data and statistical analysis, at the loss of some common sense ideas because they can not be proven with models and science. He offers the great analogy of the mapping of Africa, where attention to verifiable detail created a lose of previously valuable information. Krugman however believes that the reliance on models is basically right and tries to bridge the two ways of thinking by applying a simple model to the Big Push theory that shows there is still more to be learned from the high development theory.
Overall, Krugman highlights the difficulties of using typical models to understand development. Important factors, such as institutions, are just hard to quantify and test. However, he shows that it can be done, even through models. Since the 1990’s, other economists have been able to take a look at these ideas and apply some form of models. For example, in the Economics of Social Institutions class, we looked at paper that was able to look at the relationship between common versus civil law and its effect on economic growth. Thanks to these new methods, Krugman believes we can take advantage of old literature and avoid the intellectual waste that happened to development economics in the 60’s-80’s.
I think Krugman does an excellent job in this paper of articulating the pros and cons of traditional economic thinking and highlighting the benefits of simplifying models in high development theory. Krugman begins by reviewing the history of development economics and sighting some of the reasons why the field has been repeatedly discounted. Krugman explains that while the application of models in economics is useful and necessary many economists become bogged down in scrutinizing endless data and mathematical reasoning. He employs the example of the European mapping of Africa to illustrate the danger of overlooking important information when one continually focuses on small details.
I also found Krugman's analysis of how one should examine models to be very insightful. He immediately points out that when using a model we have to remember that we are attempting to understand a much larger system through what may seem to be a very rudimentary and flawed equation. But despite the seemingly apparent shortcomings of our model we should not let that get in the way of what our model reveals about the larger and more complex system we are attempting to understand. This is one of Krugman's main points about development economics as a whole; that by simplifying our model and disregarding some mainstays of traditional economics we can develop a sound model. Furthermore, we can develop a model that does not imply absolute certainty but rather one that encourages us to go out and start measuring.
Krugman certainly presents a more accessible view of the study of economics than is traditionally found. He faults economists for continually trying to one up the other and further complicate models in an attempt to find a model or a theory that can be universally applied. And at the same time he recognizes the importances of formal models in the study of economics. Krugman attempts to depict the middle ground between traditional economic theory and the more loosely based ideas of Myrdal and Hirschman. In doing so he really highlights the advantages of economic development theory and offers a reason for the intellectual waste of past years. He shows that while a model such as the "Big Push" may seem so simple it should not be over looked for that reason. I believe Krugman succeeds in reminding economists the the world does not operate with specific rules and regulations and models that make people ask questions and experiment in the real world may be beneficial to the study of economics.
The most interesting takeaway from Paul Krugman's article,"The Fall and Rise of Development Economics", has little to do with Albert Hirshman's "High Development". While Krugman does acknowledge that the Krugman's supporting model illustrates several key points about the relationship between mainstream economics and high development theory, he stays sharply away from deeper analysis. Rather, the article paints an interesting history of the transformation of the principles and ideals in which economists used to evaluate different economies theories through the 20th century. The imperfect model used to support High Development, is used a standard of sorts- to demonstrate the increasingly quantitative requirements of economics.
Krugman notes that theories such as "High Development", could have used its "muscular pragmatism" to eluded critics in the early 20th century. Here, he argues- simple methodology suffices in place of mathematical assertions; in a sense, practicality trumps science. This is exemplified through the support of various development growth models, arising after the second World War, that asserted large capital injections is that was needed to invigorate developing nations. Similar to "High Development", they relied on simplified models with basic assumptions- such as all countries were equipped with proper political and economic institutions to convert capital into gross economic output.
In the 1970's quantitative methods grew increasingly necessary as a foundation to support economic theories. It was this in era, unfortunately, that Hirshman's "High Development" began to grow increasingly irrelevant. Economics transitioned from a broad social science into overwhelmingly quantitative study. Today, Krugman notes, Hirshman theory is viewed as practically meaningless by modern economists- solely because it lacked the complex models necessary to support its ideas. At this point, he rescues the theory in citing that "the relationship between good economic analysis and successful policy is far weaker than we like to imagine." He then goes on to the provide significant support for Krugman's theory- ultimately in doing so, reveals a subtle truism. Historical standards, not only causation, seems to be circular in nature.
Krugman is awfully sassy in this article and I like it. Very early in the paper, when he claims that Hirschman’s Strategy of Economic Development was “not helpful to development economics,” it’s clear that he has no problem taking a bold stance towards the issues he plans to address within the article. Every time he acknowledges how intelligent these development economists are but harps on the fact that they really messed up by not following the trends of the times and formally modeling their theories, he’s takes on a very condescending tone. He approaches the economists behind high development theory in a very “bless their hearts” sort of way, which definitely makes for an interesting read. Like Krugman, I believe that a focus on models is basically right. I think that there is something pretty powerful about a complete and undeniable mathematical proof. That might just be me being a math nerd, but I think it’s amazing that proofs from hundreds of years ago still hold true today, no matter how much we have learned since then. However, because Economics is a social science, albeit a unique one for being so dependent on numerical examples and mathematical models as he points out, we will never get a perfect proof as we do in math. But wouldn’t striving towards something that is timeless be desirable? At the same time though, he does balance his argument by acknowledging the shortcomings of mathematical models, most notably in terms of the over-simplicity and great assumptions they require. These shortcomings represent somewhat of a necessary evil to him though in that their potential negative effects are far outweighed by the positive effects of a good model. He seems a little defeated in his conclusion as he notes that he wishes things “had played out differently,” but I don’t think such a pessimistic view is necessary. As the two sides of this issue he addresses continue to converge and learn from each other, the study of economics will continue to evolve productively!
"Modernization breeds modernization": a quote that Krugman uses to describe high development theory. However, as he notes, it's not always that simple. True modernization and high development theory can lead to self-reinforcing growth, but it can also lead to stagnation if not a period of regression. Krugman uses the African maps metaphor as a great example of how even in a time where there was improved technique and technology, map-making for Africa actually regressed. As the coastline was mapped out with more accuracy, the interior of the continent became blank losing it's rivers and descriptions. This parallels economics because for a time there was a great deal of fuzziness when it came to development economics, especially between the 1940s and 1970s. This rise in standards and logic actually led to a time of unwillingness to confront new understandings of certain things.
Krugman also devotes a large portion of this paper to economies of scale, which is definitely a barrier when it comes to development economics. But the particular barrier that Krugman discusses is the actual model itself of economies of scale: one that no one knew how to put into formal models. Thus bringing up the argument as to why a loose model would not suffice, and the question as to why economists don't like loose models. So the "Big Push" model is used as an example of a good formal model; it takes into account resources, technology, demand, and market structure to model high development theory. The model provides a way to tell high development-style stories and show the logic in a simplified setting. Thus I believe it paves the way for furthering development by having a model to use to display information and come to conclusions quicker than by just a verbal exposition.
In "The Rise and Fall of Development Economics", Paul Krugman discusses two central ideas relating to the growth and then essential disappearance of development economics over the past decades. First, Krugman seeks to inform the reader about the history of development economics. He does this by utilizing examples from Rosenstein Rodan and Hirschman. Both Rodan and Hirschman developed central ideas to development theory, even though they had conflicting ideas. The growth of this high development theory took place in the mid forties and fifties. Rodan's theory was known as the "Big Push" theory, which championed a push towards growth and investment from many angles, while Hirschman was a proponent of what he called "balanced growth". Balanced growth entailed focusing on a small group of sectors and then balancing the disequilibrium that occurred from these investments. While the growth of high development theory led to different policy recommendations and ideas, as a whole the development theory was moving further from mainstream economics. This is the second central problem that Krugman attacks- why high development theory became seemingly irrelevant to mainstream economists. Krugman argues that it is not because of empirical or ideological reasons, but rather because of a struggle to reconcile methodology. According to Krugman, high development theory does not lend itself to the traditional numbers and models format of traditional economics. As high development theory expanded, economists were struggling to model things like economies of scale. This led to development theory's general disappearance from the field of economics in the late 70s. Overall, I think Krugman is right to question and explore the methodology of economics. While formal modeling is a valuable and concrete tool, the rise and fall of development theory proves that it is not the only way to analyze critical issues. This analyses also speaks to the overlap of development issues with other disciplines such as politics and sociology, and helps us to see the multifaceted issues that development economics deals with.
Krugman’s “The Fall and Rise of Development Economics” focuses on the disappearance of high development theory from the 1950s to the 1970s. The cause of this disappearance was the inability of development economists to put economies of scale into formal models. Assuming economies of scale implies imperfect competition, but only perfect competition could be modeled. As Krugman says, “So development theorists were placed in an awkward bind, with basically sensible ideas that they could not quite express in fully worked-out models” (Krugman 5). Thanks to Rosenstein-Rodan’s Big Push, one can now do a formal model of high development theory.
The formal model for high development style stories helps to nullify assumptions that may or may not be true in reality. For example, according to Krugman, “It is common for those who haven’t tried the exercise of making a model to assert that underdevelopment traps must necessarily result from some complicated set of factors – irrationality or shortsightedness on the part of investors, cultural barriers to change, inadequate capital markets, problems of information and learning and so on” (12). However, according to the model, “a low-level trap can arise with rational entrepreneurs, without so much as a whiff of cultural influences, in a model without capital, and with everyone fully informed” (12).
This break for high development theory from the 1950s to the 1970s possibly caused great strides in the department to be missed out on because of the absence of a model. As a result, economic policy could possibly be in a much better state if high development theory had not been sitting idly for about twenty years. `
In Krugman's analysis of 'high development' in the 1950's, he stays away from a strong critique of the arguments given by Hirshman, instead focusing on the rational behind the distancing between methodology and theoretical ideas that happened during the evolution of development economics. I felt Krugman's overarching argument that models are an imperfect yet necessary component of economic study was strengthened by his ability to portray a fairly unbiased viewpoint. He did an excellent job of illustrating the defects of models - that models "create blind spots" and give us a false feeling of security in any insight gained from their study. At the same time, he pointed out the necessity of models in order to gain specific scientific-based knowledge about the realm of economics. His approach was not only equitable to economist ideas on both sides, but leant more depth to his own argument.
I thought his most interesting point in the article was the 'natural cycle' associated with modeling; that "a temporary evolution of ignorance may be the price of progress". As Krugman pointed out, there was potential for the breakthroughs in development economics to happen twenty five years earlier, and we need to make sure "not to let important ideas slip by just because they haven't been formulated". The balance Krugman advocates is to still consider theoretical ideas even as we focus on building new models.
Krugman’s analysis of the history of development economics, and criticism of Hirschman’s departure from mainstream economics provides several valuable insights. His discussion of the problems associated with methodology in the social sciences I found particularly interesting. He begins by exposing the disconnect between mathematically consistent models and the ineffective application of those models that various economists in the mid-20th century encountered. The result was a departure from traditional model driven study (led by Hirschman) in the field of development to a more intellectual driven study that did not necessitate the use of such models.
I am inclined to agree with Krugman’s criticism due to the parallels he constructs between social science and physical science. Hirschman’s intellectual camp rejected model-based economic study because it did not reflect reality with respect to development. However, this is not necessarily grounds to discount the utility of models. Many advances in the physical sciences are the direct result of simplistic experiments such as Krugman’s dish-pan example. Such experiments provide the foundation for future work in the respective field, and without a solid and quantifiable foundation, it is immensely difficult to advance future theory because the initial assumptions are automatically questioned. I am not suggesting that models are the only means through which a field should be advanced. However, they should not be excluded from a field of study in favor of intellectual discussion that lacks quantifiable substance.
Economics is an ambiguous, complex system. High development theory had a rough time making its way into the structure of economics. It was a viable theory regarding developmental economics but could not be applied because there were not models relevant to the theory. Models were difficult to construct due to the uncertainty regarding economies of scale and the problem of dealing with market structure; however, Lewis’s Surplus Labor model helped explain the High development theory. This way the theory could be understood and not so ambiguous. A model is necessary in order to explain a theory and allow it to be analyzed, judged and critiqued. The model presented proved that self-reinforcing growth works. I would argue that the high development theory has not, in effect, died out. I think it is taking a respite inside of Field’s three Dualistic Development approaches. It is essential that the relationship between the modern and traditional sectors of an economy be investigated, analyzed and discussed. This is the source of inequality inside a society which is a root of the intense poverty found through out the world. Models must be constructed and debated in order to come up with new plausible options to eradicate world poverty. I enjoyed the way in which this paper was written and the authors approach on demonstrating his opinion and informing his audience. He made bold statements respectfully and posed intriguing questions to further thought and discussion. There were many aspects of this paper with which I was completely unfamiliar and he explained and theorized them in a understandable and comprehensive way.
There is a certain way of writing about economics that can only be done by Paul Krugman. Sometimes it consists of everyday metaphors, other times it sounds more like an English class essay than an Econ one. Either way, he offers a refreshing sense of clarity and lucidity that articulates the intellectual message in an almost conversational way. His connection between the physical and social sciences, for example, offers a compelling argument for the need to reassess basic perceptions and models even in the more advanced stages of theory. Sometimes that need for reassessment is even more necessary in advanced stages, for it ensures that the foundation of the social study — or econ model — is sound.
Krugman's comparison to the dish pan from a weather experiment offers a compelling argument for the need to reconsider economic theories such as the high development theory. He suggests that one cause for the decline was "an unwillingness to confront those areas the new technical rigor could not yet reach." In the absence of a serious appreciation for the past principles and amidst an intrigue with more modern thoughts, the principles, in effect, of high development theory were disregarded. The cost of this dismissal is decades of work that attempts to redefine, or replace in some capacity, the original beliefs in high development theory, while the economists end up returning to that principle in the more recent past. As Krugman describes it in a surprisingly poetic tone for an economist, "Good ideas were left to gather dust in the economics attic for more than a generation; great minds retreated to the intellectual periphery."
As several other students mentioned, Krugman concludes with the lamentation that perhaps an increase in ignorance is the cost of progress. Another lesson from Krugman's piece is the fact that foundational beliefs, whether you agree with them or not, cannot be dismissed in the grand scheme of progress.
Krugman's analysis of the history of thought in development economics is fascinating. I thoroughly enjoyed his analogy in comparing this history of thought to the evolution of mapping in Africa. This analogy is a clear representation of the dilemma of focusing too much on the specific details of a study to the point where we can lose some of the bigger picture, as was the case in the mapping of interior Africa.
Krugman seems to be arguing that neither approach- focusing on detail vs. a bigger picture- is wrong, but he rather points out the limitations of each. In focusing too much on the specific detail, we may lose out on some valuable insight, such as that of Hirschman. Conversely, however, if we focus too much on the bigger picture and ignore the rigorous details of modeling, there is little room to continue to expand and evolve our collective economic knowledge. This is why, he argues, there was so much stagnation in the field of development economics during the middle of the 20th century. It is what he so brilliantly refers to as the "evolution of ignorance." It seems as though Krugman believes that the best way to progress our collective knowledge in the field of economics is to recognize the value of both the broad and narrow ways of thinking and look for ways in which we can combine the two rather than rejecting one in favor of another, as Hirschman, along with so many other economists of the era, did.
Krugman’s explanations of the need for modeling and the deficiencies of theories without modeling made for an insightful read. The lines that defined the banter about modeling came shortly after his discussion on mapping Africa. They read: “Between the 1940s and the 1970s something similar happened to economics. A rise in the standards of rigor and logic led to a much improved level of understanding of some things…” I agree with Krugman’s implication that this is a good thing because even if you lose the ability to explain some things with formal models, as the wealth of data increases and economists further the field one can refine and restructure models to explain much more complex ideas… it has to start somewhere, not just in metaphors. Even though these simplifications cannot express reality, they provide great analytical approaches to problems and thus I agree that strict modeling is important when trying to describe fundamentals of growth. One aside, I found it entertaining when Krugman points out the harshest critics of economic models are often politically motivated.
Now I’ll turn to High Development Theory. As stated in the article, this theory rests on the assumption of economies of scale. It assumes that the traditional sector pays lower wages than the modern sector and therefore the modern sector has a near unlimited supply of labor while the traditional sector is on the margin. Thus a big investment in the modern sector can yield economies of scale and then growth is self sustaining as the populace has more income, purchases more goods and the profits are re-invested in capital. This all depends on one critical assumption that often is not true, that sizeable markets exist for the goods produced by large investments. This is where the theory falls apart. There is no guarantee that any given firm will have a sizeable market, even with exports because there has to be sufficient quality. Having sufficient quality can be extremely hard as a firm or country starts.
Krugman’s paper is very straightforward and allows the reader to understand the main concepts. In this paper the two main themes are the history of development economics and the ideas in the ‘High Development Theory” and the second theme is the problem of method in the social sciences. The paper is explained through a story, which allows the reader to understand Krugmans’s message without an abundance of models.
First Krugman analyzes the “High Development Theory”, and focuses on the methods and ideas that were created during the growth of development economics. I enjoyed how Krugman decided to highlight the distance between the methodology and theories, and agree with his statements that models are flawed, but a necessary piece of economic studies and policies. Krugman illustrates the disconnect between theories/models and their application outcome through the “High Development Theory”. The “High Development Theory” is two distinctive parts: the two fundamental parts are economies of scale and the size of the market. In order to make this movement from traditional to modern the economies need to be at scale, but also the markets need to be large enough. However as Krugman says the theory falls apart when the requirement of large markets are in reality lacking to make investments.
The paper is very insightful and offers many ideas, I particularly enjoyed and agree with Krugman that people can contribute theories and that they can be over simplified, however their importance lies with the questions they can generate. I also believe that models are just that models and they can offer insight and potential outcomes, but often times become so engrained they obscure the real answers. Models have a tough time representing the real world because they are just models and can be manipulated and cannot account for many factors.
This paper, as Krugman points out at the beginning of the paper, is about the strange evolution path of development economics, and economic methodology as a whole. Krugman presents his opinions in a very non-traditional way in this economics paper.
First, concerning the subject of development economics, Krugman does a good job in explaining what “high development theory” is and points out the two most important factors in the thoery - the economies of scale and the market size. He argues that only when more productive production in the modern sector, which at the same time gives higher salary to workers, matches with a large enough market consisted of higher-paid workers can the economy self-reinforce itself and keep growing. So if everything operates in a larger scale, the system would be able to sustain itself, given the assumption that there’s surplus employment in the traditional sector where excess workers can move to urban when there’re higher paid jobs in modern sector. The story sounds quite legitimate and not that complicated. However, first developed in 1940s, it did not regain its reputation until the 80s or 90s.
This leads to the Krugman’s discussion of social science methodology. The author explores why “high development theory”, which we think makes good sense now, was forgotten for decades and taken place by other musing mainstream theories like Hirschman’s, before “high development theory” was reconsidered and given a fresh look. He thinks that it’s because modeling itself is an effort to simply the reality and many times economists oversimplify things just because they don’t know how to put certain important factors in the model so they forget about it. For example, in the high development theory, it’s hard to formalize economies of scale into a model, and as a result, Myrdal and Hirschman turned to the model-oriented mainstream and left that idea in the air.
What strikes me the most in this paper is the “African map story”, or termed the evolution of ignorance speaking of social science in general. Subjective as it is, the subject of economics can diversify in such different directions that no one agrees with each other because everyone has their models that make perfect sense to themselves. But as Krugman says in the paper, “the cycle of knowledge lost before it can be regained seems to be an inevitable part of formal model-building”.
The same problem that Krugman discusses "musings vs models" is often discussed in philosophy. Often the intuition on certain ideas and philosophers far surpasses our ability to logically explain morality or correct human action. Immanual Kant's "Critique of Pure Reason" is one of the best attempts by a philosopher to model certain philosophical ideas but these models are not sufficient to cover all questions and concerns in any given model. The fact remains that models rely on assumptions that are very infrequently full filled. Several hedge funds mix model investing strategies with strategies that rely on intuition by brilliant investors such as Paul Tudor Jones.
While its true that models evolve who can say if models are the final solution to understanding economics. Deeply intuitive people like Hirshman are needed for practical applications of economic theory. Maybe there are times when all we can do is leave policy choices to the remarkable individuals with an insight into issues that models can't account for.
It's a shame that an extrodinary amount of emphasis is placed on the necessity of models even in the initiation of a new idea. it has already been shown beyond a shadow of a doubt that creativity, ideas, musing, propel innovation and technology. For example, in class it was mentioned that the CEO of one particular company (IBM?) invites people to simply participate in conversation under observed conditions. The purpose is to capitalize on any profitable ideas that may be mentioned. It is perhaps unlikely for any of these brainstorms to have stemmed from carefully conducted experiments or any other technical means. This is reality.
In retrospective, high development theory (a victim of a model-based science) certainty seems more realistic because it sees producers and suppliers and consumers engaged in imperfect competition rather than in the idealistic perfect competition. Firms are profit-driven and especially in underdeveloped countries, they can manipulate more resources like government cooperation. There are certain conditions that must be in place in order for policy to reflect theory such as sufficient market size to demand the products and the existence of economies of scale in order to encourage migration from the traditional sector to the modern sector. Rather than simplifying the world so that models can be created, the high development theorists tried to account for the conditions that currently exist. Why is it that policy makers accepted the Harrod-Domar model that is unrealistic for underdeveloped countries to achieve, over the Big Push theory that seems much more intuitive?
Krugman takes a counterintuitive approach to thinking about development economics. The background and history of development economics is useful to provide context for where he is coming from. Krugman’s criticism of Hirschman for getting development wrong in "The Strategy of Economic Development" seems harsh, as Hirschman was merely trying to address development in the context of where main stream academic culture was going. While Krugman is quick to criticize the muscular pragmatism Hirschman and Mydral advocated for, empirical evidence and time has shown that the high development model has also failed to be extremely successful. . The fact that there are still underdeveloped countries in 2012 indicates economists are still looking for the answer to development.
ReplyDeleteHirschman’s paper turned away from the economies of scale and positive feedback approach put forth by Rosenstein Rodan’s high development idea in 1943. Krugman argues that Hirschman turned away from high development because of pressures from mainstream economics and an inability to capture economies of scale in models. While Krugman is correct in noting the benefits of high development theory, he ignores the merits of the pragmatic linkages approach Hirschman proposes. Linking industries together in developing countries and between developed and developing countries is an essential part of economic success, which can then lead to social and political development. Thinking about development outside the world of models may have been useful to those like Hirschman who struggled with thinking about development strictly in terms of mathematical arguments and economies of scale.
Krugman accurately notes the complexities of reality and social science. Any model may simply be good if it succeeds in explaining or rationalizing some of what you observe in the world in a way that may not have been anticipated. Any good economist, particularly development economists, must always be cognizant of the fact that models are merely tools to help map reality, rather than reality itself. The Big Push Model is an example of when and how a model can be helpful, even if it appears to be too simple. The model appears simple but produced conclusions that were not obvious to many people, including those specializing in development. Amidst all the analysis of varying approaches to development economics one thing seems clear, there is no easy answer to development economics and no model that captures all variables and works in every development situation; rather over time some models have been developed to assist in our thinking of what contributes to successful development.
I believe that the thesis of Krugman’s paper is initially one of regret: he does his best to reconcile the inspiring ideas of Albert Hirschman and his contemporaries within a more legitimate and widely recognized context of conventional economics. His main objective was to incorporate the main ideas of high development theory, which reigned in the 1940s and 1950s, into the sphere of mainstream economics to better portray their validity. These topics include the ideas of modernization breeding modernization (i.e. the “virtuous circle”), self-reinforcing growth, economies of scale, and dualism. The main issue of high development theory, Krugman explains, is that economies of scale are difficult to introduce in formal economic models.
ReplyDeleteInterestingly, Krugman dives into the complexities and contradictions of the social sciences. He explains the precarious balance between the coveted simplicity of an adaptable model and the complex detail lost through its simplification. For this reason, against the ideals of mainstream economics, development economists such as Hirschman and Myrdal refused to formalize their ideas in models. As admirable as that may have been, Krugman argues, their lack of formal expression caused their insights to die out because they were difficult to adapt and teach. Ultimately, Krugman explains, “there is no alternative to models.” Those who try and avoid models rely on metaphor and other similar techniques, which in themselves are innately models.
Krugman, et. al.’s adaptation of the high development idea of the “Big Push” into a formalized model brings the entire concept into clearer view. As Krugman states, his model “makes one want to go out and start measuring” instead of lulling a reader into a sense of rhetorical reassurance of truthfulness without empirical evidence. It also trims down the idea to its core and avoids the confusing “rich interdisciplinary stew of effects,” allowing the logic of the high development story to be adapted and utilized with more freedom by others in the field. In the end, Krugman’s point that there is no creditable replacement for a well-designed model rings true.
Overall, Krugman does a good job of proving his thesis that although development economics faced difficulties for years about methodization and was behind many other sciences, recent economists have been able to find a place for the high development theory in mainstream economics. The ability to do so came from fitting development economic scenarios into models.
ReplyDeleteKrugman spends a significant portion of the paper discussing the reasons modeling is necessary in not only just economics, but in all social sciences. His reasoning for not supporting Hirschman’s work is because Hirschman relied on metaphorical and thus abstract writing, which was nonetheless convincing and believable at the time. Even before Krugman explains Hirschman’s studies, he traces the path development economics took in order to get to where it is today. Although there are more questions to be asked and few definite solutions to global issues, development economics has come a long way since the 1940s.
Krugman’s main point during this section shows that development economics moved back before it could move forward. With the map of Africa analogy, Krugman stated that more knowledge and improved technique actually led to a loss of accuracy and understanding. The field of mainstream economics was raising its standards and becoming based on models and mathematics more and more. However, the only known models described situations with perfect competition, which would not fit an economy for a developing country where monopolies and oligopolies hold most control through economies of scale. Since the 1970s, though, development economists have gotten around this mathematical dilemma by making assumptions that allow for a model to be built, including breaking down economies to the most basic components. These models allow us to fully see and understand the circular process taking place in developing countries that makes growth difficult and forces them to remain in economic distress.
In the end, Krugman gives an example of a development economic model and explains what we can learn from it. The major aspects to note are that developing economic situations can be broken down into rigid models, the reasoning of developing economic issues can be seen even in a simple setting, conclusions in models are significantly more sensitive than those in metaphorical or written examples, and finally development economic issues must be approached with an open mind because although the answers might seem simple, many mechanisms from the “tool box” must be used.
“It is said that those who can, do, while those who cannot, discuss methodology.” This quote represents many modern-day economist point of view towards modeling. This macho, I can make concepts more complicated than you attitude towards teaching and modeling has most definitely set economics back many years. Krugman echoes this sentiment when he says that the work that Hirschman’s paper could have just as easily been presented in 1989 as 1950. One economist after another has come along and tried to reinvent the wheel. Adding new shifts, curves, models, and most notably, assumptions. Economist should accept the graphs they learn in principles of Micro and Macro and build their theory from there.
ReplyDeleteModeling and methodology have a place in an economics classroom, but it is important to note that the world does not go on in a classroom. Most graphs start with the economist writing down a list of assumptions that include: zero unemployment, perfect information, returns to scale, and a perfectly competitive market. This is a society that does not exist. Most professors I have had say “This model is an unrealistic scenario but it is important to understand the building blocks of economics.” This is a solid point, and should be taught but new economist should stop trying to reinvent the wheel or complicate the model. New economist should build off the building blocks and give their students and readers some new theories after we have established the fundamentals of economics.
I was particularly intrigued by Krugmans’s analysis of the weather-dishpan. Krugman states, ”What did one learn from the dish-pan? It was not telling an entirely true story: the Earth is not flat, air is not water, the real world has oceans and mountain ranges and for that matter two hemispheres. The unrealism of Fultz's model world was dictated by what he was able to or could be bothered to build -- in effect, by the limitations of his modeling technique. Nonetheless, the model did convey a powerful insight into why the weather system behaves the way it does.” This is exactly the way economics should be taught. At a fundamental level, the models should be diagramed for students and readers. Models give us a basic understanding of the principles of an economy. But once the groundwork has been laid it is time for us to explore the oceans and mountain ranges, if you will.
It is not accurate to say that those who cannot model, as if the actual application of the science is not relevant and in some way rudimentary. From my studies this is in fact the opposite of the truth. What happens to wages when prices rise, in a fictional economy, is much easier to understand (black and white) than the theoretical questions asked in the gray world we actually live in. The fictitious modeling world is one with little to no consequences or ramifications. In my opinion, the quote should be “those who cannot graph, those who can, graph, discuss, and theorize."
“The Fall and Rise of Development Economics” describes the evolution of the study of economic development. The early phase of study was characterized by the High Development Theory imbedded in the Rosenstein-Rodan Big Push Model and ended around the time of Hirschman’s “Strategy of Economic Development”. As students of modern day development theory, we must be cautious to denounce the older narrative expressions as being too informal and not mathematically on par with other branches of economics because the generation that followed the Big Push Model did just that in the 1950s.
ReplyDeleteMr. Krugman compares his synopsis of the redemption of economic development theory back into the limelight of society against the evolution of maps of the African continent. African maps dating back to the Middle Ages were filled with details, but naturally all the landscapes were inaccurate and many were untrue, but explorers were able to relate some the geographically information back to European map makers, who were able to construct a rough estimation of the interior and coastline. Centuries of accumulated research allowed the densely populated coastal cities to be extremely critiqued, while interestingly the details from the less observed interior disappeared almost completely. Mr. Krugman notes that in a way Europeans became less informed and more ignorant about Africa than generations previous. The cause of this progressive lack of information was due to the fact that improved standards of map making invalidated prior data from being included in the new maps; eventually however, modern cartography filled out the African interior. Krugman illustrates a similar phenomenon occurring in economic development theory. In the mid 20th century, rising technological and conceptual standards of economic modeling blacked out prior theory that was considered unfounded. This summary describes the fall out of the mainstream of economic development theory prior to the second coming.
This rise occurred in the 1980s when rigorous models appeared, explaining the Big Push Theory in “three pages, two equations, and one diagram”. Murphy, Shleifer, and Vishny were responsible for this reinstatement of development economics into mainstream economics. Their re-engineering of the Big Push was able to reformulate and mathematically model the estimated literature of the original modelers.
The lesson I took away from this reading was that literary approximations of economical models is important, but policy makers are looking for models that they can use to discern appropriate solutions to economic problems. Therefore, the analysis must be applicable to actually be taken seriously in mainstream economic discussion, going beyond the realm of generalizations and observations into the world of observational study and experimentation.
Overall "The Fall and Rise of Development Economics" was very interesting. At first it was tough for me to see where Krugman was going, but as the article unfolded it began to make more sense. I thought it interesting how Krugman compared the map-making of Africa and the dish-pan meteorology example to explain how sometimes models can progressive and regressive at the same time. While one seemingly expands their knowledge in the creation of a model, they also neglect important details that are essential to understanding the greater concept. My only issue with Krugman is that I feel that in a lot of ways you can learn just as much from metaphors as you can from models. He even says that models are a gross simplification of how the world actually works because you leave out crucial details. Why was Hirschman's way of explaining high development theory so inferior? He may have not been able to model his claim but a model that leaves out the role of human and physical capital is still a gross assumption. I understand that the route that economics was taking during Hirschman's era was not aligned with his way of defending ideas, however he was still correct all along, just not for the right reasons. I guess what I'm trying to say is that it is annoying that models are the only way to make a legitimate economic claim because they generally leave out such significant factors. It bothers me that someone as brilliant as Hirschman is essentially left out of history books because he didn't feel that oversimplifying the economy to make a model work correctly was the only way to prove a correct point. Unfortunately for him, that's how the world works.
ReplyDeleteKrugman's "The Fall and Rise of Development Economics" echoes some very similar ideas to a paper I read for Macro Theory last week, "Hip Heterodoxy" by Christopher Hayes. Both papers examine the conflict of trying to fit creative economic theories into a formalized model. Unlike Hayes who leans mostly towards the more "radical" economists, Krugman takes a middle of the road approach by acknowledging that models can hinder new theories and research but that "the insistence on modeling is basically right". I found it refreshing that Krugman chose to examine both sides of the argument and critiqued the expectations that surround modeling. By using the global weather system as an example, Krugman conveys that any model is "to some degree a falsification". Nothing can be an exact replica of reality, and acknowledging that fact puts formalized models into perspective. As we've discussed in class, models provide insights, not answers. Accepting this means we can step beyond the literal representation of a model and extrapolate likely outcomes and policy applications in the real world.
ReplyDeleteKrugman puts a large emphasis on a supposed loss of knowledge during the evolution of ignorance and its effect on development economics. Personally, I felt that he was harping way too much about lost decades when economists had to narrow their frameworks and tools in order to fit into classical models. He himself says that "models are maps" so my take on those decades in the dark is that there was no road to allow economists to reach the broader horizon and it took a few years to establish the infrastructure to get beyond their limited scope. Once they did, however, an economical renaissance occurred. One matter not addressed by Krugman in terms of economic ignorance is whether or not this is a cyclical trend. Was the time from 1940-1970 the only age of ignorance or are we due for another installment sometime in the future? According to Krugman this would be the worst thing that could happen. He makes a bold claim that we will never know to what extent development economics could have flourished if not for those dark decades where “great minds retreated to the intellectual periphery”. This is a bold claim. It is here that he reconnects with Hayes, but in an opposing manner. Hayes recounts an economics symposium where the neoclassical economists are showered with fanfare where as those that are deemed “radicals” that stray away from classical models. Hayes represents these radicals as the future of economic progress. However, Krugman pleads for those who want to deviate from formal modeling to reconsider and stick to the norm. While those that deviate are often brought back into the fold after failing to provide adequate framework for their visions, I believe their breaking off, while it may cripple development economics’ growth in the short run, provides applicable insights into how the formalized tools and frameworks can evolve in the long run. I feel there is trade off between steady long run evolution and a fall and rapid rise progression. Ultimately, I think we end up in the same place.
In “The Fall and Rise of Development Economics,” Krugman presents an interesting story of economic theory over the 20th century. His focus is on two themes: a set of ideas that seeks to explain what development is about and that he has coined “high development theory,” and the issue of methodology within the field of economics. Although there are certainly plenty of critical aspects to his writing, his paper does not solely serve as a critique. He critiques and applauds both high development theory and the emphasis on models prevalent beginning in the 1950s. He criticizes the lack of any empirical proof or modeling in high economics, but applauds the sense of high economics arguments. He does not dismiss the ideas of high economic writers, but only their method of doing so. And even here, he concedes that the only reason high economic ideas were so non-mathematical was the total lack of knowledge at the time of how to put economies of scale into a formal model. Likewise, although he is a strong supporter of using models, he critiques the tightly specified models of the ‘50s and beyond and the way economists of that time simply overlooked any ideas difficult to quantify and formally model.
ReplyDeleteIn light of these praises and criticisms, Krugman then offers up a compromise of both schools of thought on modeling. As he explains, in order to pull out the truth of high economic ideas, it is necessary to “do violence to the richness and complexity of the real world in order to produce controlled, silly models that illustrate key concepts.” No model can ever be completely correct. This is simply a fact with which economists must come to grips. As long as a “silly,” simplified model can demonstrate some basic truths, it is worthwhile. As we see in the article, the rigorous model of the Big Push Theory still produces the same conclusions as high economic theory without models did. The important thing is that models are created initially. Once this occurs, such models can be tested and then improved, no matter how much they simplify the complexities of reality. It is much easier to go out into the real world and explore the accuracy of a model than to explore the veracity of a purely verbal argument. Economic theory is constantly being modified and updated, just as high economic theory has now been reconciled to appropriate modeling that can be accepted into mainstream economics.
In the "Fall and Raise of Development Economics", Paul Krugman offers a "meditation on economic methodology". He does so by reviewing the history of development economics and providing the example of the "Big Push". Krugman's main point revolves about the idea that economic models serve to provide good insight and understanding of a larger and more complex system. He goes on to provide an example of an economic model. Krugman described the Rosenstein Rodan Effect or the Big Push. As Krugman argues, this model provides useful insight on the pros and cons of simultaneous or coordinated industrialization versus individual and uncoordinated industrialization. Economists like Acemoglu and Robinson might argue that this is not a good depiction of development because it does not account for "political losers"; however, as Krugman said, "economic theory is a collection of models" or following his example of the weather, the only complete model is the system itself.
ReplyDeleteI found reading this paper extremely gratifying for several reasons; but mainly because today, the importance of economic models are being questioned everywhere. GDSE Models failed at predicting the market meltdown. Therefore, people started to question what are economists doing. Jonathan Schlefer wrote "The Assumptions Economists Make", in there he reproaches at economist for trying to create economic models that are too simple. However, I think that Krugman's point here will help him understand that the most simple model may provide valuable insight to the bigger picture and save economists a whole lot of time.
First, let me just say that it’s a nice break to read an economics paper written in such a conversational style. I could almost see this in condensed form as one of Krugman’s New York Times columns, minus the equations and graphs. With his own metaphors and comparisons, he lays out the history of “high development theory,” from its roots to its current state. The insights he provides in the paper are mostly a collection of interesting thoughts and then a little advice on how economics should be done. He spends most of the paper defending “high development theory” as brilliant but tragically misguided in its early days because its advocates engaged in what Professor Goldsmith would call “musing.”
ReplyDeleteHirschman and his “high development theory” comrades bucked the mainstream trend toward specific mathematical models and instead argued their ideas verbally and with metaphors. Krugman uses his own metaphors to explain why this led to their downfall, comparing their fall and rise to the evolution of ignorance in maps of Africa. The reason for their rejection of formalized models, besides the lack of necessary background models such as one for economies of scale, seems to be an unwillingness to simplify our complex world. Krugman says that such simplification would naturally seem silly to an economist focused on the intricacies of life. But you’ve got to start somewhere. Just like we all had to start with ECON 101 and a bunch of assumptions that make no sense in the real world, so does a new economic theory have to start with a simple model and add nuances from there.
Krugman is clear that he thinks models are the foundation of economic theory, but he qualifies this by saying they can create blind spots. An economist loses something in the paring down of reality into something manageable. What then needs to happen is an acknowledgement of a model’s limitations, an honest discussion of the assumptions made, and then any ideas that cannot be incorporated into the model should be marked for later review, instead of dismissed outright. Krugman takes “high development theory” and reviews it, successfully explaining it through a formal model, something early advocates of the theory refused to do.
In connection with themes that we have been discussing in class the past several weeks, Paul Krugman takes a look at how development economics has tried to fit in with the greater field of economics and makes a comment on the general methodology of economics through this. As we started off discussing in the beginning of class, when looking at low-income countries there are many more complexities than we are used to when looking at high-income countries. To some extent, it seems hard to identify the typical formal models economists have developed to explain how rational individuals act. For example, when we examined the “Economic Lives of the Poor” we saw that households spend little money saving and accumulating capital, even though in high-income countries it is easy to see the relationship between investing in capital and higher incomes, and it easy to model that though a simple production function.
ReplyDeleteKrugman argues that development economics was generally discredited for these reasons. Development economists, Hirschman for example, could not put simple models to their ideas at a time when mathematical models were taking over. Economics has tried to position itself on the top of the social sciences pyramid by relying heavily on data and statistical analysis, at the loss of some common sense ideas because they can not be proven with models and science. He offers the great analogy of the mapping of Africa, where attention to verifiable detail created a lose of previously valuable information. Krugman however believes that the reliance on models is basically right and tries to bridge the two ways of thinking by applying a simple model to the Big Push theory that shows there is still more to be learned from the high development theory.
Overall, Krugman highlights the difficulties of using typical models to understand development. Important factors, such as institutions, are just hard to quantify and test. However, he shows that it can be done, even through models. Since the 1990’s, other economists have been able to take a look at these ideas and apply some form of models. For example, in the Economics of Social Institutions class, we looked at paper that was able to look at the relationship between common versus civil law and its effect on economic growth. Thanks to these new methods, Krugman believes we can take advantage of old literature and avoid the intellectual waste that happened to development economics in the 60’s-80’s.
I think Krugman does an excellent job in this paper of articulating the pros and cons of traditional economic thinking and highlighting the benefits of simplifying models in high development theory. Krugman begins by reviewing the history of development economics and sighting some of the reasons why the field has been repeatedly discounted. Krugman explains that while the application of models in economics is useful and necessary many economists become bogged down in scrutinizing endless data and mathematical reasoning. He employs the example of the European mapping of Africa to illustrate the danger of overlooking important information when one continually focuses on small details.
ReplyDeleteI also found Krugman's analysis of how one should examine models to be very insightful. He immediately points out that when using a model we have to remember that we are attempting to understand a much larger system through what may seem to be a very rudimentary and flawed equation. But despite the seemingly apparent shortcomings of our model we should not let that get in the way of what our model reveals about the larger and more complex system we are attempting to understand. This is one of Krugman's main points about development economics as a whole; that by simplifying our model and disregarding some mainstays of traditional economics we can develop a sound model. Furthermore, we can develop a model that does not imply absolute certainty but rather one that encourages us to go out and start measuring.
Krugman certainly presents a more accessible view of the study of economics than is traditionally found. He faults economists for continually trying to one up the other and further complicate models in an attempt to find a model or a theory that can be universally applied. And at the same time he recognizes the importances of formal models in the study of economics. Krugman attempts to depict the middle ground between traditional economic theory and the more loosely based ideas of Myrdal and Hirschman. In doing so he really highlights the advantages of economic development theory and offers a reason for the intellectual waste of past years. He shows that while a model such as the "Big Push" may seem so simple it should not be over looked for that reason. I believe Krugman succeeds in reminding economists the the world does not operate with specific rules and regulations and models that make people ask questions and experiment in the real world may be beneficial to the study of economics.
The most interesting takeaway from Paul Krugman's article,"The Fall and Rise of Development Economics", has little to do with Albert Hirshman's "High Development". While Krugman does acknowledge that the Krugman's supporting model illustrates several key points about the relationship between mainstream economics and high development theory, he stays sharply away from deeper analysis. Rather, the article paints an interesting history of the transformation of the principles and ideals in which economists used to evaluate different economies theories through the 20th century. The imperfect model used to support High Development, is used a standard of sorts- to demonstrate the increasingly quantitative requirements of economics.
ReplyDeleteKrugman notes that theories such as "High Development", could have used its "muscular pragmatism" to eluded critics in the early 20th century. Here, he argues- simple methodology suffices in place of mathematical assertions; in a sense, practicality trumps science. This is exemplified through the support of various development growth models, arising after the second World War, that asserted large capital injections is that was needed to invigorate developing nations. Similar to "High Development", they relied on simplified models with basic assumptions- such as all countries were equipped with proper political and economic institutions to convert capital into gross economic output.
In the 1970's quantitative methods grew increasingly necessary as a foundation to support economic theories. It was this in era, unfortunately, that Hirshman's "High Development" began to grow increasingly irrelevant. Economics transitioned from a broad social science into overwhelmingly quantitative study. Today, Krugman notes, Hirshman theory is viewed as practically meaningless by modern economists- solely because it lacked the complex models necessary to support its ideas. At this point, he rescues the theory in citing that "the relationship between good economic analysis and successful policy is far weaker than we like to imagine." He then goes on to the provide significant support for Krugman's theory- ultimately in doing so, reveals a subtle truism. Historical standards, not only causation, seems to be circular in nature.
Krugman is awfully sassy in this article and I like it. Very early in the paper, when he claims that Hirschman’s Strategy of Economic Development was “not helpful to development economics,” it’s clear that he has no problem taking a bold stance towards the issues he plans to address within the article. Every time he acknowledges how intelligent these development economists are but harps on the fact that they really messed up by not following the trends of the times and formally modeling their theories, he’s takes on a very condescending tone. He approaches the economists behind high development theory in a very “bless their hearts” sort of way, which definitely makes for an interesting read. Like Krugman, I believe that a focus on models is basically right. I think that there is something pretty powerful about a complete and undeniable mathematical proof. That might just be me being a math nerd, but I think it’s amazing that proofs from hundreds of years ago still hold true today, no matter how much we have learned since then. However, because Economics is a social science, albeit a unique one for being so dependent on numerical examples and mathematical models as he points out, we will never get a perfect proof as we do in math. But wouldn’t striving towards something that is timeless be desirable? At the same time though, he does balance his argument by acknowledging the shortcomings of mathematical models, most notably in terms of the over-simplicity and great assumptions they require. These shortcomings represent somewhat of a necessary evil to him though in that their potential negative effects are far outweighed by the positive effects of a good model. He seems a little defeated in his conclusion as he notes that he wishes things “had played out differently,” but I don’t think such a pessimistic view is necessary. As the two sides of this issue he addresses continue to converge and learn from each other, the study of economics will continue to evolve productively!
ReplyDelete"Modernization breeds modernization": a quote that Krugman uses to describe high development theory. However, as he notes, it's not always that simple. True modernization and high development theory can lead to self-reinforcing growth, but it can also lead to stagnation if not a period of regression. Krugman uses the African maps metaphor as a great example of how even in a time where there was improved technique and technology, map-making for Africa actually regressed. As the coastline was mapped out with more accuracy, the interior of the continent became blank losing it's rivers and descriptions. This parallels economics because for a time there was a great deal of fuzziness when it came to development economics, especially between the 1940s and 1970s. This rise in standards and logic actually led to a time of unwillingness to confront new understandings of certain things.
ReplyDeleteKrugman also devotes a large portion of this paper to economies of scale, which is definitely a barrier when it comes to development economics. But the particular barrier that Krugman discusses is the actual model itself of economies of scale: one that no one knew how to put into formal models. Thus bringing up the argument as to why a loose model would not suffice, and the question as to why economists don't like loose models. So the "Big Push" model is used as an example of a good formal model; it takes into account resources, technology, demand, and market structure to model high development theory. The model provides a way to tell high development-style stories and show the logic in a simplified setting. Thus I believe it paves the way for furthering development by having a model to use to display information and come to conclusions quicker than by just a verbal exposition.
In "The Rise and Fall of Development Economics", Paul Krugman discusses two central ideas relating to the growth and then essential disappearance of development economics over the past decades. First, Krugman seeks to inform the reader about the history of development economics. He does this by utilizing examples from Rosenstein Rodan and Hirschman. Both Rodan and Hirschman developed central ideas to development theory, even though they had conflicting ideas. The growth of this high development theory took place in the mid forties and fifties. Rodan's theory was known as the "Big Push" theory, which championed a push towards growth and investment from many angles, while Hirschman was a proponent of what he called "balanced growth". Balanced growth entailed focusing on a small group of sectors and then balancing the disequilibrium that occurred from these investments. While the growth of high development theory led to different policy recommendations and ideas, as a whole the development theory was moving further from mainstream economics. This is the second central problem that Krugman attacks- why high development theory became seemingly irrelevant to mainstream economists.
ReplyDeleteKrugman argues that it is not because of empirical or ideological reasons, but rather because of a struggle to reconcile methodology. According to Krugman, high development theory does not lend itself to the traditional numbers and models format of traditional economics. As high development theory expanded, economists were struggling to model things like economies of scale. This led to development theory's general disappearance from the field of economics in the late 70s. Overall, I think Krugman is right to question and explore the methodology of economics. While formal modeling is a valuable and concrete tool, the rise and fall of development theory proves that it is not the only way to analyze critical issues. This analyses also speaks to the overlap of development issues with other disciplines such as politics and sociology, and helps us to see the multifaceted issues that development economics deals with.
Krugman’s “The Fall and Rise of Development Economics” focuses on the disappearance of high development theory from the 1950s to the 1970s. The cause of this disappearance was the inability of development economists to put economies of scale into formal models. Assuming economies of scale implies imperfect competition, but only perfect competition could be modeled. As Krugman says, “So development theorists were placed in an awkward bind, with basically sensible ideas that they could not quite express in fully worked-out models” (Krugman 5). Thanks to Rosenstein-Rodan’s Big Push, one can now do a formal model of high development theory.
ReplyDeleteThe formal model for high development style stories helps to nullify assumptions that may or may not be true in reality. For example, according to Krugman, “It is common for those who haven’t tried the exercise of making a model to assert that underdevelopment traps must necessarily result from some complicated set of factors – irrationality or shortsightedness on the part of investors, cultural barriers to change, inadequate capital markets, problems of information and learning and so on” (12). However, according to the model, “a low-level trap can arise with rational entrepreneurs, without so much as a whiff of cultural influences, in a model without capital, and with everyone fully informed” (12).
This break for high development theory from the 1950s to the 1970s possibly caused great strides in the department to be missed out on because of the absence of a model. As a result, economic policy could possibly be in a much better state if high development theory had not been sitting idly for about twenty years.
`
In Krugman's analysis of 'high development' in the 1950's, he stays away from a strong critique of the arguments given by Hirshman, instead focusing on the rational behind the distancing between methodology and theoretical ideas that happened during the evolution of development economics. I felt Krugman's overarching argument that models are an imperfect yet necessary component of economic study was strengthened by his ability to portray a fairly unbiased viewpoint. He did an excellent job of illustrating the defects of models - that models "create blind spots" and give us a false feeling of security in any insight gained from their study. At the same time, he pointed out the necessity of models in order to gain specific scientific-based knowledge about the realm of economics. His approach was not only equitable to economist ideas on both sides, but leant more depth to his own argument.
ReplyDeleteI thought his most interesting point in the article was the 'natural cycle' associated with modeling; that "a temporary evolution of ignorance may be the price of progress". As Krugman pointed out, there was potential for the breakthroughs in development economics to happen twenty five years earlier, and we need to make sure "not to let important ideas slip by just because they haven't been formulated". The balance Krugman advocates is to still consider theoretical ideas even as we focus on building new models.
Krugman’s analysis of the history of development economics, and criticism of Hirschman’s departure from mainstream economics provides several valuable insights. His discussion of the problems associated with methodology in the social sciences I found particularly interesting. He begins by exposing the disconnect between mathematically consistent models and the ineffective application of those models that various economists in the mid-20th century encountered. The result was a departure from traditional model driven study (led by Hirschman) in the field of development to a more intellectual driven study that did not necessitate the use of such models.
ReplyDeleteI am inclined to agree with Krugman’s criticism due to the parallels he constructs between social science and physical science. Hirschman’s intellectual camp rejected model-based economic study because it did not reflect reality with respect to development. However, this is not necessarily grounds to discount the utility of models. Many advances in the physical sciences are the direct result of simplistic experiments such as Krugman’s dish-pan example. Such experiments provide the foundation for future work in the respective field, and without a solid and quantifiable foundation, it is immensely difficult to advance future theory because the initial assumptions are automatically questioned. I am not suggesting that models are the only means through which a field should be advanced. However, they should not be excluded from a field of study in favor of intellectual discussion that lacks quantifiable substance.
- Clay
Economics is an ambiguous, complex system. High development theory had a rough time making its way into the structure of economics. It was a viable theory regarding developmental economics but could not be applied because there were not models relevant to the theory. Models were difficult to construct due to the uncertainty regarding economies of scale and the problem of dealing with market structure; however, Lewis’s Surplus Labor model helped explain the High development theory. This way the theory could be understood and not so ambiguous. A model is necessary in order to explain a theory and allow it to be analyzed, judged and critiqued. The model presented proved that self-reinforcing growth works.
ReplyDeleteI would argue that the high development theory has not, in effect, died out. I think it is taking a respite inside of Field’s three Dualistic Development approaches. It is essential that the relationship between the modern and traditional sectors of an economy be investigated, analyzed and discussed. This is the source of inequality inside a society which is a root of the intense poverty found through out the world. Models must be constructed and debated in order to come up with new plausible options to eradicate world poverty.
I enjoyed the way in which this paper was written and the authors approach on demonstrating his opinion and informing his audience. He made bold statements respectfully and posed intriguing questions to further thought and discussion. There were many aspects of this paper with which I was completely unfamiliar and he explained and theorized them in a understandable and comprehensive way.
There is a certain way of writing about economics that can only be done by Paul Krugman. Sometimes it consists of everyday metaphors, other times it sounds more like an English class essay than an Econ one. Either way, he offers a refreshing sense of clarity and lucidity that articulates the intellectual message in an almost conversational way. His connection between the physical and social sciences, for example, offers a compelling argument for the need to reassess basic perceptions and models even in the more advanced stages of theory. Sometimes that need for reassessment is even more necessary in advanced stages, for it ensures that the foundation of the social study — or econ model — is sound.
ReplyDeleteKrugman's comparison to the dish pan from a weather experiment offers a compelling argument for the need to reconsider economic theories such as the high development theory. He suggests that one cause for the decline was "an unwillingness to confront those areas the new technical rigor could not yet reach." In the absence of a serious appreciation for the past principles and amidst an intrigue with more modern thoughts, the principles, in effect, of high development theory were disregarded. The cost of this dismissal is decades of work that attempts to redefine, or replace in some capacity, the original beliefs in high development theory, while the economists end up returning to that principle in the more recent past. As Krugman describes it in a surprisingly poetic tone for an economist, "Good ideas were left to gather dust in the economics attic for more than a generation; great minds retreated to the intellectual periphery."
As several other students mentioned, Krugman concludes with the lamentation that perhaps an increase in ignorance is the cost of progress. Another lesson from Krugman's piece is the fact that foundational beliefs, whether you agree with them or not, cannot be dismissed in the grand scheme of progress.
Krugman's analysis of the history of thought in development economics is fascinating. I thoroughly enjoyed his analogy in comparing this history of thought to the evolution of mapping in Africa. This analogy is a clear representation of the dilemma of focusing too much on the specific details of a study to the point where we can lose some of the bigger picture, as was the case in the mapping of interior Africa.
ReplyDeleteKrugman seems to be arguing that neither approach- focusing on detail vs. a bigger picture- is wrong, but he rather points out the limitations of each. In focusing too much on the specific detail, we may lose out on some valuable insight, such as that of Hirschman. Conversely, however, if we focus too much on the bigger picture and ignore the rigorous details of modeling, there is little room to continue to expand and evolve our collective economic knowledge. This is why, he argues, there was so much stagnation in the field of development economics during the middle of the 20th century. It is what he so brilliantly refers to as the "evolution of ignorance." It seems as though Krugman believes that the best way to progress our collective knowledge in the field of economics is to recognize the value of both the broad and narrow ways of thinking and look for ways in which we can combine the two rather than rejecting one in favor of another, as Hirschman, along with so many other economists of the era, did.
Krugman’s explanations of the need for modeling and the deficiencies of theories without modeling made for an insightful read. The lines that defined the banter about modeling came shortly after his discussion on mapping Africa. They read: “Between the 1940s and the 1970s something similar happened to economics. A rise in the standards of rigor and logic led to a much improved level of understanding of some things…” I agree with Krugman’s implication that this is a good thing because even if you lose the ability to explain some things with formal models, as the wealth of data increases and economists further the field one can refine and restructure models to explain much more complex ideas… it has to start somewhere, not just in metaphors. Even though these simplifications cannot express reality, they provide great analytical approaches to problems and thus I agree that strict modeling is important when trying to describe fundamentals of growth. One aside, I found it entertaining when Krugman points out the harshest critics of economic models are often politically motivated.
ReplyDeleteNow I’ll turn to High Development Theory. As stated in the article, this theory rests on the assumption of economies of scale. It assumes that the traditional sector pays lower wages than the modern sector and therefore the modern sector has a near unlimited supply of labor while the traditional sector is on the margin. Thus a big investment in the modern sector can yield economies of scale and then growth is self sustaining as the populace has more income, purchases more goods and the profits are re-invested in capital. This all depends on one critical assumption that often is not true, that sizeable markets exist for the goods produced by large investments. This is where the theory falls apart. There is no guarantee that any given firm will have a sizeable market, even with exports because there has to be sufficient quality. Having sufficient quality can be extremely hard as a firm or country starts.
Krugman’s paper is very straightforward and allows the reader to understand the main concepts. In this paper the two main themes are the history of development economics and the ideas in the ‘High Development Theory” and the second theme is the problem of method in the social sciences. The paper is explained through a story, which allows the reader to understand Krugmans’s message without an abundance of models.
ReplyDeleteFirst Krugman analyzes the “High Development Theory”, and focuses on the methods and ideas that were created during the growth of development economics. I enjoyed how Krugman decided to highlight the distance between the methodology and theories, and agree with his statements that models are flawed, but a necessary piece of economic studies and policies. Krugman illustrates the disconnect between theories/models and their application outcome through the “High Development Theory”. The “High Development Theory” is two distinctive parts: the two fundamental parts are economies of scale and the size of the market. In order to make this movement from traditional to modern the economies need to be at scale, but also the markets need to be large enough. However as Krugman says the theory falls apart when the requirement of large markets are in reality lacking to make investments.
The paper is very insightful and offers many ideas, I particularly enjoyed and agree with Krugman that people can contribute theories and that they can be over simplified, however their importance lies with the questions they can generate. I also believe that models are just that models and they can offer insight and potential outcomes, but often times become so engrained they obscure the real answers. Models have a tough time representing the real world because they are just models and can be manipulated and cannot account for many factors.
This paper, as Krugman points out at the beginning of the paper, is about the strange evolution path of development economics, and economic methodology as a whole. Krugman presents his opinions in a very non-traditional way in this economics paper.
ReplyDeleteFirst, concerning the subject of development economics, Krugman does a good job in explaining what “high development theory” is and points out the two most important factors in the thoery - the economies of scale and the market size. He argues that only when more productive production in the modern sector, which at the same time gives higher salary to workers, matches with a large enough market consisted of higher-paid workers can the economy self-reinforce itself and keep growing. So if everything operates in a larger scale, the system would be able to sustain itself, given the assumption that there’s surplus employment in the traditional sector where excess workers can move to urban when there’re higher paid jobs in modern sector. The story sounds quite legitimate and not that complicated. However, first developed in 1940s, it did not regain its reputation until the 80s or 90s.
This leads to the Krugman’s discussion of social science methodology. The author explores why “high development theory”, which we think makes good sense now, was forgotten for decades and taken place by other musing mainstream theories like Hirschman’s, before “high development theory” was reconsidered and given a fresh look. He thinks that it’s because modeling itself is an effort to simply the reality and many times economists oversimplify things just because they don’t know how to put certain important factors in the model so they forget about it. For example, in the high development theory, it’s hard to formalize economies of scale into a model, and as a result, Myrdal and Hirschman turned to the model-oriented mainstream and left that idea in the air.
What strikes me the most in this paper is the “African map story”, or termed the evolution of ignorance speaking of social science in general. Subjective as it is, the subject of economics can diversify in such different directions that no one agrees with each other because everyone has their models that make perfect sense to themselves. But as Krugman says in the paper, “the cycle of knowledge lost before it can be regained seems to be an inevitable part of formal model-building”.
- Christy
The same problem that Krugman discusses "musings vs models" is often discussed in philosophy. Often the intuition on certain ideas and philosophers far surpasses our ability to logically explain morality or correct human action. Immanual Kant's "Critique of Pure Reason" is one of the best attempts by a philosopher to model certain philosophical ideas but these models are not sufficient to cover all questions and concerns in any given model. The fact remains that models rely on assumptions that are very infrequently full filled. Several hedge funds mix model investing strategies with strategies that rely on intuition by brilliant investors such as Paul Tudor Jones.
ReplyDeleteWhile its true that models evolve who can say if models are the final solution to understanding economics. Deeply intuitive people like Hirshman are needed for practical applications of economic theory. Maybe there are times when all we can do is leave policy choices to the remarkable individuals with an insight into issues that models can't account for.
It's a shame that an extrodinary amount of emphasis is placed on the necessity of models even in the initiation of a new idea. it has already been shown beyond a shadow of a doubt that creativity, ideas, musing, propel innovation and technology. For example, in class it was mentioned that the CEO of one particular company (IBM?) invites people to simply participate in conversation under observed conditions. The purpose is to capitalize on any profitable ideas that may be mentioned. It is perhaps unlikely for any of these brainstorms to have stemmed from carefully conducted experiments or any other technical means. This is reality.
ReplyDeleteIn retrospective, high development theory (a victim of a model-based science) certainty seems more realistic because it sees producers and suppliers and consumers engaged in imperfect competition rather than in the idealistic perfect competition. Firms are profit-driven and especially in underdeveloped countries, they can manipulate more resources like government cooperation. There are certain conditions that must be in place in order for policy to reflect theory such as sufficient market size to demand the products and the existence of economies of scale in order to encourage migration from the traditional sector to the modern sector. Rather than simplifying the world so that models can be created, the high development theorists tried to account for the conditions that currently exist. Why is it that policy makers accepted the Harrod-Domar model that is unrealistic for underdeveloped countries to achieve, over the Big Push theory that seems much more intuitive?