Economical with the 'truths'

This short volume is a stimulating essay by one of the world's most thoughtful and innovative economists into the nature of economic inquiry. To illustrate his more general arguments, Krugman uses the specific examples of the theories of economic development and of economic geography, the latter involving questions about space such as the size, location or even existence of cities.

These apparently dissimilar topics are shown to be related in several fundamental ways. Krugman rediscovers some fascinating literature from 40 and 50 years ago which offered deep insights into the questions involved. Yet the economic mainstream proceeded to ignore them resolutely. It is only within the last decade that interest has revived and the true worth of these earlier papers become appreciated.

The discussion of the particular theories is stimulating in its own right, but their exposition as such is not the main aim of the book. Rather, it is to ask the question: why were important advances ignored by orthodox economics, and knowledge thereby lost for several decades?

Economic theory is far from being based so securely that practitioners can avoid thinking about such questions from time to time, even though the author himself remarks ironically that those who can, do, while those who can't, do methodology. Krugman's clear and powerful style makes the book accessible to noneconomists, and those with an interest in the philosophy of science will find this book gives a valuable insight into the mind set of the economist.

Krugman's answer to his own question, in essence, is that the reasons were purely technical. He asserts forcefully that the basic problem was not one of ignorance or bias on the part of conventional economists. Quite simply, in the prevailing state of knowledge, economists were unable to model the seminal ideas with sufficient rigour, and hence ignored them. Orthodox theory depended, and still does depend, very heavily upon the use of linear mathematics. A proper understanding of why some countries develop successfully, or why populations are concentrated in cities instead of being spread at random involves nonlinearities. But the tools were simply not available to turn the sometimes sprawling, verbal expositions of the original papers into neat mathematical models.

There is truth in this reply, but it is very far from being complete. For example, Brian Arthur made important mathematical advances in nonlinear probability theory in the early 1980s, and used the insights to construct a very rigorous model of the diffusion of new technologies which not only challenges conventional economic thinking on this important question, but offers a better and more wide-ranging understanding of the phenomenon. Yet it took him the best part of a decade to get his paper published in a leading economic journal, and even now this area of inquiry is sidelined by most of the profession.

To take a different example, the centrepiece of orthodox theory is the model of general competitive equilibrium. In such a state of the world, supply equals demand in all markets, and no one can be made better off without someone else being made worse off: government intervention is, therefore, at best unnecessary and at worst harmful. Yet it was proved as long ago as 1982 that the second of these fundamental "truths" only holds in a timeless world. In general, if the future exists, the proposition is not true. But the vast majority of economics students still complete their education unaware of this rigorous advance in knowledge, schooled in the desirability of the idealised competitive world.

Krugman himself is wonderfully open-minded and willing to entertain imaginative, heterodox ideas. The answer which he gives to his question is undoubtedly true of himself, but he is mistaken to imagine that it is valid throughout the profession. At the risk of being deemed appallingly nonrigorous, in my view the discipline of the sociology of knowledge is able to supply a much better answer than the purely technical one of Krugman. But his book is still very much worth reading.

Paul Ormerod is chairman of Post-Orthodox Economics and visiting professor of economics, University of Manchester.