Krugman on Minsky – in danger of reinventing the wheel

27 March, 2012 at 21:02 | Posted in Economics, Theory of Science & Methodology | 8 Comments

Paul Krugman has a post up today, responding to a new paper by Steve Keen on how some people – like Krugman – gets it so wrong on  the economics of Hyman Minsky.

Krugman says that his basic reaction to discussions about “What Minsky Really Meant” or “What Keynes Really Meant” is that “Krugman Doesn’t Care.” The reason given for this rather debonair attitude is allegedly that history of economic thought may be OK, but what really counts is if reading Minsky or Keynes give birth to new and interesting insights and ideas. Economics is not religion, and to simply refer to authority is not an accepted way of arguing in science.

Although I have a lot of sympathy for Krugman’s view on authority, there is a somewhat disturbing and unbecoming coquetting – and certainly not for the first time, as his rather controversial speech at Cambridge last year, commemorating the 75th anniversary of Keynes’ General Theory, bear evidence of – in his attitude towards the great forerunners he is discussing.

Sometimes – and this goes not only for children – it is easier to see things if you can stand on the shoulders of elders and giants. If Krugman took his time and really studied Keynes and Minsky, I’m sure even he would learn a lot.

Krugman is a great economist, but it smacks not so little of hubris to simply say “if where you take the idea is very different from what the great man said somewhere else in his book, so what?” Physicists arguing like that when discussing Newton, Einstein, Bohr or Feynman would not be taken seriously. 

Krugman’s comments on this issue is really interesting also because they shed light on a kind of inconsistency in his own art of argumentation. During a couple of years Krugman has in more than one article criticized mainstream economics for using to much (bad) mathematics and axiomatics in their model-building endeavours. But when it comes to defending his own position on various issues he usually himself ultimately falls back on the same kind of models. Models that actually, when it comes to methodology and assumptions, has a lot in common with the kind of model-building he otherwise criticizes.

On most macroeconomic policy discussions I find myself in agreement with Krugman. To me that just shows that Krugman is right in spite of and not thanks to those models he ultimately refers to. And although Krugman repeatedly says that he is a strong believer in “simple models,” these models are far from simple (at least not in any interseting meaning).

As all students of economics know, time is limited. Given that, there has to be better ways to optimize its utilization than spending hours and hours working through or constructing irrelevant economic models. And whether they are simple – something Krugman likes – or not, is not the nodal point.

Instead of risking to just reinvent the wheel, I would rather recommend my students allocating their time also studying great forerunners like Keynes and Minsky, to help them constructing better, real and relevant economic models – models that really help us to explain and understand reality.

Added 28/3: Philip Pilkington has a nice piece on the kind of “intellectual conservatism” that Krugman seems to adhere to when it comes to giving credits to heterodox economists like Minsky.

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  1. Have you read Steve Keens Debunking Economics or his blog Debtwatch, and are familiar with his views? I’ve never seen you mention him on the blog and he seems to garnered a good reputation in certain circles (MMT:ers and other heterodox economists). And he was one of very few economists who actually did see the crisis coming and warned about it.
    I really don’t know much about economics myself yet (I’ve just recently started to look into it) but it seems to me like he’s actually got something sensible to say, unlike most economists.

    • “Debunking economics” is a great book. There’s a lot of what Steve writes that I could have written myself (actually if you look into the critique I have of neoclassical economics e. g. in “Den dystra vetenskapen” it substantailly overlaps with Steve’s I would say). Starting your critical study of economics with “Debunking economics” is a good choice!

  2. I have to say that it does put a smile on my face when I read things like:

    “So, first of all, my basic reaction to discussions about What Minsky Really Meant — and, similarly, to discussions about What Keynes Really Meant — is, I Don’t Care. I mean, intellectual history is a fine endeavor. But for working economists the reason to read old books is for insight, not authority; if something Keynes or Minsky said helps crystallize an idea in your mind — and there’s a lot of that in both mens’ writing — that’s really good, but if where you take the idea is very different from what the great man said somewhere else in his book, so what? This is economics, not Talmudic scholarship.”

    In particular when I wrote myself just a few days ago:

    “Second, I’m not even sure what it means to know Keynes. There are hundreds and yet hundreds of books trying to “make sense” of, and interpret, Keynes. And they are not even consistent with each other! Keynesian conferences are much like Islamic science, in which the whole game is to find a sentence in the General Theory (or the Qu’ran) which had already predicted the housing crisis (or the Higgs boson).”

    • It’s always pleasing when people are happy, Pontus. Even better, however, is when they are happy for the right reasons. My critique of Krugman on the issue remains unaltered.

  3. L. Randall Wray posted an article commenting on the Krugman article here:

    Also Keen has posted a reply on his blog:

    I sincerely hope that Krugman doesn’t simply stick his head in the sand and ignore the replies, but take the time to read and respond to them.

    • Thanks for the links Kristoffer (I actually commented on Randalls article yesterday: “Nice piece Randall! I had the great fortune of having Hyman Minsky as a teacher when I was a research student in the U.S. in the begining of the 80s. He was a great source of inspiration then. He still is.”)
      Keens response looks interesting, and I will certainly read it more carefully when time permits.

  4. I came across Keen’s debt deflation blog a while back and watched a lot of the lectures, and I like his approach and 95% of what he says makes a lot of sense to me, but there are some things about his stance here that I don’t get. The argument he’s making now seems to be one he’s posted repeatedly starting here.

    1. He makes a lot of the fact that banks will lend and then find deposits — so what? The fact that they look for depositors means they have to consider their ability to find them and the interest rates they will have to offer to get them, and that will constrain the so the depositors are still a part of the equation.

    2. Where do interest rates come from? I notice in his lectures he dismisses the idea of a supply and demand for money, insists the supply and demand curves are the same and the fed sets the rate. But the fed doesn’t simply decree a rate and the banks obey; they affect the rate by acting as participants in the market Keen claims doesn’t exist — they print dollars to trade for financial assets, increasing the supply of money while taking on some of the demand for it, or they do the reverse. So, if there is no supply/demand of money, where does the interest rate come from?

    3. Is he living in a world where no one was buying mortgage backed securities, Greek bonds, or otherwise putting money into the financial sector? Does the fact that the wealthiest have accumulated lots of money and put it in hedge funds have anything to do with financial instability? Do endogenous money proponents believe that the giant pool of money has nothing to do with our giant pile of debt?

    4. He identifies endogenous money as central to mainstream macro’s misunderstandings of the economy, but I don’t see why anything else that he argues depends on throwing out the idea of patient agents loaning to impatient agents. For example, he dismisses the idea of a money multiplier because banks might lend before coming up with the cash to meet their reserve ratio. As long as banks have to meet this reserve ratio that’s irrelevant. I argue the money multiplier doesn’t control the money supply because these days banks securitize their loans, and the securities require no reserve. (And I do think financial assets are a form of money, in that asset holders view them as a form of savings — a store of value. My 401k statements claim I have a certain number of dollars in my retirement savings, for example, and none of that is reflected in the M0 or M1 money supply.) He criticizes Bernanke for thinking that repayment of debts results in money being redistributed from debtors to savers. I would argue that Bernanke is wrong to think such a redistribution would have no macroeconomic implications — marginal spending propensities are certain to be quite different between the two groups; that’s why one group became the savers and the other the debtors. And I also think that, because the savers view financial assets as savings, they will view repayments on principal as changing one sort of savings into another, not as an increase in their wealth. So in that sense I’m close to the endogenous money position, but I don’t see how you get rid of the role of savers in creating debt.

    I like his approach to modeling the economy and think he gets the basic dynamics of the business cycle and financial instability right. But he says he demonstrated an all-credit economy, yet the banks in this economy start with a fixed amount of money in their vaults, which they can’t create, only re-lend? He says models need banks, patient agents lending money won’t do, but ultimately to make his model work the banks have to spend just like workers do (though at a lower velocity — sounds like they’re more patient?); banks morph into bankers. I don’t see why you couldn’t build essentially the same model, but have that initial money in the bank vault be the initial fiat money supply and replace banks with wealthier citizens who spend more slowly and lend money to firms and workers. Aggregate debt levels would still matter.

    So am I missing something? Does Keen think savers are irrelevant or am I misunderstanding the role he believes they play in the economy?

  5. [...] Krugman on Minsky – in danger of reinventing the wheel « Lars P … [...]

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