So you think Paul Krugman is a Keynesian? I’ll be dipped!2 June, 2013 at 22:48 | Posted in Economics | 5 Comments
On his blog today, Paul Krugman tries to explain why we should still use the neoclassical hobby horse Aggregate Supply-Aggregate Demand model:
So why do AS-AD? … We do want, somewhere along the way, to get across the notion of the self-correcting economy, the notion that in the long run, we may all be dead, but that we also have a tendency to return to full employment via price flexibility. Or to put it differently, you do want somehow to make clear the notion (which even fairly Keynesian guys like me share) that money is neutral in the long run.
Actually, this is the same unsubstantiated stuff you find in all of the “fairly Keynesian” Greg Mankiw’s textbooks.
Well, this “fairly Keynesian” guy is not impressed. And I doubt that Keynes himself would have been impressed by having his theory being characterized with catchwords like “tendency to return to full employment” and “money is neutral in the long run.”
One of Keynes’s central tenets – in clear contradistinction to the beliefs of classical economists – is that there is no automatic tendency for economies to move toward full employment levels in monetary economies.
Money does not matter in neoclassical macroeconomic models. That’s true. But in the real world in which we happen to live in, money does certainly matter. Money is not neutral and money matters in both the short run and the long run:
The theory which I desiderate would deal … with an economy in which money plays a part of its own and affects motives and decisions, and is, in short, one of the operative factors in the situ-ation, so that the course of events cannot be predicted in either the long period or in the short, without a knowledge of the behaviour of money between the first state and the last. And it is this which we ought to mean when we speak of a monetary economy.
J. M. Keynes A monetary theory of production (1933)