Time for Krugman to take a course in the history of economics

15 Sep, 2013 at 09:47 | Posted in Economics | 2 Comments

Paul Krugman commented on the NY Times piece on Wynne. There are many little incorrect interpretations, which derive from his lack of understanding of the history of ideas. First, he equates Wynne’s model with the old hydraulic Keynesianism (i.e. Neoclassical Synthesis) of Phillips (of Phillips curve fame, but also of the hydraulic model of the British economy). Nothing further from the truth …

Phillips_and_MONIAC_LSENote that conventional hydraulic models, including the sort of Cowles models like the Klein-Goldberger model of the US economy, put great emphasis on the estimation of parameters based on certain simplistic macro behavior. Wynne took a very different approach to modeling than Klein-Goldberger. He was more concerned with what he referred to as ‘model architecture’ than with parameter estimation …

Krugman then says these models were abandoned because they failed in the face of the Great Inflation of the 1970s, and because they did not deal with consumption in a coherent way. Here again he is wrong. First of all, Wynne’s models had no trouble dealing with the inflation of the 1970s, correctly pointing out the effects of oil prices, devaluation, and wage pressures from the cost side rather than demand pull views, and he was one of the few that correctly foresaw the big recession that the Thatcher policies would cause …

On a funny note at the end, Krugman reveals his misconception about the role of old ideas in the history of science, and economics in particular. He says: “it is kind of funny to see a revival of old-fashioned macro hailed, at least by some, as the key to a reconstruction of the field.” In his view, old ideas are only relevant if you can formalize them in modern garb, but are not a source of forgotten and incorrectly discarded knowledge that are better prepared to understand how the economy works. The limitations of the ‘great economists’ of today, make the loss of economists like Wynne all the more painful.

Matias Vernengo

Added 11.00 GMT: Unlearning economics has another nice piece on Krugman’s dismissal of “hydraulics.”

2 Comments

  1. An interesting debate that, knowing Krugman, will never develop:

    Long Live Hydraulic Keynesianism: Krugman on Godley and Vernengo on Krugman

    Comment by pilkingtonphil— 15 Sep, 2013 #

  2. Not all share Dr Krugman´s view even in the mainstream establishment:
    for exampel, Martin Wolf- in The Financial Times celebrate´s Wynne Godley and his approach:
    http://blogs.ft.com/martin-wolf-exchange/2012/07/19/the-balance-sheet-recession-in-the-us/?

    “Last week (in Debt, deleveraging and crisis in the US), I discussed what happened to US debt and borrowing, prior to and since the crisis. In this post, I look at the associated pattern of income and expenditure. It looks at the macroeconomics of deleveraging or what Richard Koo of Nomura Research calls “balance sheet recessions”.
    I look at this through the lens of “sectoral financial balances”, an analytical framework learned from the work of the late Wynne Godley. The essential idea is that since income has to equal expenditure for the economy, as a whole, (which is the same things as saying that saving equals investment) so the sums of the difference between income and expenditures of each of the sectors of the economy must also be zero. These differences can also be described as “financial balances”. Thus, if a sector is spending less than its income it must be accumulating (net) claims on other sectors.”

    and
    The Economist:Wynne Godley
    http://www.economist.com/node/16214152

    “Mr Godley was a man of several talents, many interests and an intelligence to make good use of them.”

    The Guardian-Wynne Godley -A Economist with a flair for anticipating and responding to crises”
    http://www.theguardian.com/politics/2010/may/20/wynne-godley-obituary

    “Wynne Godley, who has died aged 83, was the warmest of men and the greatest of economists. Both at the Treasury, where he worked from 1956 to 1970, and afterwards, from Cambridge and various overseas institutes, he made powerful contributions to public policy and the economic debate, not all of which were sufficiently recognised at the time. During his Treasury years, he was hugely influential, and officials still acknowledge his lasting contribution…The present chief economic adviser to the Treasury, Dave Ramsden, acknowledged the Treasury’s huge debt to Godley over the years, adding: “In the 2000s, much of which coincided with a period of apparent and widely researched stability, what stands out is his distinctive analysis and his prescience about the looming financial and economic crisis, and the potential role for what had become by then innovative policies in responding.” (Monetary Economics stressed the importance of a more active fiscal policy.)”

    The Telegraph-Professor Wynne Godley
    http://www.telegraph.co.uk/news/obituaries/finance-obituaries/7750835/Professor-Wynne-Godley.html
    ” He was known as a nervous but brilliant economic forecaster, described at the time as “one of the Government’s ablest economists”.

    here is his one of Godley´s later contributes:
    Fiscal Policy in a Stock-Flow Consistent (SFC) Model
    by Wynne Godley and Marc Lavoie*
    April 2007

    Click to access wp_494.pdf

    Comment by Jan Milch— 15 Sep, 2013 #


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