Krugman & Co. — totally flabbergasting neoclassical apologetics

18 November, 2013 at 21:01 | Posted in Economics | 6 Comments

Is academic (mainstream neoclassical) macroeconomics flourishing? “New Keynesian” macroeconomist Simon Wren-Lewis had a post up not that long ago on his blog, answering the question affirmatively:

Consider monetary policy. I would argue that we have made great progress in both the analysis and practice of monetary policy over the last forty years … However, it has to be acknowledged that policymakers who look at the evidence day in and day out believe that New Keynesian theory is the most useful framework currently around. I have no problem with academics saying ‘I know this is the consensus, but I think it is wrong’. However to say ‘the jury is still out’ on whether prices are sticky is wrong. The relevant jury came to a verdict long ago …

It is obvious that when it comes to using fiscal policy in short term macroeconomic stabilisation there can be no equivalent claim to progress or consensus. The policy debates we have today do not seem to have advanced much since when Keynes was alive …

What has been missing with fiscal policy has been the equivalent of central bank economists whose job depends on taking an objective view of the evidence and doing the best they can with the ideas that academic macroeconomics provides…

The contrast between monetary and fiscal policy tells us that this failure is not an inevitable result of the paucity of evidence in macroeconomics. I think it has a lot more to do with the influence of ideology …

And today another sorta-kinda “New Keynesian” — Paul Krugman — has a post up arguing that the problem with the academic profession is that some macroeconomists aren’t “bothered to actually figure out” how the New Keynesian model with its Euler conditions —  “based on the assumption that people have perfect access to capital markets, so that they can borrow and lend at the same rate” — really works. According to Krugman, this shouldn’t  be hard at all — “at least it shouldn’t be for anyone with a graduate training in economics.”

Hmm. This doesn’t seem convincing at all.

1 So, according to Wren-Lewis, macroeconomics has really made progress on monetary issues thanks to central bank economists and since we have been able to definitely conclude that wages are “sticky”. Wow! That’s really impressive! (And the earth still isn’t flat?) Keynes argued that conclusively more than 75 years ago …

2 And are central bank economists really “taking an objective view”? How is it even possible to think that thought today, when the “relevant jury” for at least four years has known that these guys to a large extent were the culprits of the latest financial and economic crisis. Devoted Ayn Randian Alan Greenspan “taking an objective view”? I’ll be dipped!

3 Is ideology only playing a role when it comes to fiscal policies? Hard to believe. As already Gunnar Myrdal argued 80 years go, ideology is all over all economists. Whether they are into monetary or fiscal policies is immaterial.

4 And — perhaps most disturbing of all — in both Krugman and Wren-Lewis we see a rather unbecoming self-congratulatory attitude, according to which all macroeconomists (allegedly) share the same basic mainstream neoclassical theory, so when we discuss and argue it’s only about which policy and model to choose. All the more or less licensed and shared models and policies are already there on the shelf and we just have to decide which one — with or without Euler conditions — to pick for today’s monetary or fiscal problem solving. This is of course nothing but pure nonsense. Today’s macroeconomic debates are about so much more than selecting models and giving policy advice. And I think this is obvious for all that look further than the seminar room at the economics departments at Oxford University or at MIT.

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  1. RE: Monetary policy. Kalecki got it right in the 1940s. Wren-Lewis and co got it desperately wrong:

    http://www.interfluidity.com/v2/3451.html

    To claim that monetary policy has been perfected as a means to stabalise the economy with one breath and then complain about some “zero-lower bound” in the next is either evasive or deluded.

  2. Why stagnation? by David F. Ruccio-Department of Economics at the University of Notre Dame

    http://anticap.wordpress.com/2013/11/18/why-stagnation/

    It’s a sad commentary on contemporary economics that Larry Summers’s belated, poorly thought-out, population-driven “discovery” of the possibility of secular stagnation continues to receive such accolades. Paul Krugman gives him credit for “forcefully” offering such a “radical” idea at “at the most ultrarespectable of venues, the I.M.F.’s big annual research conference.” Jared Bernstein, for his part, finds it “compelling.” And then there’s Gavyn Davies, who considers Summers’s speech “a tour de force that demands to be watched.”

    Oh, please!

    Let’s give credit where credit is due, starting with Paul Sweezy, who offers an appropriate history lesson, explaining how and why the issue of secular stagnation was raised during the First Great Depression and then “so abruptly interrupted by the outbreak” of WWII. And while I’ve never been entirely convinced by Sweezy’s own explanation of the stagnationist tendencies of “monopoly capitalism,” he certainly offers much more food for thought than we’ll find in the present discussion. In fact, Sweezy’s observation about the state of the debate, offered in 1982, is even more accurate today:

    ” I have the feeling that if you ask an economist how we got into the mess we are in, he or she, while not denying that it is indeed a mess, will reply by giving advice as to how to get out of it but will not have anything very enlightening to say about how we got into it.” Paul Sweezy http://monthlyreview.org/2012/06/01/why-stagnation-2

    For my part, I’m all in favor of resuming the long-interrupted debate over capitalism and stagnation, especially about how we got into the current mess. But, if we’re going to take the discussion seriously, let’s open up the terms of debate, in terms of both the history of economic thought and the range of ideas that exist today, which Summers and his colleagues have worked so long and hard to keep on the “radical fringe.”

  3. How should we interpret “What has been missing with fiscal policy has been the equivalent of central bank economists whose job depends on taking an objective view of the evidence and doing the best they can with the ideas that academic macroeconomics provides.”?

    What attention do academics pay to the ideas and experience of practitioners? What does ‘objective’ mean in this context?

  4. […] Krugman & Co. — totally flabbergasting neoclassical apologetics Lars P. Syll (Jan) […]

  5. “I’ll be dipped.” My late mother was Norwegian and she’s the only other person I’ve heard use this expression.

  6. Stagnation is a lot more related to wealth distribution, which both ignore, than demographics. If wealth were redistributed, the marginal propensity to consume would increase and we wouldn’t need monetary policy to drive interest rates down.


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