LARS P SYLL

Gold – a really bad idea

Eighty years ago Keynes could congratulate Great Britain on finally having got rid of the biggest ”barbarous relic” of his time – the gold standard. He lamented that

advocates of the ancient standard do not observe how remote it now is from the spirit and the requirement of the age … [T]he long age of Commodity Money has at last passed away before the age of Representative Money. Gold has ceased to be a coin, a hoard, a tangible claim to wealth … It has become a much more abstract thing – just a standard of value; and it only keeps this nominal status by being handed round from time to time in quite small quantities amongst a group of Central Banks.

Ending the use of fiat money guaranteed by promises for currencies once more backed by gold is not the way out of the present economic crisis. Far from being the sole prophylactic against the alleged problems of fiat money, as the “gold bugs” maintain, a return to gold would only make things far worse. So yours truly - just as Keynes did – most certainly reject any proposals for restoring the gold standard.

The “gold bugs” seem to forget that we actually have tried the gold standard before – in the era more or less between 1870 and 1930 – and with disastrous results!

Implementing a new gold standard today would only lead to a generally falling price level. Sounds great? If you think so, read what Keynes wrote already eighty years ago in Essays in Persuasion:

Of course, a fall in prices, which is the the same thing as a rise in the value of claims on money, means that real wealth is transferred from the debtor in favour of the creditor, so that a larger proportion of the real assets is represented by the claims of the depositor, and a smaller proportion belongs to the nominal owner of the asset who has borrowed in order to buy.

Allowing this debt deflation process – the analysis of which was later developed by Irving Fisher and Hyman Minsky – would land us in a situation where output and wages would fall and unemployment and the real burden of debt would increase. The only winners would probably be banks and financial institutes.

So why would anyone want to reinstate a gold standard? The best surmise is probably that it’s a question of ideology and politics. Libertarians and market fundamentalists that advocate a return to gold, want to restrict the possibilities of governments to intervene in the economy and – even harder than with “independent” central banks – force countries to pursue restrictive economic policies that at all costs keep inflation down.

Still not convinced of why a return to gold is a bad idea? Then, at least, remember what Keynes wrote in The Economic Consequences of Mr Churchill (1925):

We stand midway between two theories of economic society. The one theory maintains that wages should be fixed by reference to what is ’fair’ and ’reasonable’ as between classes. The other theory–the theory of the economic juggernaut–is that wages should be settled by economic pressure, otherwise called ’hard facts’, and that our vast machine should crash along, with regard only to its equilibrium as a whole, and without attention to the chance consequences of the journey to individual groups. The gold standard, with its dependence on pure chance, its faith in the ’automatic adjustments’, and its general regardlessness of social detail, is an essential emblem and idol of those who sit in the top tier of the machine. I think that they are immensely rash… in their comfortable belief that nothing really serious ever happens. Nine times out of ten, nothing really does happen–merely a little distress to individuals or to groups. But we run a risk of the tenth time (and stupid into the bargain), if we continue to apply the principles of an economics, which was worked out on the hypothesis of laissez-faire and free competition, to a society which is rapidly abandoning these hypotheses.

So, next time you want to come up with some new idea on how to solve our economic problems with a magic gold bullet, remember new economic thinking starts with reading old books! Why not start with the best there are – those written by John Maynard Keynes and Hyman Minsky.

Kenneth Arrow on knowledge that only comes trailing clouds of vagueness

In a very personal discussion of uncertainty and the hopelessness of accurately modeling what will happen in the real world, Nobel laureate Kenneth Arrow – in M. Szenberg, ed., Eminent Economists: Their Life Philosophies, CUP (1992) – writes:

It is my view that most individuals underestimate the uncertainty of the world. This is almost as true of economists and other specialists as it is of the lay public. To me our knowledge of the way things work, in society or in nature, comes trailing clouds of vagueness … Experience during World War II as a weather forecaster added the news that the natural world as also unpredictable. An incident illustrates both uncertainty and the unwilling-ness to entertain it. Some of my colleagues had the responsi-bility of preparing long-range weather forecasts, i.e., for the following month. The statisticians among us subjected these forecasts to verification and found they differed in no way from chance. The forecasters themselves were convinced and requested that the forecasts be discontinued. The reply read approximately like this: ‘The Commanding General is well aware that the forecasts are no good. However, he needs them for planning purposes.’

What is neoclassical economics – a rejoinder to Noahpinion

Noah Smith – on his blog Noahpinion – writes that when yours truly and other heterodox economists criticize neoclassical economics

the term “neoclassical” gets slung around quite a lot, usually as a perjorative (sic!) … The idea is that “neoclassical” econ is the dominant paradigm, and that the “heterodox” schools are competing paradigms that lost out, and were, to use Kuhn’s terminology, “simply read out of the profession…and subsequently ignored.”

He then goes on to define neoclassical economics with the help of Wikipedia:

“Neoclassical economics is a term variously used for approaches to economics focusing on the determination of prices, outputs, and income distributions in markets through supply and demand, often mediated through a hypothesized maximization of utility by income-constrained individuals and of profits by cost-constrained firms employing available information and factors of production, in accordance with rational choice theory.”

OK, makes sense. Assumption of individual rationality, utility maximization, and supply/demand. One or more of things terms probably describes most of mainstream economics theory.

The basic problem with this definition of neoclassical economics – basically arguing that  the differentia specifica of neoclassical economics is its use of demand and supply, utility maximization and rational choice – is that it doesn’t get things quite right. As we all know, there is an endless list of mainstream models that more or less distance themselves from one or the other of these characteristics. So the heart of neoclassical economic theory lies elsewhere.

The essence of neoclassical economic theory is its exclusive use of a deductivist Euclidean methodology. A methodology  that is more or less imposed as constituting economics, and, usually, without a smack of argument.

The theories and models that neoclassical economists construct describe imaginary worlds using a combination of formal sign systems such as mathematics and ordinary language. The descriptions made are extremely thin and to a large degree disconnected to the specific contexts of the targeted system than one (usually) wants to (partially) represent. This is not by chance. These closed formalistic-mathematical theories and models are constructed for the purpose of being able to deliver purportedly rigorous deductions that may somehow by be exportable to the target system. By analyzing a few causal factors in their “laboratories” they hope they can perform “thought experiments” and observe how these factors operate on their own and without impediments or confounders.

Unfortunately, this is not so. The reason for this is that economic causes never act in a socio-economic vacuum. Causes have to be set in a contextual structure to be able to operate. This structure has to take some form or other, but instead of incorporating structures that are true to the target system, the settings made in economic models are rather based on formalistic mathematical tractability. In the models they appear as unrealistic assumptions, usually playing a decisive role in getting the deductive machinery deliver “precise” and “rigorous” results. This, of course, makes exporting to real world target systems problematic, since these models – as part of a deductivist covering-law tradition in economics – are thought to deliver general and far-reaching conclusions that are externally valid. But how can we be sure the lessons learned in these theories and models have external validity, when based on highly specific unrealistic assumptions? As a rule, the more specific and concrete the structures, the less generalizable the results. Admitting that we in principle can move from (partial) falsehoods in theories and models to truth in real world target systems does not take us very far, unless a thorough explication of the relation between theory, model and the real world target system is made. If models assume representative actors, rational expectations, market clearing and equilibrium, and we know that real people and markets cannot be expected to obey these assumptions, the warrants for supposing that conclusions or hypothesis of causally relevant mechanisms or regularities can be bridged, are obviously non-justifiable. To have a deductive warrant for things happening in a closed model is no guarantee for them being preserved when applied to an open real world target system.

Henry Louis Mencken once wrote that “there is always an easy solution to every human problem – neat, plausible and wrong.” And neoclassical economics has indeed been wrong. Its main result, so far, has been to demonstrate the futility of trying to build a satisfactory bridge between formalistic-axiomatic deductivist models and real world target systems. Assuming, for example, perfect knowledge, instant market clearing and approximating aggregate behaviour with unrealistically heroic assumptions of representative actors, just will not do. The assumptions made, surreptitiously eliminate the very phenomena we want to study: uncertainty, disequilibrium, structural instability and problems of aggregation and coordination between different individuals and groups.

The punch line is that most of the problems that neoclassical economics is wrestling with, issues from its attempts at formalistic modeling per se of social phenomena. Reducing microeconomics to refinements of hyper-rational Bayesian deductivist models is not a viable way forward. It will only sentence to irrelevance the most interesting real world economic problems. And as someone has so wisely remarked, murder is unfortunately the only way to reduce biology to chemistry – reducing macroeconomics to Walrasian general equilibrium microeconomics basically means committing the same crime.

If scientific progress in economics – as Robert Lucas and other latter days neoclassical economists seem to think – lies in our ability to tell “better and better stories” without considering the realm of imagination and ideas a retreat from real world target systems reality, one would of course think our economics journal being filled with articles supporting the stories with empirical evidence. However, contrary to Noah Smith, I would argue that the journals still show a striking and embarrassing paucity of empirical studies that (try to) substantiate these theoretical claims. Equally amazing is how little one has to say about the relationship between the model and real world target systems. It is as though thinking explicit discussion, argumentation and justification on the subject not required. Neoclassical economic theory is obviously navigating in dire straits.

The latest financial-economic crisis has definitely shown the shortcomings of neoclassical economic theory. What went wrong, according to Paul Krugman, was basically that economists “mistook beauty, clad in impressive-looking mathematics, for truth.” This is certainly true as far as it goes. But it doesn’t go deep enough. Mathematics is just a means towards the goal – modeling the economy as a closed deductivist system.

If the ultimate criteria of success of a deductivist system is to what extent it predicts and coheres with (parts of) reality, modern neoclassical economics seems to be a hopeless misallocation of scientific resources. To focus scientific endeavours on proving things in models, is a gross misapprehension of what an economic theory ought to be about. Deductivist models and methods disconnected from reality are not relevant to predict, explain or understand real world economic target systems. These systems do not conform to the restricted closed-system structure the neoclassical modeling strategy presupposes.

Neoclassical economic theory still today consists mainly in investigating economic models. It has since long given up on the real world and contents itself with proving things about thought up worlds. Empirical evidence only plays a minor role in neoclassical economic theory, where models largely function as substitutes for empirical evidence.

What is wrong with neoclassical economics is not that it employs models per se, but that it employs poor models. They are poor because they do not bridge to the real world target system in which we live. But “facts kick”, and hopefully humbled by the manifest failure of its theoretical pretences, the one-sided, almost religious, insistence on mathematical deductivist modeling as the only scientific activity worthy of pursuing in economics will give way to methodological pluralism based on ontological considerations rather than formalistic tractability.

What stops economists exploring new ideas

There are plenty of economists who will happily admit the limits of their discipline, and be nominally open to the idea of other theories. However, I find that when pushed on this, they reveal that they simply cannot think any other way than roughly along the lines of neoclassical economics. My hypothesis is that this is because economist’s approach has a ‘neat and tidy’ feel to it: people are ‘well-behaved’; markets tend to clear, people are, on average, right about things, and so forth. Therefore, economist’s immediate reaction to criticisms is “if not our approach, then what? It would be modelling anarchy!” …
 

 
The economist’s mentality extends up to the highest echelons of economics modelling, and culminates in the ‘DSGE or die’ approach, described well on Noah Smith’s blog by Roger Farmer:

“If one takes the more normal use of disequilibrium to mean agents trading at non-Walrasian prices, … I do not think we should revisit that agenda. Just as in classical and new-Keynesian models where there is a unique equilibrium, the concept of disequilibrium in multiple equilibrium models is an irrelevant distraction.”

When questioned about his approach, Farmer would probably suggest that if we do not assume markets tend to clear, and that agents are, on average, correct, then what exactly do we assume? A harsh evaluation would be to suggest this is really an argument from personal incredulity. There is simply no need to assume markets tend to clear to build a theory – John Maynard Keynes showed us as much in The General Theory, a book economists seem to have a hard time understanding precisely because it doesn’t fit their approach. Furthermore, the physical sciences have shown us that systems can be chaotic but model-able, and even follow recognisable paths …

Ultimately, the only thing stopping economists exploring new ideas is economists. There is a wide breadth of non-equilibrium, non-market clearing and non-rational modelling going on. Economists have a stock of reasons that these are wrong: the Lucas Critique, Milton Friedman’s methodology, the ‘as if‘ argument and so forth. Yet they often fail to listen to the counterarguments to these points and simply use them to defer to their preferred approach. If economists really want to broaden the scope of the discipline rather than merely tweaking it around the edges, they must be prepared to understand how alternative approaches work, and why they can be valid. Otherwise they will continue to give the impression – right or wrong – of ivory tower intellectuals, completely out of touch with reality and closed off from new ideas.

Unlearning Economics

Unemployment benefits and speed limits

One way to think about this is to say that unemployment benefits may, perhaps, reduce the economy’s speed limit, if we think of speed as inversely related to unemployment. And this suggests an analogy.Imagine that you’re driving along a stretch of highway where the legal speed limit is 55 miles an hour. Unfortunately, however, you’re caught in a traffic jam, making an average of just 15 miles an hour. And the guy next to you says, “I blame those bureaucrats at the highway authority — if only they would raise the speed limit to 65, we’d be going 10 miles an hour faster.”

Dumb, right? Well, so is the claim that unemployment benefits are causing today’s high unemployment.

Paul Krugman

Austerity policies – total horseshit

Microfoundations – neither laws, nor true

Oxford professor Simon Wren-Lewis doesn’t agree with Paul Krugman’s statement that

the whole microfoundations crusade is based on one predictive success some 35 years ago; there have been no significant payoffs since.

Why does Wren-Lewis disagree? He writes:

I think the two most important microfoundation led innovations in macro have been intertemporal consumption and rational expectations. I have already talked about the former in an earlier post … [s]o let me focus on rational expectations …  [T]he adoption of rational expectations was not the result of some previous empirical failure. Instead it represented, as Lucas said, a consistency axiom …

I think macroeconomics today is much better than it was 40 years ago as a result of the microfoundations approach. I also argued in my previous post that a microfoundations purist position – that this is the only valid way to do macro – is a mistake. The interesting questions are in between. Can the microfoundations approach embrace all kinds of heterogeneity, or will such models lose their attractiveness in their complexity? Does sticking with simple, representative agent macro impart some kind of bias? Does a microfoundations approach discourage investigation of the more ‘difficult’ but more important issues? Might both these questions suggest a link between too simple a micro based view and a failure to understand what was going on before the financial crash? Are alternatives to microfoundations modelling methodologically coherent? Is empirical evidence ever going to be strong and clear enough to trump internal consistency? These are difficult and often quite subtle questions that any simplistic for and against microfoundations debate will just obscure.

On this argumentation I would like to add the following comments:

(1) The fact that Lucas introduced rational expectatuions as a consistency axiom is not really an argument to why we should accept it as an acceptable assumption in a theory or model purporting to explain real macroeconomic processes (see e. g. Robert Lucas, rational expectations, and the understanding of business cycles).

(2) “Now virtually any empirical claim in macro is contestable” Wren-Lewis writes. Yes, but so is virtually also any claim in micro (see e. g. When the model is the message – modern neoclassical economics).

(3) To the two questions “Can the microfoundations approach embrace all kinds of heterogeneity, or will such models lose their attractiveness in their complexity?” and “Does sticking with simple, representative agent macro impart some kind of bias?” I would unequivocally answer yes (I have given the reasons why e. g. in David Levine is totally wrong on the rational expectations hypothesis , so I will not repeat the argumentation here).

(4) “Are alternatives to microfoundations modelling methodologically coherent?” Well, I don’t know. But one thing I do  know, is that the kind of miocrofoundationalist macroeconomics that New Classical economists in the vein of Lucas and Sargent and the so called New Keynesian economists in the vein of Mankiw et consortes are pursuing, are not methodologically coherent (as I have argued e. g. in What is (wrong with) economic theory?) And that ought to be rather embarrassing for those ilks of macroeconomists to whom axiomatics and deductivity is the hallmark of science tout court.

So in the Wren-Lewis – Krugman discussion on microfoundations I think Krugman is closer to truth with his remark that

what we call “microfoundations” are not like physical laws. Heck, they’re not even true.

Krugman – more Wicksell than Keynes

In a recent blogpost Paul Krugman comes back to his idea that it would be great if the Fed stimulated inflationary expectations so that investments would increase. I don’t have any problem with this idea per se, but I don’t think it’s of the stature that Krugman seems to think. But although I have written extensively on Knut Wicksell and consider him the greatest Swedish economist ever, I definitely - since Krugman portrays himself as “sorta-kinda Keynesian” - have to question his invocation of Knut Wicksell for his ideas on the “natural” rate of interest. Krugman writes (emphasis added):

Start with the very simplest view of how Fed policy affects the economy: the Fed sets short-term interest rates, and other things equal a lower rate leads to higher output; the “natural rate” of interest … is the rate at which output equals potential, that is, at which there are neither inflationary nor deflationary pressures …

What does this tell us? First of all, that there is nothing “artificial” or “unnatural” about low interest rates; they’re low because demand is low, and the Fed is responding appropriately. If anything, the “unnatural” situation is that rates are too high, because they’re constrained by the zero lower bound (rates can’t go below zero, except for some minor technical bobbles, because people can always just hold cash).

Second, the Fed’s inability to get rates as low as they should be justifies a search for policies that can fill this policy gap. Fiscal stimulus is one such policy; unconventional monetary policies of various kinds are another. Actually, the natural policy — natural in a Wicksellian sense, and also the one that in terms of standard economics should produce the least distortion — would be a credible commitment to higher inflation.

Now consider what Keynes himself wrote in General Theory:

In my Treatise on Money I defined what purported to be a unique rate of interest, which I called the natural rate of interest¾namely, the rate of interest which, in the terminology of my Treatise, preserved equality between the rate of saving (as there defined) and the rate of investment. I believed this to be a development and clarification of Wicksell’s ‘natural rate of interest’, which was, according to him, the rate which would preserve the stability of some, not quite clearly specified, price-level.

I had, however, overlooked the fact that in any given society there is, on this definition, a different natural rate of interest for each hypothetical level of employment. And, similarly, for every rate of interest there is a level of employment for which that rate is the ‘natural’ rate, in the sense that the system will be in equilibrium with that rate of interest and that level of employment. Thus it was a mistake to speak of the natural rate of interest or to suggest that the above definition would yield a unique value for the rate of interest irrespective of the level of employment. I had not then understood that, in certain conditions, the system could be in equilibrium with less than full employment.

I am now no longer of the opinion that the [Wicksellian] concept of a ‘natural’ rate of interest, which previously seemed to me a most promising idea, has anything very useful or significant to contribute to our analysis. It is merely the rate of interest which will preserve the status quo; and, in general, we have no predominant interest in the status quo as such.

Barkley Rosser on the crisis predictions debate

I probably should not dredge around in this further, but there has been in the last week or so a major outpouring of dicussion about “who predicted the crisis,” with a lot of wrangling and some less than pleasant comments being strewn about. I got dragged into it and should probably leave it alone, but more keeps coming, and I also think there might be a link to developments here at this blog.

Anyway, the main volley and still the main center of this discussion was set off by Noah Smith … He laid out three conditions for having really predicted it fully, actually four. The main three were to have called the housing bubble, then called the broader financial market collapse deriving from the collapse of the housing bubble, and then to have called that there would be deep recession with a long stagnation afterwards. Oh, and to really qualify for him, one needed to do this with a fully specified model based on data. He basically argued that nobody fully satisfied all these criteria, although he makes lots of favorable remarks about Dean Baker, accurately crediting him, I think, with having first called the housing bubble back in 2002, and also arguing that its collapse would lead to a recession, although not necessarily a broader financial collapse nor how deep the recession would be, and also he did not have a fully specified data-based model for his forecasts, although he did use data. I basically agree with this.

Now most of the rest of the post, after throwing out a few other names (not including me), focused on Steve Keen, who has quite prominently claimed to have called the crisis. Noah basically jumped all over Steve, even confessing to not liking him personally based on his tweets. He admits that Steve had an interesting Minsky- based model in 1995, which I happen to be a fan of, but argued that it was not based on data and had various characteristics (such as lots of cyclicity) that made it not all that good for actually forecasting the crisis in the way he prescribed. At least some of this is true, although I commented on the thread that I thought he was overdoing the harshness of his criticisms of Steve, particularly the personal ones. I have always found Steve to be personable and lots of fun in person, even though he definitely argues hard, thereby annoying many. I also noted that Steve has been the victim of a purge at the University of Western Sydney, although I did not fully spell it out there. But he has. His department was eliminated as of the end of March, and there is little question that this was done specifically to get rid of him. One can dump on Steve Keen all one wants, but he is currently unemployed as a result of a vendetta by orthodox types in the Australian establishment against him, which is a scandal as far as I am concerned …

This led me to enter the fray, talking about how I had made predictions on the old Maxspeak about the housing bubble, but that these were not available due to the archives being sealed. Although these were initially inspired by Dean Baker and later supported by data from Shiller in his Irrational Exuberance, 2nd edition, Chap. 2 (did not mention that, but is true). I also noted that though I did not blog on it early, I gave talks about the link between the housing bubble and global financial markets, forecasting a major crash in March and December, 2007 (dates of speeches, I did not pick a time for the crash), with this insight coming from a Sept. 2006 speech by Timothy Geithner in Hong Kong, of all people. I then called that the crash was coming soon in a post here that was … based on a model of mine with Antonio Palestrini and Mauro Gallegati, published in Macroeconomic Dynamics in 2011, although the first draft was out in 2005. Nobody was interested in publishing an ABM of Minsky dynamics somehow prior to the crash. It was this model that Jamie cited when he mentioned me.

That model was more specifically of the three different kinds of crashes that can come out of a bubble according to Minsky initially and picked up by Charles Kindleberger, in his classic _Manias, Panics, and Crashes_: a sudden fall from the peak, a gradual decline from the peak with no hard crash, and then one with a “period of financial distress” wherein there is a gradual decline for awhile after the peak, followed by a hard crash, which is by far the most common historical pattern according to Kindleberger. I said in July, 2008 that the global financial markets were in such a period of distress, which had started in Summer 2007, varying slightly depending on the market, and that it looked like a hard crash was coming probably pretty soon, the Minsky Moment, which indeed happend in mid-September after the failure of Lehman Brothers.

I have since with Gallegati and Marina Rosser published a paper in 2012 in the Journal of Economic Issues noting how other bubbles of the period fit into this. Housing looked like the gradual decline, roughly paralleling its rise, something one would expect more from real estate, particularly residential real estate, where people resist selling their homes when the price is falling, and oil, which in 2008 followed the sudden crash scenario from $147 per barrel in July to around $30 in November, with commodities often more likely to follow this scenario than the other two. I admitted in my comment at Noah’s that I did not anywhere forecast the depth of the recession or the length of the recovery.

Then deep in the debate, Robert Viennau linked to a paper from a couple of years ago by Jamie Galbraith entitled, “Who Are These Economists Anyway?’  I do  not have a solid link to it, but it is linked to in another blogpost out yesterday by Lars Syll, 
http://rwer.wordpress.com/2013/06/04/bashing-crises-predictions
 .  Jamie’s piece mentions another set of candidates for “who predicted it,” including Marxists Patrick Bond and Robert Brennan, Keynesians such as Wynne Godly and people at the Levy Institute, Minsky non-linearians, including the late Peter Albin, me, and Ping Chen, and then “the new criminologists” who focus on insitutions and fraud, Gary Dymski and Bill Black, whom he saw as following his late father’s ideas.  (I don’t think he mentioned Steve, but maybe I just did not read closely enough.)

This would be the most recent post by Lars Syll, which on the one hand I appreciate, but on the other I think he does not quite have things right. He bashes Noah for “bashing the predictors,” and then names five people: Dean Baker, Dirk Bezemer, Nouriel Roubini, me, and Steve Keen. Now, he certainly did bash Steve, but I do not think this characterizes what he said about the rest of us. He simply linked to Bezemer’s paper, but really did not comment on it at length other than to argue that none of those listed by Bezemer fulfilled his own criteria, even if all of them got at least parts of it right. He is not all that unfavorable to Roubini, although thinking that his mechanism for the recession was off, involving a crash of the dollar, when just the opposite happened at the Minsky Moment, with Bernanke doing a Fed save by buying up $600 billion of eurotrash to prop up the collapsing euro, which was quietly rolled over during the next six months into MBSs (Noah did not spell out all those last details; I did). Dean Baker he actually said good things about, mostly, even if Dean did not have a full model. And he really did not comment on my post other than to say that Dean was one of those who did not constantly beat his own drum. I am doing so here, although I have not done so super-duper often in the past. As it is, I have to say that Lars overdid how hard Noah came down on all of us, although he definitely came down hard on Steve Keen big time, and promised in some comments to come down hard on Peter Schiff some other time.

I shall close this by noting some quotes that Lars pulled from the end of Jamie’s paper, that he had written in 2000, doing his own “claiming,” I suppose, . Just a few, and I think he is right on this. He speaks of “a kind of Politburo of correct economic thinking” that rules the profession. “They predict disaster where none occurs. They deny the possibility of events that then happen.” But, “No one of them loses face, in the club, for having been wrong. No one is disinvited from presenting papers at later annual meetings. And still less is anyone from the outside invited in.” And this remains pretty much true to this day.

Barkley Rosser

Paul Krugman – a Bastard Keynesian

Some decades ago the British economist Joan Robinson – one of John Maynard Keynes’ most brilliant students who helped him with the original draft of his General Theory – half-jokingly referred to some of her colleagues as “Bastard Keynesians”. These colleagues were mostly American Keynesians, but there were a few British Bastard Keynesians too – such as John Hicks, who invented the now famous ISLM diagram. What Robinson was trying to say was that these so-called Keynesians were fatherless in the sense that they should not be recognised as legitimately belonging to the Keynesian family. The Bastard Keynesians, in turn, generally assumed that this criticism implied some sort of Keynesian fundamentalism on the part of the British school. They seemed to assume that Robinson and her colleagues were just being obscurantist snobs.

Such a misinterpretation exists to this day. The second and third generation Bastard Keynesians – which include many of those who generally collect under the title “New Keynesian” – have reinforced this criticism. Paul Krugman, for example, in response from criticisms that he was misrepresenting the work of Keynes and his follower Hyman Minsky wrote:

“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.”

This is a classic misrepresentation of those who accuse Krugman and his ilk of Bastard Keynesianism. When people accuse Krugman and others of distorting the work of others it is not because of some sort of sacredness of the original text, but instead because Bastard Keynesianism is racked with internal inconsistencies that its adherents cannot recognise because, blinded as they are by their neoclassical prejudices, they never get beyond a shallow reading of actual Keynesian economics. What is more, these inconsistencies are not simply some sort of obscure doctrinal or theoretical nuance that only matters to hard-core theorists; rather they generate concrete policy responses that may well cause a great deal of trouble and, quite possibly, discredit Keynesian economics itself if and when they fail spectacularly should they be implemented.

Philip Pilkington