Krugman & Wren-Lewis flim-flamming on heterodox assaults on mainstream economics

10 Jan, 2015 at 18:10 | Posted in Economics | 3 Comments

Simon Wren-Lewis is not satisfied with heterodox economists’s attacks on the mainstream. He’s even annoyed:

The implication is that modern intertemporal New Keynesian theory is somehow behind the view that austerity will not harm a recovery.

This is absolute and dangerous nonsense. Having spent the last decade or two looking at fiscal policy in intertemporal New Keynesian models, I know that exactly the opposite is true. In these models temporary decreases in government spending have significant negative effects on output for given real interest rates … Anyhow anyone who says that mainstream New Keynesian theory supports austerity does not know what they are talking about.

And Paul Krugman seems to share his annoyance:

The point is that standard macroeconomics does NOT justify the attacks on fiscal stimulus and the embrace of austerity. On these issues, people like Simon and myself have been following well-established models and analyses, while the austerians have been making up new stuff and/or rediscovering old fallacies to justify the policies they want. Formal modeling and quantitative analysis doesn’t justify the austerian position; on the contrary, austerians had to throw out the models and abandon statistical principles to justify their claims.

flimflam-2But even if Simon and Paul do not generally defend (“expansionary” or not) austerity measures, there certainly are other mainstream “New Keynesian” economists that do. Greg Mankiw, e. g., has more than once defended austerity policies (here). There has to be some reason for this. If three self-proclaimed sort-kinda “New Keynesians” come up with different views on such a central macroeconomic issue, one has to legitimately ask what kind of theories and models that ilk of “Keynesianism” stands for.

Reading Wren-Lewis and Krugman ultimately reaffirms the impression of a macroeconomic framework that doesn’t succeed in giving a convincing analysis of what a modern capitalist economy is. Keynes’s macroeconomics was a theory for all seasons. It is not enough to put on some “Keynesian” glasses at the zero lower bound and then take them off and put on New Classical glasses once we’re out of that predicament.

Back in 1994 Laurence Ball and Greg Mankiw argued that

although traditionalists are often called ‘New Keynesians,’ this label is a misnomer. They could just as easily be called ‘New Monetarists.’

That is still true today. “New Keynesianism” is a gross misnomer. The macroeconomics of people like Greg Mankiw, Paul Krugman and Simon Wren-Lewis has theoretically and methodologically a lot to do with Milton Friedman, Robert Lucas and Thomas Sargent — and very little to do with the founder of macroeconomics, John Maynard Keynes.

3 Comments

  1. The question is not “are there New Keynesians who recommended austerity?”

    The question is, “Is there an identifiable method to separate the ‘ideological’ analysis supporting austerity from practitioners like PK and SWL who are practicing ‘textbook’ economics?”

  2. “Keynes’s macroeconomics was a theory for all seasons.”

    Nope. Keynes made it pretty clear that he just wanted to add something to the Classical theory, to make it more general (the book wasn’t called New Theory). He made it crystal clear that the Classical theory is appropriate in the long-run while his is appropriate in the short run (of course he feared, thankfully wrongly, that the short-run will be very long, something we nowadays label secular stagnation):

    “But if our central controls succeed in establishing an aggregate volume of output corresponding to full employment as nearly as is practicable, the classical theory comes into its own again from this point onwards. If we suppose the volume of output to be given, i.e. to be determined by forces outside the classical scheme of thought, then there is no objection to be raised against the classical analysis of the manner in which private self-interest will determine what in particular is produced, in what proportions the factors of production will be combined to produce it, and how the value of the final product will be distributed between them.”

    So you guys, the self-proclaimed Apostles of Keynes, are wrong. You really should think twice before you call other folks keynesian heretics (not that good economists care about whether their thoughts are in-line with a dead economist, no matter how brilliant he was; good economists care about doing good economics).

    • From the context of my remark, I thought it would be clear that I meant “not only at the ZLB” …
      And yes, Keynes theory is not long run. “In the long run we are all dead” …


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