Why monetarism — and ‘New Keynesianism’ — failed

13 April, 2016 at 19:28 | Posted in Economics | 3 Comments

Paul Krugman has a post up today on why monetarism has more or less disappeared from economics nowadays. Milton Friedman’s project was, according to Krugman, doomed to failure. The key point for this argument is the following:

On the intellectual side, the “neoclassical synthesis” — of which Friedman-style monetarism was essentially part, despite his occasional efforts to make it seem completely different — was inherently an awkward construct. Economists were urged to build everything from “micro foundations” — which was taken to mean perfect rationality and clearing markets, not realistic descriptions of individual behavior. But to get a macro picture that looked anything like the real world, and which justified monetary activism, you needed to assume that for some reason wages and prices were slow to adjust.

Sounds familiar, doesn’t it? Yes, indeed, that is exactly what Krugman’s ‘New Keynesian’ buddies — Greg Mankiw, Olivier Blanchard, David Romer, Simon Wren-Lewis et consortes — are doing today!

So being consistent to his own argument, Krugman has to conclude that their project is ‘doomed to failure.’

Mirabile dictu!

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 — the macroeconomics of people like Greg Mankiw and Paul Krugman has theoretically and methodologically a lot more to do with Milton Friedman than with John Maynard Keynes.



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  1. See the direct comment on Brad DeLong’s ‘Hoisted from Fifteen Years Ago: The Monetarist Counterrevolution’:
    ‘Indeed, Keynesianism and Monetarism are basically the same proto-scientific rubbish’

  2. I am not sure Friedman would be impressed with New Keynesianism. Lucas and Sargent it certainly is, but Friedman I am not convinced. Friedman was an empiricist first and foremost. He said (JMK Keynesianism) was the “correct framework, but without the correct conclusions.” New Keynesianism/Lucas-Sargent/Samuelson is really Walrasian. You could say New Keynesians have the right conclusions, but not the right framework! And monetarist? New Keynesian ‘monetarist’ models are models of cashless economies! This is definitely not Friedman material!

    The key argument I think is about micro-foundations. Friedman was not part of this project to put macro into micro, and he preferred partial equilibrium approaches that gave good forecasts. NK Is largely stuff that goes back to Samuelson, pushed aggressively ‘foreward’ by Lucas and Sargent.

  3. I have read Krugman’s column. He is conflating Monetarism and Walrasianism; the two are very separate things. Essentially the Lucas-Sargent project was about putting macro into a classical general equilibrium micro framework. (Although they did not like Keynesian anti-cyclical policy in the same way they did not like Keynesian approaches to analysis; in my view what they were really about was looking for excuses to mathematicise the discipline so as to suit their own personal tastes.)

    Monetarism is about the importance of the stability of money growth and the dangers of using this as a anti-cyclical tool.

    Very different things.

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