Krugman and ‘what Keynes really meant’

19 May, 2016 at 09:34 | Posted in Economics | 6 Comments

krugmanPaul Krugman has often been criticized by people like yours truly for getting things pretty wrong on  the economics of  John Maynard Keynes.
When Krugman has responded to the critique, by himself rather gratuitously portrayed as about ‘what Keynes really meant,’ the overall conclusion is — ‘Krugman doesn’t care.’

Responding to a post up here on the blog, Krugman writes:

Surely we don’t want to do economics via textual analysis of the masters. The questions one should ask about any economic approach are whether it helps us understand what’s going on, and whether it provides useful guidance for decisions.

So I don’t care whether Hicksian IS-LM is Keynesian in the sense that Keynes himself would have approved of it, and neither should you.

The reason for this rather debonair attitude seems to be that history of economic thought may be OK, but what really counts is if reading Keynes gives birth to new and interesting insights and ideas.

No serious economist would question that explaining and understanding ‘what’s going on’ in our economies is the most important task economists can set themselves — but it is not the only task.  And to compare one’s favourite economic gadget model to what ‘austerians’ and other madmen from Chicago have conjured up, well, that’s like playing tennis with the nets down, and we have to have higher aspirations as scientists.

Although I have a lot of sympathy for Krugman’s view on authority, there is also a somewhat disturbing and unbecoming coquetting in his attitude towards the great forerunners he is discussing. Krugman is a great economist, but it smacks not so little of hubris to simply say ‘if where you take the idea is very different from what the great man said somewhere else in his book, so what?’ Physicists arguing like that when discussing Newton, Einstein, Bohr or Feynman would not be taken seriously.

Krugman’s comment on this issue is interesting, however, because it sheds light on a kind of inconsistency in his own art of argumentation. Krugman has repeatedly criticized mainstream economics for using to much (bad) mathematics and axiomatics in their model-building endeavours. But when it comes to defending his own position on various issues, he usually himself ultimately falls back on the same kind of models. Models that actually, when it comes to methodology and assumptions, have a lot in common with the kind of model-building he otherwise criticizes. And although Krugman says that he is a strong believer in ‘simple models,’ those models are far from simple (at least not in any interesting meaning of the word).

But the absolute all-time low in Krugman’s response to his critics is this remarkable passage:

Has declaring uncertainty to be unquantifiable, and mathematical modeling in any form foolish, been productive? Remember, that’s what the Austrians say too.

23e17eb61f800c21ca20e84926a714a278a62f70f97c7ed404223ffa5adfbd3eI won’t comment on the shameful guilt-by-association part of the quote, but re uncertainty it’s absolutely gobsmacking how Krugman manages to mix up the ontological question — is the economy permeated by calculable risk or by genuine and often uncalculable uncertainty  — with the epistemological question — how do we manage to analyze/understand/explain/model such an economy. Here Krugman seems to say — much in the spirit of Robert Lucas — that if reality is uncertain and non-ergodic, well then let’s just pretend it’s ergodic and susceptible to standard probabilistic analysis, so that we can go on with our FORTRAN programs and mathematical models! In other areas of science that would rightfully be considered fraud, but in ‘modern’ neoclassical mainstream economics it’s obviously thought of as an unprobematical and justified procedure.

Where does all this leave us? Well, I for one, is not the least impressed by Krugman’s gadget interpretation of economics. And if labels are as uninteresting as he says — well, then I suggest Krugman and other ‘New Keynesians’ stop calling themselves Keynesians at all. I’m pretty sure Keynes would have appreciated not having his theories and thoughts being referred to by people having preciously little to do with those theories and thoughts.

Studying great forerunners like Keynes may help us to construct better and more relevant economic models – models that really help us to explain and understand reality. So when Krugman writes

Second — and this plays a surprisingly big role in my own pedagogical thinking — we do want, somewhere along the way, to get across the notion of the self-correcting economy, the notion that in the long run, we may all be dead, but that we also have a tendency to return to full employment via price flexibility

I would certainly recommend him to compare his own statement with what Keynes himself wrote:

Though we all started out in the same direction, we soon parted company into two main groups. What made the cleavage that thus divided us?

On the one side were those who believed that the existing economic system is in the long run self-adjusting, though with creaks and groans and jerks, and interrupted by time-lags, outside interference and mistakes … These economists did not, of course, believe that the system is automatic or immediately self-adjusting, but they did maintain that it has an inherent tendency towards self-adjustment, if it is not interfered with, and if the action of change and chance is not too rapid.

John Maynard KeynesThose on the other side of the gulf, however, rejected the idea that the existing economic system is, in any significant sense, self-adjusting. They believed that the failure of effective demand to reach the full potentialities of supply, in spite of human psychological demand being immensely far from satisfied for the vast majority of individuals, is due to much more fundamental causes …

The gulf between these two schools of thought is deeper, I believe, than most of those on either side of it realize. On which side does the essential truth lie?

The strength of the self-adjusting school depends on its having behind it almost the whole body of organized economic thinking and doctrine of the last hundred years. This is a formidable power. It is the product of acute minds and has persuaded and convinced the great majority of the intelligent and disinterested persons who have studied it. It has vast prestige and a more far-reaching influence than is obvious. For it lies behind the education and the habitual modes of thought, not only of economists but of bankers and business men and civil servants and politicians of all parties …

Thus, if the heretics on the other side of the gulf are to demolish the forces of nineteenth-century orthodoxy … they must attack them in their citadel … Now I range myself with the heretics. I believe their flair and their instinct move them towards the right conclusion. But I was brought up in the citadel and I recognize its power and might … For me, therefore, it is impossible to rest satisfied until I can put my finger on the flaw in the part of the orthodox reasoning that leads to the conclusions that for various reasons seem to me to be inacceptable. I believe that I am on my way to do so. There is, I am convinced, a fatal flaw in that part of the orthodox reasoning that deals with the theory of what determines the level of effective demand and the volume of aggregate employment …

John Maynard Keynes (1934)



  1. I expected you to attack Krugman’s notion of price flexibility. What does this mean? Cut the price until the market clears, or cut wages until everyone is employed?

    Whenever the term ‘models’ is used is seems to me that the specific model being referred to should be addressed. So, what are some of the models at issue: the supply-side model, the demand side model, the model of the consumer as a rational utility maximizer, the business cycle model, etc. It is not clear what is being referred to by the term model. Mentioning IS-LM in today’s context of transnational corporations operating with globalization parameters under a neoliberal ideology can hardly explain employment or average wages in one nation, not to mention labor mobility. What is the point when a CEO makes 500 times the average worker’s income, wealth is hoarded, and the 1% dwarfs the rest of the population? Keynes was arguing for a structural redistribution of the wealth and income – for fundamental reform! You seem to be saying that this is not Krugman’s point.

  2. “Krugman is a great economist, but it smacks not so little of hubris to simply say ‘if where you take the idea is very different from what the great man said somewhere else in his book, so what?’ Physicists arguing like that when discussing Newton, Einstein, Bohr or Feynman would not be taken seriously.”

    That’s probably true. But physicists arguing like that when discussing physics would very much indeed be taken seriously, and those who would dissent by appealing to what Newton, Einstein, Bohr or Feynman “really meant” would be dismissed as engaging in textual analysis, and not in science per se. And I believe that Krugman is discussing economics, not what “Keynes really meant”.

  3. One of the more fun mental exercises of my life was trying to expand on Veblen’s notion that the biggest class distinctions were between the Leisure and Industrial Classes. Turns out this was a very large subject but one of the more interesting items was how the two classes validated their knowledge of the world. While the Industrial Classes rely almost exclusively on experimentation / demonstration, the Leisure Classes seem bonded to their their habit of citing authority (footnotes, quoting famous people, and hairsplitting over the author’s original intent.) Ask yourself, have you ever heard a high-end Industrial Class person like an aeronautical engineer EVER quote the founding fathers (like Wilbur Wright) of aviation to prove his point?

    The truth is, if economics were a science as it claims to be, it would make no difference whatsoever what Keynes said or meant. If his observations were accurate, we could validate them with experimentation. And in fact many of his observations can be so validated. But they are not true because Keynes said they were—they are true because we can replicate his thinking with similar results.

    But economics is NOT a science, and so it is often reduced to theological-grade hairsplitting. Economics—theology for folks who aren’t very good at it.

  4. The Keynes link doesn’t work… Sandwichman has JMK’s statement at EconoSpeak:

  5. Simon Wren Lewis is getting stroppy about a Telegraph article which says things like:

    “It is not clear that economics has been getting better over time, unlike biology, physics or medicine.”

    I love it! But it is precisely because of these things we need to constantly go back to the classics of the discipline and make sure we understand the arguments made correctly – whether we agree with them or not. I would argue that economics since Samuelson 1948 has been regressive, and in many ways has turned the clock back on what Keynes tried to achieve.

  6. “I would argue that economics since Samuelson 1948 has been regressive”

    Entertaining opinion. Anything to back it up with?

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