Secular stagnation and failed interpretations​ of Keynes

7 September, 2018 at 14:01 | Posted in Economics | 3 Comments

Commenting on the Stiglitz-Summers debate on secular stagnation, Roger Farmer writes:

nk-2-2We cannot continue to make unfounded assertions about economic policy using the failed interpretation of the General Theory that evolved from John Hicks’ attempt to reconcile Keynes with the classics. The current manifestation of that approach is so-called New Keynesian Economics, which Summers himself has rightly rejected because it is inconsistent with secular stagnation. But it is not enough to assert that secular stagnation is possible. It is time to confront alternative theories of secular stagnation with empirical evidence, as I have done. The assertion that money wages are downwardly rigid is not, in my view, a credible explanation of persistent unemployment. Nor was it a credible explanation for Keynes, who asserted that his theory did not rely on the assumption of rigid wages …

In my work, expectations – or so-called animal spirits – are a new and independent fundamental that determines the steady-state unemployment rate. When we feel rich, we are rich. And if animal spirits are indeed fundamental, it becomes important to understand the factors that determine swings in confidence.

If a large dose of expansionary fiscal policy is not the answer, what is? My response is that the right way to respond to financial crises is with policies that restore the value of private assets. And the right way to prevent financial crises in the first place is to intervene in the financial markets to moderate swings in asset values and to head off recessions before they happen.

Maintaining that economics is a science in the ‘true knowledge’ business, I cannot but concur with Farmer. We have to remain skeptical of the pretences and aspirations of ‘New Keynesian’ macroeconomics. So far, I cannot really see that it has yielded very much in terms of realist and relevant economic knowledge. And there’s nothing new or Keynesian about it.

counterfeit‘New Keynesianism’ doesn’t have its roots in Keynes. It has its intellectual roots in Paul Samuelson’s — partly following in John Hicks’ footsteps — ill-founded ‘neoclassical synthesis’ project, whereby he thought he could save the ‘classical’ view of the market economy as a (long run) self-regulating market clearing equilibrium mechanism, by adding some (short run) frictions and rigidities in the form of sticky wages and prices.

But — putting a sticky-price lipstick on the ‘classical’ pig sure won’t do. The ‘New Keynesian’ pig is still neither Keynesian nor new.

The rather one-sided emphasis of usefulness and its concomitant instrumentalist justification cannot hide that ‘New Keynesians’ cannot give supportive evidence for their considering it fruitful to analyze macroeconomic structures and events as the aggregated result of optimizing representative actors. After having analyzed some of its ontological and epistemological foundations, yours truly cannot but conclude that ‘New Keynesian’ macroeconomics, on the whole,​ has not delivered anything else than ‘as if’ unreal and irrelevant models.

The purported strength of New Classical and ‘New Keynesian’ macroeconomics is that they have a firm anchorage in preference-based microeconomics, and especially the decisions taken by inter-temporal utility maximizing ‘forward-looking’ individuals.

To some of us, however, this has come at too high a price. The almost quasi-religious insistence that macroeconomics has to have microfoundations – without ever presenting neither ontological nor epistemological justifications for this claim – has put a blind eye to the weakness of the whole enterprise of trying to depict a complex economy based on an all-embracing representative actor equipped with superhuman knowledge, forecasting abilities and forward-looking rational expectations.

And then, of course, there is that weird view on unemployment that makes you wonder on which planet those ‘New Keynesians’ live …

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3 Comments

  1. “In my work, expectations – or so-called animal spirits – are a new and independent fundamental that determines the steady-state unemployment rate. When we feel rich, we are rich. And if animal spirits are indeed fundamental, it becomes important to understand the factors that determine swings in confidence.”

    There is a far simpler explanation for recessions like the recent one. The collapse in asset markets forced people to cut their consumption for long periods. The recent revision of data by the US Bureau of Economic Analysis shows that the resultant increase in the saving rate lasted far longer than originally believed.

    People cut their consumption not because they felt poorer but because they were poorer.

  2. Farmer: . . . the right way to respond to financial crises is with policies that restore the value of private assets.
    .
    hmmm.
    .
    Much of what passes for “debate” over the state of the macro economy is just coded language for political desiderata that dare not speak, for fear of condemnation as the apology of the would-be minions of the mega-rich for policies of predation.

    The “politics” of policy to which both Stiglitz and Summers refer is the continuing struggle over the distribution of income and wealth, a “politics” that has seen a full 10% share of U.S. national income shifted from the bottom half to the top 1% over the course of 30 years. “Secular stagnation” is just an excuse for the policies that has brought about that shift in income distribution, offered to obscure rather than explain.
    .
    Roger Farmer, distinguished and serious, steeped in theory, brings his ego and desperate thirst for attention to this contretemps between Stiglitz and Summers, neither of whom lack for worldly attention, but before he talks about “business confidence” as it were some new concept, and recommending the restoration of private value, he might consider the nature of the claims behind those assets, he wants to “restore” like discarded Bourbons.
    .
    Economists of a certain familiar type do like to prattle on about micro foundations, but do not want to consider politics, let alone rampant fraud and predation, as fundamental to economic structure. The neoclassical synthesis buried the core function of (unearned!) economic rents and with rents, economic structure itself. Prices and wages that are mysteriously “sticky” “downward” are the ghosts of that disappeared economic structure.
    .
    Farmer complains — rightly I suppose — that neither Stiglitz not Summers expose their respective “models” in a clarifying game of “I will show you mine, if you show me yours” but can any of the three offer such clarity without embarrassment? I would judge Stiglitz most innocent of the three as he seems to want to address the economic distress caused by an austerity aimed at ” restoring” the value of the private assets of the 1% at the expense of a wide swath of wage earners.
    .
    But, none of them seem all that eager to leave behind those esoteric, highly abstract “models” with few referents to the observable world. If we stopped talking about the economy in the framework of terms dictated by a “model” of a “market economy” tending toward “general equilibtium” in price, we might begin to talk more convincingly about the state of the world we are in. It would not, in my view, be all happy talk a la MMT.
    .
    I think the truth about the policy Summers expertly managed in 2008 is that he very deliberately steered policy toward the stimulus — in size and character — that would do the least damage to a structure that favored the vested interests of the 1%. He made no mistake in judgment; he served his masters well. Stiglitz is a tool for suggesting otherwise. This is not a technical problem, but as Stiglitz rightly says, but not plainly enough, a political problem. Summers works the very, very rich — the 1/10th of 1%, not even the 1% — and Farmer aspires to do the same on the evidence of his essays.
    .
    Still, there are problems of economics involved in managing the economy, even if those who argue for the convenience to the rich the case of unseen conditions and forces dictating policy, or the self-regulating nature of “the system”, leave a deficit in the public discourse where insight and judgment are desperately needed. The implications of global resource limits and the on-going collapse of the natural ecology worldwide are far more important constraints on policy — or should be — than a purely imaginary secular stagnation or psychology of business confidence.

    • “the right way to respond to financial crises is with policies that restore the value of private assets.”
      .
      Yes, this is the lesson learned from 2008. But the fiscal stimulus was just political theatre; the real monetary expansion of world dollar reserves was provided by the Fed. As the Fed printed digital dollars, the dollar got stronger. Farmer may understand this; Stiglitz and Summers are clueless, or lying.
      .
      The further lesson is that we should apply the Fed’s proven (against market testing) unlimited liquidity to funding good ideas such as universal basic income. No taxpayer money was needed for the Fed to rescue world markets from themselves in 2008 and after.
      .
      “a full 10% share of U.S. national income shifted from the bottom half to the top 1% over the course of 30 years”
      .
      The pie slice of the top 1% has grown much quicker than other slices, due to private money creation. The bottom half’s pie slice has grown but much slower.


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