My liberal friends like Krugman, and think he is essentially the definition of economic orthodoxy, and his critics are marginal figures hanging out in goofy economic ghettos like Austria and Chicago. I knew that the discipline was not nearly so united in supporting Krugmanism/Keynesianism, but I hadn’t, until just recently, begun to think that perhaps Krugman was actually the marginal figure, far out of the mainstream.
Then Krugman himself noted how out-of-the-mainstream he is. In the <a href="critique of Eugene Fama I mentioned yesterday:
what went wrong and continues to go wrong in the Lesser Depression is that eminent economists, or at least those so judged by their peers, turned their back on everything Keynes learned.
Chicago’s John Cochrane agrees that the Keynesian position is non-mainstream, and explains just how much so.
Keynesian ISLM models have not been taught in any serious graduate school since at least 1980, except as interesting fallacies or history of thought. I include my own graduate education at very liberal Berkeley starting in 1979. Even sympathetic textbooks, like David Romer’s Advanced Macroeconomics, cannot bring themselves to integrate Keynesian thinking into modern macro. The “new Keynesian” economics, epitomized by Mike Woodford’s Interest and Prices has nothing to do with standard Keynesian thinking5 . Not a single policy simulation from a Keynesian model has appeared in any respectable academic journal since 1980. Not one. The whole business was simply discredited as being logically incoherent 30 years ago.
Krugman says “turned their backs on what Keynes learned,” while Cochrane says “discredited as logically incoherent.” But both agree that economists are mostly non-Keynesian now.
Many friends and colleagues have asked me what I think of Paul Krugman’s New York Times Magazine article, “How did Economists get it so wrong?”
Most of all, it’s sad. Imagine this weren’t economics for a moment. Imagine this were a respected scientist turned popular writer, who says, most basically, that everything everyone has done in his field since the mid 1960s is a complete waste of time. Everything that fills its academic journals, is taught in its PhD programs, presented at its conferences, summarized in its graduate textbooks, and rewarded with the accolades a profession can bestow, including multiple Nobel prizes, is totally wrong. Instead, he calls for a return to the eternal verities of a rather convoluted book written in the 1930s, as taught to our author in his undergraduate introductory courses. If a scientist, he might be an AIDS-HIV disbeliever, a creationist, a stalwart that maybe continents don’t move after all.
It gets worse. Krugman hints at dark conspiracies, claiming “dissenters are marginalized.” Most of the article is just a calumnious personal attack on an ever-growing enemies list, which now includes “new Keynesians” such as Olivier Blanchard and Greg Mankiw. Rather than source professional writing, he plays gotcha with out-of-context second-hand quotes from media interviews. He makes stuff up, boldly putting words in people’s mouths that run contrary to their written opinions. Even this isn’t enough: he adds cartoons to try to make his “enemies” look silly, and puts them in false and embarrassing situations. He accuses us of adopting ideas for pay, selling out for “sabbaticals at the Hoover institution” and fat “Wall street paychecks.” It sounds a bit paranoid….
Krugman’s article is supposedly about how the crash and recession changed our thinking, and what economics has to say about it. The most amazing news in the whole article is that Paul Krugman has absolutely no idea about what caused the crash, what policies might have prevented it, and what policies we should adopt going forward. He seems completely unaware of the large body of work by economists who actually do know something about the banking and financial system, and have been thinking about it productively for a generation.
Here’s all he has to say: “Irrationality” caused markets to go up and then down. “Spending” then declined, for unclear reasons, possibly “irrational” as well. The sum total of his policy recommendations is for the Federal Government to spend like a drunken sailor after the fact.
Paul, there was a financial crisis, a classic near-run on banks. The centerpiece of our crash was not the relatively free stock or real estate markets, it was the highly regulated commercial banks. A generation of economists has thought really hard about these kinds of events. Look up Diamond, Rajan, Gorton, Kashyap, Stein, and so on. They’ve thought about why there is so much short term debt, why banks run, how deposit insurance and credit guarantees help, and how they give incentives for excessive risk taking.
If we want to think about events and policies, this seems like more than a minor detail….
[Krugman] argues for a future of economics that “recognizes flaws and frictions,” and incorporates alternative assumptions about behavior, especially towards risk-taking. To which I say, “Hello, Paul, where have you been for the last 30 years?” Macroeconomists have not spent 30 years admiring the eternal verities of Kydland and Prescott’s 1982 paper. Pretty much all we have been doing for 30 years is introducing flaws, frictions and new behaviors, especially new models of attitudes to risk, and comparing the resulting models, quantitatively, to data. The long literature on financial crises and banking which Krugman does not mention has also been doing exactly the same.
And San Jose State economist Jeffrey Hummel, responding to another Krugman essay, writes,
Indeed, Krugman’s presentation doesn’t incorporate any of the more sophisticated arguments about the financial system of such old-line, hard-core Keynesians as James Tobin. He moreover completely ignores any possible complications arising from Ricardian Equivalence, essentially knocking down straw-men objections to fiscal policy. No other Krugman article has come closer to convincing me that John Cochrane is in fact right: Krugman doesn’t actually know or understand much modern macroeconomics, as Krugman himself comes close to admitting at the article’s beginning.
What was Krugman’s admission in the beginning of that article?
I am, after all, not a Keynes scholar, nor any kind of serious intellectual historian. Nor have I spent most of my career doing macroeconomics. Until the late 1990s my contributions to that field were limited to international issues; although I kept up with macro research, I avoided getting into the frontline theoretical and empirical disputes. By contrast I probably do have a better sense than most technically competent economists of the arguments that actually drive political discourse and policy (emphasis added).
I think I’m finally done trying to figure out if I should pay attention to Krugman. I still heartily favor reading his earlier pop economics books. And when my friends try to persuade me that Keynes is the key to contemporary macroeconomic theory, I’ve got a few links to give them.