Krugman, Out of the Mainstream?

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.

Cochrane’s critique of Krugman gets much sharper, though, in his response to a Krugman’s 2009 essay “How Did Economists Get It So Wrong?”

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.

About J@m3z Aitch

J@m3z Aitch is a two-bit college professor who'd rather be canoeing.
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9 Responses to Krugman, Out of the Mainstream?

  1. You’ve touched on one of my favorite topics here, and I wrote a guest post about this for LoOG last year:

    It’s true that the mainstream didn’t anticipate the financial crisis (although some of the writers Cochrane mentioned did.) The real question for the discipline is: do we marginalize those theoretical frameworks that didn’t predict the crisis, or do we view the ones that did as anomalies and go back to the drawing board by expanding the theoretical frameworks we consider (i.e. taking Keynesianism seriously)?

    My advisor in college was a self-described Keynesian and probably one of if not the premier historians of economic thought in the country, and he would mention all the time in class that Keynesianism has not been taken seriously since the stagflation of the late 70s seemed to falsify the theory. Since the crisis, there’s been a lot of No True Scotsman wrt the Keynesian policy that resulted in 70s stagflation, and it’s fair to say that Keynesians have tended to evangelize more than most in recent years.

    That being said, I tend to be of the (perhaps best described as “institutionalist”) school of thought that economics is squishy and descriptive instead of rock solid and verifiable science, so I’d consider some charity towards Keynesian readings of the financial crisis.

    I’ve been following this discussion for a while, and recommend this essay by Peter Boettke:

  2. James Hanley says:

    Chris, Good League post. I also have noticed the oddity of Krugman emphasizing the Freshwater/Saltwater distinction, as though the discipline simply had two clearly opposed camps. That fits well with Cochrane’s argument that Krugman hasn’t kept up with the past 30 years of macro. (And what do we call the George Mason U. guys? Tidal water economists?) And this–“it is more appropriate to say that the war interrupted and contaminated the Keynesian experiment”–is an excellent way to phrase the problem of understanding Keynes and the Depression. By “institutionalist” are you by chance referencing D. North?

  3. Dr X says:


    Mankiw posted this poll of economists in May of this year.

    Click to access DavisMay2011.pdf

    The participants were not questioned about theory, but about their regard for specific economists. So that doesn’t refute your position. I would not, however, have predicted these findings after reading your post.

    My personal contact with academic economics is extremely limited. My own college professors at Northwestern, ( early 80s) impressed me with their neutrality. One of my cousins, a Harvard trained economist, circa Summers/Sachs and early DeLong leans in a Keynesian direction, but I’ve never thought of him as a mainstream kind of guy. So while I can’t summon evidence to dispute your position, I’m not necessarily impressed by statements made by a few economists who reject Keynes. DeLong runs around saying the same kinds of things about the Chicago school, though in far less dignified language than you employ.

    Have you got access to any polls that directly ask present-day economists about theory? I really am curious about this.

  4. James Hanley says:

    Dr. X,

    The reference to “out of the mainstream” only applies to Krugman vis a vis the last three decades of Macro research. In most other ways he’s right in the mainstream of economists. For example he’s staunchly in favor of free trade, he thinks monetarism is a satisfactory solution for all but the very unusual recessions, and like most economists he naively tends to assume policy responses to market failures are highly likely to result in better outcomes.

    I don’t know of any polls that ask that refined of a question. But I’m not surprised to find that in general he’s still highly respected. I read many economists who aren’t in general fans of his thinking applaud his Nobel prize and the work that led to it. I would expect that many also appreciate the value of his many pop-econ books in bringing economic concepts to the masses. He has only a few competitors in that, and perhaps no equals.

    And notice the top three blogs. Krugman is third (which is, of course, impressive) but comes in well behind the very non-Keynesian Marginal Revolution and the tax-cut advocating, Republican-aligned Greg Mankiw.

    The data is consistent with–although obviously not proof of–general respect for what Krugman has done, and a little less for what he is doing.

  5. “Institutionalist” is kind of a vague term, but three defining characteristics I’d say are a focus on micro, a preference for “political economy” over macro (or the idea that the macroeconomy is always going to emerge from policy), and a focus on structural analysis over universal ratiocinations. There is a lot of overlap with both Austrians and Marxists, that economics is not falsifiable is usually taken for given and the emphasis is more on description than (quantitative) models. Veblen, Galbraith, Coase, North, and Ostrom are the starting five. I’m feeling like I’m at the edge of my knowledge here and verging on projecting my own beliefs onto the school, but I believe institutional economists generally believe the free market is the optimal mechanism for coordinating goods and services but that this free market must be rigorously maintained by wise policy. This doesn’t sound like much of a claim, but it is if you consider that opposition to something like privatization may serve as a litmus test. There also seems to be a wide gulf politically between someone like JKG (generally considered liberal or even leftist) and Elinor Ostrom (cited admirably by John Stossel).

  6. James Hanley says:


    OK, I get where you’re coming from, and I’m pretty much in the same camp. I had the privilege of studying under Ostrom, by the way. She’s actually quite liberal in most ways, but with a streak that might be called libertarianish, driven by policy analysis (e.g., she thought the nationalization of airport security after 9/11 was silly, having no policy value). She’s had to define clearly, though–she’s probably the only person in the discipline of political science admired by both left and right. She’s also tremendously nice.

    And I had the privilege of hearing North speak at a political science conference once (on a panel with Ostrom). He gave every appearance of being as good natured as he is intelligent. Sitting in the back of the room I couldn’t help developing warm feelings about him, and I don’t usually have that experience.

    As to Austrians and Marxists, there is a bit of overlap even there, right? Both are concerned about business interests controlling government policy.

  7. Both Austrians and Marxists seem to fall into the political economy camp of the political economy/economics descriptive-social-science/quantitative-science debate which kind of came to the fore at the end of the 1800s. A lot of Marxists kind of rejected the idea of prices as crucial medium of information, and I think this is where the two groups split fundamentally. But, there is a lot of talking past each other.

    But then again, much of the commonality may simply have to do with geography: both schools arose from a mature German-speaking world and migrated to the west after that mature German-speaking world imploded.

  8. Dr X says:

    Mankiw is a tax-cutting advocate, but isn’t that to stimulate demand?

    Top of page from Mankiw Principles…:

    How is it that stimulating demand by reducing taxes (and increasing federal borrowing) pushes growth, but increasing federal borrowing and spending by the government not push growth? Mankiw definitely believes the former.

    There is certainly an argument about which would be more effective generally and the package of federal spending itself must matter, but both tax cuts and federal spending are demand stimulus, just implemented by different mechanisms.

    via: who noted that Makiw just said on Kudlow: “Fiscal policy is going to be a drag going forward as the stimulus wears out.”

  9. D.A. Ridgely says:

    Excellent post. (Good comments, too.)

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