Krugman, Babysitting, and Keynesianism (or is it Monetarism?)

Developing my lecture on Keynesianism, I’ve developed some reservations about my objection to fiscal stimulus. I’ll write more on that when I get my thoughts better organized. But in re-reading one of Krugman’s famous analogies, about the babysitting co-op, I was struck by the lack of clarity about where the line between Keynesianism and monetary policy is drawn. The story is found in his book Peddling Prosperity (recommended), in the first chapter, titled “The Attack on Keynes,” in a section subtitled “Infantile Keynesianism.” I emphasize those titles, because clearly he wants us to know this is about Keynesianism.

Here’s the story, as told by Krugman.

A group of young professional couples with children formed a baby-sitting co-op [using] coupons worth one hour of baby-sitting. Every hour of baby-sitting would involve a transfer of a coupon to the baby-sitters from the baby-sittees…

After the co-op had been in existence for some time, it got into trouble…the number of coupons in circulation became rather low. This had peculiar consequences. Since on average members of the co-op had fewer coupons in hand than the reserves they wanted, couples tried to increase their reserves by baby-sitting more and going out less. But one couple’s decision to go out is another couple’s opportunity to baby-sit, so the increase caution of the co-op’s members about spending their coupons made it increasingly difficult to find chances to earn coupons. The result was a sharp fall in the volume of baby-sitting actually taking place…

In other words, the baby-sitting co-op had managed to get itself into a recession.

This is a great Keynesian description. It’s all about a fall in aggregate demand. “The number of coupons in circulation became low” = “people were saving, not spending.” So surely Krugman demonstrates a Keynesian solution, which presumably would involve a central authority–the co-op board or something like, borrowing those coupons and spending them?

Only after a considerable time did the co-op increase the quantity of scrip in circulation. When it did, the results were…miraculous: couples began going out more, making baby-sitting opportunities more plentiful, which made couples still more willing to go out, and so on.

That’s a monetary solution! The central banking authority, the co-op board, created more money. Now I don’t have any problem with Krugman’s analogy. It’s a good one, and it’s great for explaining…monetary theory. And of course Krugman believes monetary theory works in most cases, so it’s not like he’s really perjuring himself, but he claims to be making an analogy to Keynesianism.

Here’s where the lines blur. The increase in the money/coupon supply apparently led to an increase in the velocity of circulation, which is Keynesian theory (and is not monetarism). But Keynesian theory doesn’t attribute increases in velocity to an increase in the money supply, so it’s not Keynesian. Too little money causing people to hoard it is neither strictly Keynesian nor strictly monetarist. There’s more here than I think Krugman recognized. But the key policy initiative he emphasizes is a monetary policy, not a Keynesian stimulus policy.

In fact Krugman even says at one point that “the problem was essentially monetary,” yet he purports to be writing about Keynesianism. It’s a puzzle.

David Henderson suggests another critique of the analogy.

But nowhere does Krugman mention that another way to solve a problem of excess supply is to let prices fall. This missing piece is interesting, given that it was explicitly discussed in the article from which Krugman draws the analogy. The Sweeneys pointed out that because the founders of the co-op economy imposed price controls, decreeing that one unit of scrip must always exchange for a half-hour of baby-sitting services, there would be shortages when demand was too high and surpluses when it was too low.

In other words, the problem was actually a policy problem of fixed exchange rates, neither an aggregate demand problem nor even a monetary problem.

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About J@m3z Aitch

J@m3z Aitch is a two-bit college professor who'd rather be canoeing.
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39 Responses to Krugman, Babysitting, and Keynesianism (or is it Monetarism?)

  1. D. C. Sessions says:

    I think we’re back to Brad DeLong’s big gripe about ignorance of economic history.

    Today’s monetarism is founded on Keynesian demand-side analysis, which is why you’ll find Krugman et al proposing monetary solutions in, for instance, discussion of the Japanese or European situations. Their disagreement with Friedman is that they’re not persuaded that Friedman’s monetarist purism is such a complete model that it can be used unreservedly in all situations.

    Where they take issue with today’s monetarists is that those today not only discard the Keynesian roots of Friedman’s monetarism, but go the extra step of disconnecting from Friedman as well in pursuit of a monetarism which leaves demand analysis (and its nonlinearities) out of the picture altogether.

  2. Keynesians claim monetarism is consistent with Keynesianism, so while the babysitting coop parable is an example of monetarist solutions, it is also an example of Keynesian solutions (wink wink). Where the two groups differ is that a Keynesian would consider it an equally acceptable solution for the languishing coop to collectively adopt children from some other country in order to increase the opportunities to babysit, whereas a monetarist or any other sane person would not think creating additional work for everybody was a good idea. Krugman’s parable serves to discredit Keynesianism more than anything.

    In other words, all Keynesians are monetarists, but not all monetarists are Keynesians. Krugman’s parable here illustrates another flaw of Keynesianism, and that is its reliance of contrived ideal cases to make unsupported general conclusions. To be charitable, and since I don’t think ideal cases should be credited with much epistemological heft, the best argument Keynesianism has going for it is that, if we’re talking about persistently high rates of unemployment, making work that allows people to retain skill sets may actually be superior to allowing them to fall into the vicious cycle of unemployment.

  3. James Hanley says:

    Krugman’s parable here illustrates another flaw of Keynesianism, and that is its reliance of contrived ideal cases to make unsupported general conclusions.
    I’m not so sure about that. Epistemologically you’re correct, but I think Krugman uses such parables not to demonstrate or “prove” the correctness of a theory as to explain the theory, make it accessible, for non-expert readers. I think that’s one of his strengths, and why I recommend his books to people who want to get a low-cost (in terms of effort) introduction to economics.

    Keynesians claim monetarism is consistent with Keynesianism,
    Eh, maybe now (since monetarism became more influential than Keynesianism, both in the academy and in politics), but originally they lashed out ferociously at Friedman’s heresies.

  4. James Hanley says:

    Today’s monetarism is founded on Keynesian demand-side analysis, which is why you’ll find Krugman et al proposing monetary solutions in, for instance,

    Yeah, but basing something on demand-side analysis is not really saying much. Granted Keynes was probably the first to break with Marshall and insist on focusing on the demand side, but that in itself is just a call for focusing on a particular element of the problem. It says nothing about what that element means, how we should analyze it, or how we should respond to it. And certainly there are any number of monetarists out there who wholly reject the conclusions Keynes took from focusing on AD.

    I think it’s accurate to say that’s why Krugman proposes monetary solutions, but primarily because Krugman is remarkably resistant to given even cursory consideration to any theories not based on an AD perspective. And I think he accepts monetary solutions because he, honestly and accurately, sees them as working regularly. But in his heart he seems to favor more active policy approaches, and that seems to me to be the primary explanation for why he promotes policy approaches, even to the point of contradicting his own previously published work.

  5. Dr X says:

    @James:
    “Krugman is remarkably resistant to given even cursory consideration to any theories not based on an AD perspective. ”

    I think this can be seen in two ways:

    First, as you say, Krugman is remarkably resistant to even cursory consideration to any theories not based on the AD perspective.

    Or, Krugman was, at one time, a monetarist who gave lots of consideration to a non-AD perspective (remember, he was part of Reagan‘s council of econ advisors), until the Japanese recession convinced him that monetarism couldn’t do it all. As I understand his metamorphosis, it was at that point, that Krugman began to emphasize the notion of “liquidity traps” or as Paul Samuelson once described the problem: “you can lead a horse to water, but you can’t make him drink.”

    So is it fair to characterize Krugman as resistant to even cursory consideration non-AD perspectives? I guess so, if you leave out the time before he changed his mind in the 90s, the time when he gave lots of consideration to non-AD perspectives. But I would say that consideration of the non-AD perspective is always in the background for him.

    Here’s a comparison to my own changing political and economic views. I was, for a long time, a Libertarian, quite convinced, correctly I think, that most liberals really didn’t understand libertarian perspectives. I devoted a great deal of effort to learning libertarian arguments and criticisms (economic, ethical and philosophical) of alternate perspectives that I’d bought into earlier in my life. I could argue quite well for the L perspective, frequently finding that non-libertarians were overburdened with assumptions about libertarianism that interfered with their ability to reasonably address libertarian arguments. I think that has changed some. I do know liberals now who get it and present well-reasoned counterarguments.

    So I’m not a Libertarian today, but does that mean I don’t see a great deal of usefulness in it, both as a way to think about economics and the relationship of the individual to the state? Consider that I’m now strongly committed to the idea that a single-payer system of health coverage would be both economically and morally preferable to what we have now, and superior, as well, to a completely unregulated libertarian system, but does that mean I don’t give cursory consideration to libertarian views? I guess I don’t, really, in a real, day-to-day sense, but my feeling is that I went over every bit of that ground earlier in my life and unless someone can come up with a novel game-changing, frame-changing argument(s), I really don’t expect that I’m going to change my mind. And I will know it immediately if I ever I hear a novel, game-changing libertarian argument. So far, I’ve only heard the things I’ve long understood and, at one time, endorsed.

    So am I like Krugman?

  6. James Hanley says:

    So am I like Krugman?

    No, because you don’t simply insult all libertarians and dismiss the idea that they might have some contributions worth listening carefully to. That’s a huge difference. You also demonstrate that you understand libertarianism, whereas some macro economists question whether Krugman actually understands what they are talking about at all. Here is John Cochrane, whom I have previously quoted:

    [Krugman] 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….[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?” … Pretty much all we [macroeconomists] 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.

    Conversely, I’ve never had any suspicion that you might actually be ignorant about libertarianism. Else I would have told you so long ago!

  7. Lance says:

    Dr. X,

    After several years of reading your posts and interacting with you, both here and at Ed Brayton’s blogs, I have found you to be honest and considerate almost to a fault. Still, when I hear someone say “I used to be a libertarian.” it reminds me of the fundamentalist Christians that say ” I used to be an atheist.”

    It is usually a vehicle to dismiss libertarian thought as either poorly thought out or a sign of youthful naivete. Or worse to place the libertarian at a moral disadvantage, as in “That’s what I used to believe before I began caring>/i> about other people.”

    You have gone to great lengths to distance yourself from those type of remarks.

    How would you describe yourself now, and what lead to this metamorphosis? (In 500 words or less.)

  8. Lance says:

    Sorry Mr. Hanley,

    I see I botched another tag.

  9. James Hanley says:

    Of course I often say I used to be a leftie. It’s a true statement, but presumably it carries all the same baggage.

    And that’s two strikes on botched tags. Oh, yeah, I’m keeping count. *grin*

  10. Lance says:

    I also identified as a “lefty” well into my twenties. In today’s terminology I would have self-identified as a “progressive”.

    My “road to Damascus” moment was when I realized that all of the high minded ideals of my leftist brethren (and err sistren?) could only be realized by imposing them on other people by means of continuous force.

    This became clear to me when confronted with the idea of positive and negative liberties as proposed by Isaiah Berlin.

    After that I couldn’t justify calling myself a leftist. I didn’t at first embrace the term libertarian but as my reading and thinking on the subject progressed I realized the term came closest to expressing my thoughts and values.

  11. Lance says:

    Although I prefer the term classical liberal the word liberal has been co-opted by the left.

  12. Dr X says:

    @Lance,

    “You have gone to great lengths to distance yourself from those type of remarks.”

    Yes, I have. That I was a Libertarian is a fact, and that’s why I’m very well versed in libertarian ideas. When someone says they used to be an atheist, that doesn’t say much about their former perspective on the world, other than that it didn’t include a god or gods. Atheism isn’t a system of thought that would imply a particular way of organizing and understanding human activity and relations. Someone could be an atheist, for example, and believe in astrology–a far cry from how Dawkins would think.

    When someone has been seriously involved in libertarianism–reading, writing, attending lectures, discussion groups and actually involved politically at the big L level for years–the experience imparts an understanding of this system of thinking, its variants and internal disagreements that can be quite detailed, in a way, that merely being an atheist doesn’t remotely organizes person’s thinking and views. I guess saying I was a Libertarian is a shorthand hand, for don’t assume that I don’t have a broad and detailed understanding simply because I don’t spell out all aspects of my understanding. That’s a bit defensive.

    Certainly in my case, to say I was a Libertarian, big L and small L, isn’t a way to say I know better than libertarians, as is often the case when someone says I used to be an atheist. When I say I was a libertarian, I’m trying to indicated that I’m hospitable to the ideas. Actually, that’s how I feel about atheism, though I don’t say I used to be an atheist because it isn’t illuminating as to what I believed, and it’s so readily understood as a statement of superiority, when in fact, I don’t feel superior in any way to atheists, and I have much more respect for the kind of atheist we’d more typically find at a site like Dispatches, than I have for most people who call themselves Christians. I think that the type of atheist I respect is far more interested in and committed to pursuit of truth than most Christians who seem to be truth annihilators.

    I suppose my perspective falls on the odd or unconventional side in these matters.

    I’m going to come back later to the subject of my changing ideas. I’m riding the EL right now, and thinking and writing are a bit challenging . Anyway, less than 500 words,.. I don’t know, but I’ll try to provide a few broad strokes across the subject of change in my thinking.

  13. Lance,

    I remember writing a little about my metamorphosis a while back at Dispatches, and was able to locate a link to that comment:

    http://scienceblogs.com/dispatches/2011/01/the_non-libertarian_tea_party.php#comment-3169076

    That doesn’t explain what actually changed my thinking. Briefly, my big L libertarian identity was dropped as I moved away from the party. Of course, my criticisms of the party are not an indictment of libertarians ideas. I just mention moving away from the party because I think my political identity softened up and it was one of those times in life that, as a result of softening identity, I let in more uncertainty and re-examination. People rarely change significantly because of rational argument, that’s why don’t evangelize (in any sphere). For better for worse, identity biases processing in subtle and more obvious ways. So let’s say change became more possible for me at that point in my life. It doesn’t mean that the change was right (people often make very changes), but I think this did, in my case, lead me to question myself more.

    I would divide my libertarian views into two broad sectors that were subsequently affected by the change. First, I came to believe that as logical and internally consistent as my economic views were, I was always preferring explanations for data that fit my theoretical paradigm, which was a very compelling paradigm with an enormous amount of truth and insight into economic activity. But, I came to believe that I really was bringing a bias to how I looked at these matters. That kind of self-re-examination was also partly influenced by what I was learning. I you look at some of my comments on economic matters, you can see how I’ve veered from more typically libertarian views and, I think, not without evidence, that there very well might be something to those views. That isn’t to say I have absolute certainty, but I no longer have certainty about more libertarian explanations for what we see in the world. And in some areas of my thinking I’ve become more persuaded by non-libertarian views.

    The other broad sector of my libertarian views pertains to the philosophical/ethical side of my libertarianism. I would say that this aspect of my libertarianism was influenced not by economic theories, though the economics worked well with the philosophy, but by my beliefs about the very nature of human beings. –As my beliefs about human beings (how they think, what they need) changed dramatically, my view of the suitable and even necessary organization of group relations shifted. This I could on and on about.

    In another comment at Dispatches I just touch on the subject more obliquely.

    http://scienceblogs.com/dispatches/2011/07/former_bachmann_insider_shes_n.php#comment-4297254

    In that comment, I’m merely critiquing a perception of Ayn Rand as a groundbreaking thinker about the human condition. My comment is not a critique of libertarianism. But the comment does allude a bit to my changed perception of the human condition. And that has had, for me, implications for how think of appropriate or helpful roles for the state. I certainly see the nature of the human being differently from how I saw human beings when I was a libertarian.

    I know that’s not really specific about what persuasive over time for me, but that would require a lot more discussion.

    Sorry for any typos, this has been cracked out rather quickly during a break in my schedule.

  14. dr x says:

    Oops, wrote my url where my name should be.

  15. James Hanley says:

    Dr. X,

    As far as human nature goes, I agree that a Randian approach is fundamentally wrong. I think libertarianism actually can mesh quite well with a fairly communitarian view of human nature, and that excessively individualistic libertarians are seriously misguided.

  16. Lance says:

    When I first began reading about libertarian ideas I was impressed by Rand and the philosophy of objectivism.

    It’s stated reliance on reason as the only absolute was extremely appealing to a young man just beginning the study of physics.

    I later found that objectivism was a bit sterile. It presented an idealized structure that didn’t seem to have any practical way of being applied. Of course this could be said for most philosophies.

    Still I find it interesting that some people have such a virulent reaction to it.

    It brings to mind a line from a Dire Straits song, Industrial Disease,

    “Philosophy is useless, theology is worse.”

  17. Lance says:

    Dr. X,

    I agree that evangelizing is pointless.

    You seem to have arrived at your current views by way of introspection and insights about the psycho-social nature of humans that have come through your professional experiences.

    I am still curious to hear these insights fleshed out. Perhaps they cannot be parsed in the empirical language that I best understand.

    I have always had a talent for intuiting mathematics and the underlying laws of nature but have always struggled to understand the emotional landscape of my fellow humans. I have a feeling that you don’t share this limitation.

  18. Kevin Donoghue says:

    Doesn’t issuing scrip to the members of the baby-sitting co-op count as fiscal policy?

    As I pointed out in comments to David Henderson’s post, he evidently missed this bit of The Return of Depression Economics:

    “In the story of the depressed baby-sitting co-op, one way the situation could have resolved itself would have been for the price of an hour of baby-sitting in terms of coupons to fall, so that the purchasing power of the existing supply of coupons would have risen, and the co-op would have returned to ‘full employment’ without any action by its management.”

    Krugman goes on to discuss the real balance effect, without giving it that name. That’s the issue, not fixed exchange rates (unless of course you mean the exchange rate between scrip and baby-sitting services).

  19. Michael Heath says:

    James Hanley writes:

    Eh, maybe now (since monetarism became more influential than Keynesianism, both in the academy and in politics), but originally they lashed out ferociously at Friedman’s heresies.

    When did this take place? The reason I ask is that my econ profs at Michigan State U. in the mid/late-1980s didn’t just teach both Keynesianism and Monetarism, but argued that employing both optimized results. Nothing I’ve encountered in any economy I follow has challenged their position while everything I’ve encountered since then buttresses it, e.g., the rise of China and how it is managing itself in this down cycle, the U.S. failures given its failure to properly employ Keynesianism fiscal policy in spite of the Monestarists at the Fed are doing their best. [Disclaimer, I’m no longer an ardent enough student of economics to remember all the math or observe a representative population of global economic activities.] So my limited observations has illustrated to me how badly each theory needs the other employed for optimal results, especially when an economy has big fundamental weaknesses like our’s currently does and has since the 1980s.

    Those profs also didn’t view Friedman negatively, but perceived him analogous to how biologists perceive Mendel’s contributions to biology, i.e., he made a whole aspect of policy development more feasible when the theory of monetarism was in its toddler age when he started his work researching and publishing. He pushed a maturing theory into the realm where policy makers could employ its tools. The fact he was wrong on many counts when he was at his height of influence is attributable to its newness, not his being on an incredibly wrong path in the early part of his career. He was wrong because he had a typical conservative mind-set that prevented him from adapting to new information. In fact 1962’s Capitalism and Freedom was required reading for 200-level econ students, where many of its ideas continue to resonate. The latest example is where I find the Friedman-friendly ‘fee and dividend’ to be a vastly more attractive policy solution for capturing the negative externality costs of carbon emissions than either carbon taxes or cap and trade – the latter where we’ve ignored climate change too long for it to be a sufficiently workable solution.

  20. Michael Heath says:

    James Hanley writes,

    [Krugman] in his heart he seems to favor more active policy approaches, and that seems to me to be the primary explanation for why he promotes policy approaches, even to the point of contradicting his own previously published work.

    It could be because the Fed is both independent and more technocratic and therefore does a far better job of employing technocratic solutions that leads to more optimal results. Whereas the President and Congress continually avoid technocratic solutions for policy that is politically popular with an economically illiterate society. From this perspective one’s attention is naturally drawn to the trouble-spot, which is fiscal policy which properly demands Keynesianism.

    The Fed’s relatively superior performance to the government doesn’t mean I’m an enormous fan of the Fed, I’m not. I think they do a great job but naturally gravitate to favor fighting inflation at the cost of more economic growth (and jobs though the two are no longer correlating as strongly). One should expect this from bankers. So given the Fed’s natural bias, more optimal fiscal policy favoring growth is even more paramount. Yet we instead see conservatives divorcing themselves ever-more from sound fiscal policy while demanding deflationary policies from the Fed even when deflation/contraction is the current risk. We observe this now if one watches the GOP presidential debates – an entry to the party seems to require its candidates demand the firing of Ben Bernanke in spite of successes I think will be judged heroically by future economists and historians.

  21. James Hanley says:

    Michael,

    Friedman began publishing monetarist arguments, I believe, in the ’50s. Initially there was a strong reaction against his arguments (I’d invoke Thomas Kuhn’s theory of paradigms here, rather than suggest any implications that his critics were dumb). Ironically, by the time Nixon took the U.S. off the gold standard in 1971 and announced, “I am a Keynesian now,” monetarism had already gained serious traction in the academy. When Carter appointed Paul Volcker to be chair of the Federal Reserve in ’79, monetarism became the Fed’s primary philosophy and began to seep into the public awareness. With God Greenspan’s Fed Chairmanship, monetarism became firmly entrenched politically. Your business profs would have been rather laggard had they not been familiar with monetarism by then. It’s good to hear they weren’t.

    It could be because the Fed is both independent and more technocratic and therefore does a far better job of employing technocratic solutions that leads to more optimal results.
    There is an element of that in Krugman, as some of his critics have noted. I’m ambivalent on this issue. Theoretically, it’s a bit nervewracking that the Fed isn’t particularly politically accountable. On the other hand, they clearly perform better than the elected branches. I think the answer is that, like the also-politically unaccountable Supreme Court, they just don’t have great opportunities for gain through corruption and malfeasance as members of Congress do. That hearkens back to the concept of “benevolent dictators.” If we could truly set up a government lacking incentives to bad behavior, democracy might not be necessary (and of course democracy itself is one of those incentives to bad behavior). But I think realistically we can only make that work for a few select branches of the government.

    I think they do a great job but naturally gravitate to favor fighting inflation at the cost of more economic growth
    I agree. I’m something of an inflation hawk, so a lot of times I’m strongly in favor of that focus. But it’s awfully easy to overdo it, and I think sometimes they do–like right now.

  22. James Hanley says:

    Kevin Donoghue,

    Welcome, and thanks for commenting.

    Doesn’t issuing scrip to the members of the baby-sitting co-op count as fiscal policy?
    I think it doesn’t because it is an actual increase in the money supply, not just an effort to get the current supply of money moving. I’m in a good mood today, so of course I’m open to correction on that.

    David Henderson…evidently missed this bit of The Return of Depression Economics:
    “In the story of the depressed baby-sitting co-op, one way the situation could have resolved itself would have been for the price of an hour of baby-sitting in terms of coupons to fall, so that the purchasing power of the existing supply of coupons would have risen,”

    Did Krugman write that? Crap, I wish I hadn’t quoted that part of Henderson, then. Color me embarrassed. But whether it’s made by Krugman, Henderson, or both, it’s a great point that reaffirms–for those on either left or right who doubt it–Krugman’s deep commitment to market systems.

  23. D. C. Sessions says:

    Theoretically, it’s a bit nervewracking that the Fed isn’t particularly politically accountable. On the other hand, they clearly perform better than the elected branches.

    If nothing else, the latency of doing anything in Congress is going to make for a really bad control loop. You can model it as a Laplace continuous-time function or as a Z-transform discrete time function, and either way it sucks.

    A semi-autonomous bureau like the Fed can act quickly and reduce system instability. Accountability can still be maintained by the usual BOD/executive oversight, as long as there are mechanisms (often informal) to prevent micromanagement.

    We’re starting to see a lot of papers on the relative superiority of automatic fiscal stabilizers, which have even less latency than bureaus like the Fed (which still has a rather long decision loop.) Something similar on the monetary front would be highly desirable, but would probably require a different set of econometric mechanisms to really work any better than what we have.

  24. Kevin Donoghue says:

    James,

    As to fiscal/monetary terminology, issuing scrip is a helicopter drop which I’ve always thought of as fiscal. But having just googled to see who supports me, I see Nick Rowe saying the orthodox view is that helicopter money is BOTH fiscal and monetary policy. So be it.

    Did Krugman write that?

    Yes, that quotation is from Chapter 9 of The Return of Depression Economics. Maybe it has moved in the latest edition but I’m sure it hasn’t vanished. I agree that Krugman has a lot more respect for markets than some of his readers seem to appreciate. However, when you see that particular passage in context, you’ll find he is really pointing out a limitation of the market system. He is arguing against letting a deflationary spiral run its course.

  25. James Hanley says:

    Kevin,

    OK, so “fiscal” is taking on a broader meaning than I was aware of.

    I read Return of Depression Economics over a decade ago, and I don’t have a copy. I re-read the co-op story in Peddling Prosperity, but didn’t see that bit–when I go back to the office on Monday, I’ll have to see if it’s in there, too.

    when you see that particular passage in context, you’ll find he is really pointing out a limitation of the market system. He is arguing against letting a deflationary spiral run its course.
    There is that, and I agree he’s right about deflationary spirals, but I think it’s also an argument against regulations that create price stickiness. The value of the coupons was regulated, which prevented their value from falling. Conceptually, if the co-oppers had ignored the rules and just started cutting their coupons in half, or fourths, and exchanging them, the deflation problem would have been solved.

    In a sense, the regulations created a minimum wage, that was simultaneously a maximum wage, and that’s what screwed the system. I don’t think that’s precisely Krugman’s point, although he was quick to point out the regulation’s causal role in the babysitting recession, but I think that’s an important takeaway.

    [P.S. Thanks for the Nick Rowe link. At first I thought wrote Nick Lowe…]

  26. Kevin Donoghue says:

    James,

    Krugman certainly discusses the idea (that price flexibility could cure a recession) in Peddling Prosperity, but I don’t recall him tying it back to the baby-sitting story. Richard Serlin quotes the relevant passage here:

    http://richardhserlin.blogspot.com/2008/05/listen-to-pauls-krugman-and-samuelson.html

  27. Dr X says:

    @ Lance,

    “Still I find it interesting that some people have such a virulent reaction to it.”
    ————————-
    If find that interesting, as well, and, consistent with your personal experience, I think that, generally, it is intelligent young people, trying to make sense of the world, who find Rand most appealing. Rand speaks for their efforts in a world populated by beings governed by non-rational forces that can range from mildly disconcerting, to deadly at the extreme. Rationality is the way very bright, young people often try to oppose the uglier aspects of the human condition. As bright kids awaken into a rapidly maturing conceptual world during early adolescence, they sense an enormous power and potential that they hadn’t quite experienced at a younger age. So you might say that teens and young adults can be in the thrall of this magnificent rational ability and the potential of this growing capacity to immeasurably enlarge their lives.

    But about Rand’s opponents, I think that an important underlying reason for the virulent reaction many have to Rand is that they sense that many very basic human needs, including basic survival needs, are addressed in social contexts, by non-rational forces and actions that Rand seems to hold in deep contempt. ( I believe she did, in fact, hold these non-rational forces in contempt, and I have my own ideas about why she did, but that’s beyond the scope of this comment). So the virulence of the reaction might be related to the sense of threat to survival.

    I’ve seen some very intense, angry, Rand devotees whose inner lives are, in certain respects, the psychological mirror image of those who show virulent reactions to Rand. Both sense the potent, potential threat posed by the other run amok. For Randians, the threat is the diminishment of essential rationality by anti-Randians; for the anti-Randians, the threat is the Randian disregard and even contempt for implicit, evolved, non-rational survival mechanisms. In my experience, the latter don’t articulate the specific nature of this fear as well as the Randians do, but they do sense it, feeling that Randian thought squeezes the life out of life, murdering essential parts of what sustains us. And Rand’s rage at these parts of the human psyche was, indeed, effectively murderous as her fantasies about the fates of her fictional opponents demonstrate. To reading Rand, it could seem that she’s very much out to kill what keeps them alive.

    There is probably no easily accessible spokesperson for the vital significance of non-rational capacities in the way Rand speaks for rationality. For decades it was only psychoanalysis that addressed this area of mental function via a complex metaphoric model. In the past decade and a half, social psychologists and cognitive neuroscientists have recognized and found strong evidence for these non-rational mental activities, many of which fall into the category of mental heuristics.

    Both sides in the Rand-anti-Rand disputes fail to see that both rationality and non-rational mechanisms are part of who we are because these mental functions are selected traits. Either can be turned into something monstrous or, alternatively function for our betterment. And, on balance, the presence of both, even in constant mutual tension, has been better than one part alone. Dispensing with either is to be only half human in the best sense of our possibilities. But these two broad sides of our minds live in a relentless state of dynamic tension, adjusting and readjusting through Rube Goldberg-like processes.

    The internal human landscape is filled with parallel tensions, mostly managed through unconscious activity–much of which is probably occurring at the subcortical level of the brain, in wiring and switches we don’t experience consciously. Actually, we know that’s true from study of local brain stimulation and brain injury, watching how regulatory functions, including cognitive heuristics, can go haywire. What the average person knows senses is that much of what guides and keeps them alive, moment by moment, falls outside the domain of calculating awareness. It would indeed by quite a feat to function only as a rational processor, given that capacity of human working memory (human RAM) is typically 7 items.

    I was about to go on, but I realize that this is more than enough contribution to the tangential comment pool for now.

    One other thing. Though it might not be apparent, this does bear upon my views of the state.

  28. Dr X says:

    Lance,

    I promise I’ll address how my view of government was actually affected by my changing perception of human nature, trying to use accessible observations of the way human beings actually function. I know I’ve just pieces out there without the connection yet. Eh… there’s a lot of pieces.

  29. D. C. Sessions says:

    I wasn’t aware that so many people thought Krugman was in some sense anti-market. Maybe has to do with reading him selectively, or through comments about his writing or something. I know whenever he turns “wonkish” he’s using market paradigms for analysis; an example would be his market argument for deficit stimulus: the market is signaling through prices that there is more demand for Treasuries than there is supply, therefore the source of Treasuries should sell more of them.

    However, he values and respects markets — he doesn’t worship them. He deals with market failure today:
    http://krugman.blogs.nytimes.com/2011/09/30/markets-can-be-very-very-wrong/

  30. Michael Heath says:

    D.C. Sessions writes,

    “I wasn’t aware that so many people thought Krugman was in some sense anti-market.”

    People don’t handle iconoclasts very well since they mess-up our typical cognitive shortcuts. From this respective it’s easy for demagogues to falsely claim Krugman’s anti-market simply because he’s a well-known unabashed liberal – and they do. It also opens Krugman, and people like him from all political ideologies, up to critics nibbling around the margins in order to marginalize his influence all the while avoiding his central core arguments.

    Perhaps the most misrepresented person in my lifetime which also fits this bill is Mikhail Gorbechev. While he heroically worked to liberalize the USSR and get it focused on its interests which required they discard their traditional approach and positions from the past, people like Robert Gates (then Deputy Director of the CIA) pointed towards his remaining a communist to wrongly claim Gorbechev’s voiced objectives were all a scam, that he was little different than his predecessors. Of course Mr. Gates was wildly off for the same reasons so many of Krguman’s critics make fools of themselves far more than hitting the mark on Mr. Krugman.

  31. James Hanley says:

    Dr. X,
    I think that an important underlying reason for the virulent reaction many have to Rand is that they sense that many very basic human needs, including basic survival needs, are addressed in social contexts,

    I think you’re right, but in my view your emphasis on “survival needs” isn’t the critical issue–it’s her apparent obliviousness to the basic need for social connections that really repels people (at least me). When Hank Reardon gives Dagny Taggart the necklace and says, “I didn’t give it to you because I thought you’d like it, but because I like the way it looks on you,” he is claiming that he doesn’t actually care about her, but only wants her for his enjoyment whether or not she is happy. Real world humans who aren’t psychologically damaged want to make their friends happy, and enjoy their happiness. (Of course I’m lecturing a trained psychologist here, but I suspect you agree.)

  32. James Hanley says:

    D.C.,

    I agree with what Michael said about right-leaning folks, but would add that I’ve also met folks of a more left-leaning persuasion who think Krugman is not supportive of markets. I’m not sure how they can think that–I think they just read a few of his columns where he focuses on market failures and come away with the impression that he thinks markets always fail.

    And he does focus a lot on market failure. Of course all economists understand market failures, but he focuses on it more than–perceives it more frequently, values the harms more greatly, and most importantly has greater faith in government’s ability to regulate the harm away–than most of his critics.

  33. Troublesome Frog says:

    James Hanley:

    Conceptually, if the co-oppers had ignored the rules and just started cutting their coupons in half, or fourths, and exchanging them, the deflation problem would have been solved.

    I’m a little sleepy at the moment, but I think that this was what would be called “letting deflation run its course.” It’s essentially making the argument that if everybody’s wages could simultaneously fall, the problem would go away. It would work in this model because there’s no investment, debt, interest rates, etc. Wages and prices would drop simultaneously (netting to zero effect–pure, instant, “clean” deflation), but the real wealth effect of whatever coupons people already had would increase demand for babysitting.

    In the real world, Keynes makes the argument that this is not so neat. Real wages would have to fall (impossible in the example above), people have debt, and investors have expectations and fears. You’re risking the deflationary spiral situation you agreed we should be worried about.

    I always liked the line that if your model requires that we call The Great Depression “The Great Vacation” you’re probably missing an essential element. If just letting wages fall could always correct the situation, some very strange results come about.

    (Is there any way to preview posts? I don’t see one, so sorry if the tags go haywire.)

  34. James Hanley says:

    I’m a little sleepy at the moment, but I think that this was what would be called “letting deflation run its course.”

    I was pondering that, too, and I think you’re right. But I think in that simplified case it would have worked quite well. And there’s the weakness of the model–by specifying a single-product economy, it’s applicability to a real economy is limited. That’s not a criticism, though, just an observation. All models are limited, but that doesn’t mean they’re not valuable; we just have to recognize their limits.

  35. Matty says:

    Surely being limited is the point of models in all fields. You are trying to extract the things that interest you and their relationships from the complexity of the real world so you can look at them more clearly.

  36. James Hanley says:

    Matty,

    Exactly, which is why I wanted to emphasize that I wasn’t using that word as a criticism.

  37. Troublesome Frog says:

    I’ve been waiting around to see if the thread with Brad DeLong goes anywhere, but since it looks like it has petered out, I’ll toss in a few things here since the focus is a little narrower.

    1) I think that Keynes and Friedman would agree on the implications of this very simple model. People wanted to hold more money than was available, so bad things happened.

    2) Regarding Brad DeLong’s response to your other post, I think that his point was simply that it’s hard to claim to be a monetarist while simultaneously believing that fiscal stimulus can’t be expansionary and does not become useful at low nominal interest rates. He has a more fleshed-out piece here.

    3) I think that the notion of “helicopter money” is cute, but what does that look like, practically? Once nominal rates approach zero, what does the Fed do to increase t don’t think that fistfights over bails of cash is a legacy Bernanke wants. he quantity of money without an offset in the velocity? Swapping bonds whose rate is zero for shouldn’t affect anybody’s behavior one way or the other. To make it work, they’d have to do something much more interesting.

  38. Sergio says:

    Peter Schiff made an great analysis of ths Krugmann Babaysitting stuff:

  39. Troublesome Frog says:

    Wow, it’s clearly still true that you have to be an obnoxious blowhard in order to have your own commercial radio talk show.

    This little toy problem illustrates the simple fact that interesting things happen when prices don’t adjust. Schiff gets that, just like everybody else. But it’s good for more than that. It illustrates all sorts of interesting textbook economic concepts. That’s one reason why everybody is able to use it to explain why their own particular model is right. The interesting question is what you w
    ant to illustrate.

    As I read Krugman, the fundamental point is that this recession didn’t reflect a problem with their productive capacity. There was no need for “sectoral adjustments” or retraining or anything like that. People just wanted to hold more money than was available, so the economy could be restarted by supplying more money. This is clearly true because it happened.

    Something Schiff and other Austrians never seem to adquately explain is why monetary expansion necessarily leads to malinvestment. Schiff just seems to assume it. This is especially strange in a one-good economy with no concept of debt or interest rates. How does one even define malinvestment or a “bubble” in that situation?

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