Friday, March 30, 2012

Krugman and Stephen Keen on Minsky

      I won't attempt to arbitrate the debate between Krugman and on Minsky at the moment. Stephen Keen definitely hurts Krugman to the quick by speaking of him as just another neoclassical economist and claiming that he doesn't get Minsky at all.

    "for those of us who are not new to Minsky, it is hard to recognise any vestige of the Financial Instability Hypothesis in Krugman’s work. This reaction is based not merely on Minsky’s explicit denial that his hypothesis could be modelled from a neoclassical perspective (Minsky 1982 , p. 5),
1 but on ways in which it is strictly incompatible with New Keynesian methodology."

    This is the paper Krugman co-authored with Eggertsson that Keen is questioning:

    "In this paper we present a simple New Keynesian-style model of debt-driven slumps – that is, situations in which an overhang of debt on the part of some agents, who are forced into rapid deleveraging, is depressing aggregate demand. Making some agents debt-constrained is a surprisingly powerful assumption: Fisherian debt deflation, the possibility of a liquidity trap, the paradox of thrift, a Keynesian type multiplier, and a rationale for expansionary fiscal policy all emerge naturally from the model. We argue that this approach sheds considerable light both on current economic difficulties and on historical episodes, including Japan’s lost decade (now in its 18th year) and the Great Depression itself/"

    Krugman comes back-albeit in a somewhat cursory way-by accusing Keen of "banking mysticism."

    "Reading the comments on my Steve Keen post, I had an insight: banking is where left and right meet. Both the Austrians — who believe that whatever the market does is right, unless it’s fractional reserve banking, which is somehow terrible — and the self-proclaimed true Minskyites view banks as institutions that are somehow outside the rules that apply to the rest of the economy, as having unique powers for good and/or evil"

     "I guess I don't see it that way."

     I'm not sure why Krugman is supposed to be neoclassical. Most neoclassicals are pretty critical of Krugman these days. It may be to the extent that Keen believes Krugman is a proponent of the Efficient Market Hypothesis and believes in equilibrium. I suppose it's true that even the New Keynesians largely believe in EMH, although with varying degrees of qualification. Of course if Keen is right that a New Keynesian treatment disqualfies you of using an effective model in understanding Minsky than that would explain it.

     Of any mainstream economist today Krugman even among the NKers is by far the one most willing to think outside the box. He questions even DSGE itself, and goes as far as claiming that he finds what for people like Sumner and Cochrane is a bugaboo-IS-LM-is if anything more accurate in getting the picture-Krugman says that the "fancier models" of DSGE are more helpful just as aids to check your work.

     It would seem that Krugman comes closet among mainstream economists to having an open mind and his Krugman's Insurgency the field of economics has recently roiled the consensus of mainstream macro. He has become the bane of the existence for people like Scott Williamson, who wonder were the good Krugman has gone before he went over to the dark side.

    For more on Krugman's Insurgency see Noah Smith at Noahpinion

    If I had to answer this I'd say a few things may be happening. One is that since taking up his position at the New York Times, Krugman has become more and more sensitive to reader backlash in calling him must another smug neoclassical-'yeah you're suffering, and I'm not but hey the market's efficient, so you have to deal with it, and maybe try making better choices as I have."

    Not that I believe his move is mostly due to this-he has changed his world view over time, you can see it by going through what he's written over the years. Is it a vice to do so or must we have the same view always, regardless of what changes in the world?

    Having said all this for Krugman, it is true of course, that none of this makes him right. And while he is the most unorthodox among mainstream economists today, that doesn't preclude that he is still too orthodox is some important ways-I won't try to answer this nay or yay, now just speaking in principle.

   It is however, interesting to consider Minsky on his own terms-apart from whether Keen is right that Krugman gives an inadequate look at him or not. Minsky has a lot to say about two things. One of course, is the "Minsky Moment" which describes the economy going into an overheated bubble. Since the crisis many, indeed many on Wall Street, have spoken of him now. Superficially his critique of the bubble economy might even sound Austrian.

   What I find particularly interesting about him however is what he says about deep recessions and depressions. An economy-previously in a bubble-that is about to go into a deep downturn has a couple of options according to Minsky:

    "As the boom collapses, the fundamental problem facing the economy is one of excessive divergence between the debts incurred to purchase assets, and the cash flows generated by them—with those cash flows depending upon both the level of investment and the rate of inflation. "

   "The level of investment has collapsed in the aftermath of the boom, leaving only two forces that can bring asset prices and cash flows back into harmony: asset price deflation, or current price inflation. This dilemma is the foundation of Minsky's iconoclastic perception of the role of inflation, and his explanation for the stagflation of the 1970s and early 1980s."

     This shows us the two choices very starkly. In the Depression, we pursued the "liqidantionist" line, that is to say, asset price deflation. This time, in 2008, we again saw a lot of asset price deflation. What is fascinating is what Minsky had to say bout the "stagflationist" 70s. In particular,, is his book, "Stabilizing and Unstable Economy" where he analyses the recession of 1975. This was in many ways worldwide, not just in the US.

    "The existence of a large, increasing proportion of disposable income that is independent of employment or the profitability of business is beneficial, for it sustains demand and thus sustains demand and thus avoids very deep and and sustained fall of the economy during a recession. On the other hand, the existence of such programs, combined with a tendency to expand their scope when the economy is in recession, if harmful, for they impart an inflationary bias in the economy. The increase in disposable income, even as employment and output decreased during 1973-75, is one reason prices kept rising during the recession."

   This was the time when we took the "road not taken" in 1929 or 2008. According to Minsky we would have had a Depression in 1975 except that in that case we went the route of price inflation. The very large government transfer payments, the automatic stabilizers made up for the loss in demand. Unemployment benefits in particular skyrocketed during the 1975 slump. This of course is what Keynesians like myself, Krugman, et al have urged in this slump.

  However, for Minsky this road is not without problems either. He does agree with the conservative reaction that there is something problematic about economic activity being so deeply dependent on government transfer payments. Though, to be sure he agrees with us liberals, that the alternative is a depression. Ultimately, neither road is good-they are both deeply problematic, though the price inflation route is at least in the short term better, Like much medicine there are deep side effects. Still, would you rather let the patient die, or give them the needed medical treatment and suffer some-even serious-side effects?

   In this same vein, I cam across this interesting essay by James Crotty, it was back in 1986, yet it still of interest today, certainly, though some of the predictions it makes have not been so prophetic-perhaps, unfortunately on some issues.

    The essay tries to bring together Minsky, with Keynes, and yes also Marx. Strange bedfellows? Crotty acknowledges this:

     "As I see it, Marx, Keynes, and Minsky might all be embarrassed to be found in bed together, but they are not such strange bedfellows after all. Each has his role to play in constructing a theory of political economy adequate to our needs."

     He sees all three as sort of complementing each other and making up for what the others lack. He seems to offer what he sees as a solution to the recurring problem in economics-do you allow debt-deflation or do you re-inlfate prices?

     Cotty seems to think that this is a problem of capitalist economies that could be solved by more social investment-the government taking a more-perhaps a much more-active part in making investment decisions for the economy. He quotes Keynes as mentioning something like this in The General Theory. He does point out that Keynes never really tells us how we might practically achieve this, politically. This of course is the problem of economics as a social science-it can't predict where the political waters may go.


    Cotty believes this was the strength of Marx-to do a better job of relating economic issues and needs to the political sphere. Ultimately, he himself doesn't really tell us what this social investment might look like. During the New Deal, here in the US we did see the government in the South particularly make a lot more investments-the TVA especially notably. Michael Lind has argued that until the TVA and then finally, WWII, the South was essentially a Third World country within the First World United States-the East was the true First World. The South was not fully modernized till WWII.

    Interesting, in any case. I'm not sure what the ultimate answer to this question is-I still am partial to Keynesian re-inflation though I recognize that Minsky's qualms about inflation can't be wholly dismissed out of hand.


1 comment:

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