Thursday, April 12, 2012

Krugman Considered

      I've kind of been thinking about the back and forth we have seen about him since the latest go around between him and Keen. For me I find the MMT stuff interesting. Their impact on me is the opposite of Mitt Romney's on the American people. Whereas the more they hear about Mitt Romney the less they like him, the more I hear about MMT the more intrigued I become.

     I had initially been quite skeptical of it when I first came across it. However, I have over time begun to see where it's going and that it may well provide a lot of the weapons we really need-"we" being what I like to think of as Team Keynes.

     The one thing I haven't really gotten in the past as their seemingly relentlessly polemical attitude towards Krugman. I mean Krugman I've always seen as being on my side, on our side-again "our" side being Team Keynes. In looking over that post by Keen, after things have died down a little I am yet again struck that Keen's piece is way harsh.

    In particular this quote:

     "Krugman himself is unlikely to stop walking on two legs—he enjoys standing out in the crowd of neoclassical quadrupeds—but the pack will return to form once this crisis ultimately gives way to tranquility."

      Ouch! The name of the piece is "Like a Dog Walking on Hind Legs."

      Mind you, there is an African American saying: 'Only the truth hurts.'

      I actually find that a rather harsh saying and actually wrong. Lies about people can hurt even more. But there is some truth in it-it's neither wholly right or wrong.

      In the case of Krugman, Keen can deliver the goods to back up such a judgment:

      He quotes Krugman on a talk " he gave in 1996 when speaking to the European Association for Evolutionary Political Economy:

      "I like to think that I am more open-minded about alternative approaches to economics than most, but I am basically a maximization-and-equilibrium kind of guy. Indeed, I am quite fanatical about defending the relevance of standard economic models in many situations…"

       This would seem to conform to this uncharitable narrative that Keen suggests here about Krugman. His virtue is to always be the neoclassical economist who walks on his hind legs.

       But when push comes to shove:

       "most economists who try to apply evolutionary concepts start from some deep dissatisfaction with economics as it is. I won’t say that I am entirely happy with the state of economics. But let us be honest: I have done very well within the world of conventional economics. I have pushed the envelope, but not broken it, and have received very widespread acceptance for my ideas. What this means is that I may have more sympathy for standard economics than most of you. My criticisms are those of someone who loves the field and has seen that affection repaid."

      So even if he does have reservations about the field he is still loved by this field that he sometimes razzes quite sharply. You can argue that this has always been his modus operandi-he's always more vocal about the limitations and weaknesses in neoclassical economics. But at the end of the day, he is one of them and they mostly indulge his sometimes infidelity from orthodoxy. He is more critical than most within the establishment but at the end of the day he is still in it and would not want to leave it. He's kind of it's court jester.

     So is that it, is Krugman the court jester of Neoclassical economics? This paper that Keen quotes from, is actually interesting reading in it's own right. At this speech he talked about the idea of "evolutionary economics" and he revealed that he did actually do a good deal of reading about the other "less dismal" sciences.

      "But there is another reason I am here. I am an economist, but I am also what we might call an evolution groupie. That is, I spend a great deal of time reading what evolutionary biologists write - not only the more popular volumes but the textbooks and, most recently, some of the professional articles. I have even tried to talk to some of the biologists, which in this age of narrow specialization is a major effort. My interest in evolution is partly a recreation; but it is also true that I find in evolutionary biology a useful vantage point from which to view my own specialty in a new perspective. In a way, the point is that both the parallels and the differences between economics and evolutionary biology help me at least to understand what I am doing when I do economics - to get, to be pompous about it, a new perspective on the epistemology of the two fields. "

      This idea of a meeting of the minds between economists and biologists is interesting though the odds are probably against it being too productive, alas. Hard to believe there was a time in which philosophy believed all the sciences could be brought together holistically.

       What he goes on to do is suggest that contrary to what the "evolutionary economists"-who he is addressing-might hope, the field of evolutionary biology is not so very different than economics. I find particularly interesting some comments he makes as an aside about Galbraith.

The Coming Great Depression of 1990 by Ravi Batra? And I guess it is no secret that even John Kenneth Galbraith, still the public's idea of a great economist, looks to most serious economists like an intellectual dilettante who lacks the patience for hard thinking. Well, the same is true in evolution."

     "I am not sure how well this is known. I have tried, in preparation for this talk, to read some evolutionary economics, and was particularly curious about what biologists people reference. What I encountered were quite a few references to Stephen Jay Gould, hardly any to other evolutionary theorists. Now it is not very hard to find out, if you spend a little while reading in evolution, that Gould is the John Kenneth Galbraith of his subject. That is, he is a wonderful writer who is beloved by literary intellectuals and lionized by the media because he does not use algebra or difficult jargon. Unfortunately, it appears that he avoids these sins not because he has transcended his colleagues but because he does does not seem to understand what they have to say; and his own descriptions of what the field is about - not just the answers, but even the questions - are consistently misleading. His impressive literary and historical erudition makes his work seem profound to most readers, but informed readers eventually conclude that there's no there there. (And yes, there is some resentment of his fame: in the field the unjustly famous theory of "punctuated equilibrium", in which Gould and Niles Eldredge asserted that evolution proceeds not steadily but in short bursts of rapid change, is known as "evolution by jerks")."

     "What is rare in the evolutionary economics literature, at least as far as I can tell, is references to the theorists the practitioners themselves regard as great men - to people like George Williams, William Hamilton, or John Maynard Smith. This is serious, because if you think that Gould's ideas represent the cutting edge of evolutionary theory (as I myself did until about a year and a half ago), you have an almost completely misguided view of where the field is and even of what the issues are."

      Now it is important that we bear in mind that he said this in 1996. But at the time at least he certainly held Galbraith in pretty low esteem-as the Stephen Jay Gould of economics. Again, Krugman had said that he liked to push the edge of the mainstream macro, however he would never go too far. Evidently, Galbraith is one who would go too far. To recall:

     "I have done very well within the world of conventional economics. I have pushed the envelope, but not broken it, and have received very widespread acceptance for my ideas."

      So if Krugman was the court jester-someone who could flout orthodoxy in important ways but never went too far so as to lose widespread acceptance for his views, Galbraith went too far and lost the respect of macro. Krugman was the jester, Galbraith the foil. Maybe we see Krugman's real dilemma? His is a more open, critical mind than average who is a genuine progressive and does believe in Keynes' vision but who also really doesn't want to go too far to the point that he has lost respectable opinion?

     In all fairness this is 16 years ago now. Krugman has certainly gone pretty far since. Two things he has done especially shook macro since this speech. The first was in 1998 when he begun his work on liquidity traps in earnest. This was the rise of his analysis of "depression economics." He suggested that there had been major macro errors made in Japan and that even went so far as to suggest it can happen here.

      Then there was the (in)famous paper he wrote in 2009 that declared that marco had failed. For those who don't come from those circles this may not seem like such a big deal. However such people are "ex-intimates." In this intimate world Krugman had uttered quite a heresy.

       In his piece "How Did Economists Get it So Wrong?"  Krugman says:

       "It’s hard to believe now, but not long ago economists were congratulating themselves over the success of their field. Those successes — or so they believed — were both theoretical and practical, leading to a golden era for the profession. On the theoretical side, they thought that they had resolved their internal disputes. Thus, in a 2008 paper titled “The State of Macro” (that is, macroeconomics, the study of big-picture issues like recessions), Olivier Blanchard of M.I.T., now the chief economist at the International Monetary Fund, declared that “the state of macro is good.” The battles of yesteryear, he said, were over, and there had been a “broad convergence of vision.” And in the real world, economists believed they had things under control: the “central problem of depression-prevention has been solved,” declared Robert Lucas of the University of Chicago in his 2003 presidential address to the American Economic Association. In 2004, Ben Bernanke, a former Princeton professor who is now the chairman of the Federal Reserve Board, celebrated the Great Moderation in economic performance over the previous two decades, which he attributed in part to improved economic policy making."

       "Last year, everything came apart." Krugman went on to say that macro mistook beauty for truth and had given way to "Panglossian finance."

        "It’s much harder to say where the economics profession goes from here. But what’s almost certain is that economists will have to learn to live with messiness. That is, they will have to acknowledge the importance of irrational and often unpredictable behavior, face up to the often idiosyncratic imperfections of markets and accept that an elegant economic “theory of everything” is a long way off. In practical terms, this will translate into more cautious policy advice — and a reduced willingness to dismantle economic safeguards in the faith that markets will solve all problems."

     This 2009 Krugman who called for acknowledging the importance of irrational and often unpredictable behaviour ought to be put up against what the 1996 Krugman said while addressing the evolutionary economists.

    "The main difference between evolutionary theory and economics is that while economists routinely suppose that the agents in their models are very smart about finding the best strategy - and an economist is always defensive about any model in which agents are assumed to act with less than perfect rationality - evolutionists have no qualms about assuming myopic behavior. Indeed, myopia is of the essence of their view."

      So what gives? How much has Krugman changed or not changed? One economist who seems to truly revile Krugman is Stephen Williamson over at his New Monetarism blog. I don't really get how he's even a Monetarist, most Monetarists at least want a lot of monetary stimulus but not Williamson.  In a another recent missive he's at it again:

     "I wish I didn't have to do it, but it's time - once again - to stick up for economic science. Krugman has crossed the line (I know it when I see it) here. If it offends you that he offends me, then stop reading. You're not allowed to whine about Krugman-bashing. The guy deserves it, after all."

     What roused him this time? This paragraph by Krugman:

      " sense is that a lot of younger economists are aware, even if they don’t dare say so, that freshwater macro has been a great embarrassment these past four years, and that liquidity-trap Keynesianism has done very well. This will affect future research; it will, over time, break the stranglehold of decadent Lucasian doctrine on the journals."

      Williamson goes on-and on:

       "I don't think this is about giggles and whispers any more. We're all guffawing out loud, I'm afraid. I looked at the the DeLong/Summers paper, and you really should not waste time on that piece of trash. The analytical core is, yes, an IS-LM model. Yikes. Again, there are many reasons why we don't want to go there any more, including the ones I articulated here, and here."

       See while, the MMTers-inspired by Minsky-actually see IS-LM as a mainstream model that needs to be overthrown-from the Left-Williamson-and most Monetarsits-see IS-LM as having been overthrown a long time ago-their all about DSGE.

       In another post, Williamson is more direct about today's Krugman vs. the Krugman of the 90s in a piece called "What Happened to the Krugman We Used to Know and Love?"

       "Someone forwarded a link to this post, from October 25, 1996, by Paul Krugman in Slate. This is an excellent piece. It's beautifully written and well-argued. I agree with essentially everything in it. It's bold, in that Krugman sticks up for Economic Science in the face of a barrage of criticism from what he thinks are loose-thinking innumerate "economists." He concludes with:
The literati truly cannot be satisfied unless they get economics back from the nerds. But they can't have it, because we nerds have the better claim.
     "I know some nerds too. Bob Lucas: nerd. Mark Gertler: nerd. Nobu Kiyotaki: serious nerd. Ed Prescott: very serious nerd. Mike Woodford: nerd. Neil Wallace: serious nerd. Tom Sargent: incredibly serious nerd nerd."

       This is Krugman, again in 1996 talking about the idea that economics is no longer accessible to the non-specialist and that's they way it needs to be: This Krugman piece, which Stephen Williamson likes so much-it's even beautiful whereas the later Krugman questions beauty as a category in economics-deserves being quoted in length. I think it touches on where the actual faultlines are in many debates but certainly the problem that many MMTers have with him:

      "Economics writer Bob Kuttner devotes an essay in the American Prospect, a journal he edits, to an attack on my writings in Slate and elsewhere. Don't worry, I won't respond here to that attack. If you're interested, you can read my response in the November-December issue of Kuttner's journal. What I would like to discuss is what I think is the true reason people like myself and Kuttner--who also writes columns for Business Week and the Boston Globe--have so much trouble getting along. We are both, after all, liberals. I have even written for the American Prospect. It is not, I claim, really a political issue in the normal sense. What we are really fighting about is a matter of epistemology, of how one perceives and understands the world."

     Very interesting. It's not "politics in the normal sense" as they are both liberals. On most direct policy issues they probably agree on most issues. It's "epistemological" reaching up to the way one perceives and understands the world-wow! Shades of Heidegger's "being in the world" even.

     When we were all debating Krugman-Keen before, Dan Kervick admitted to me my insistence that Krugman is one of the good guys, that his heart in the right place. What then is the problem? Dan
s answer was to the effect that Krugman "needs to bone up on banking" or something, I'm paraphrasing, but that was the just of it. I would say that even that is in a way still just on the foreground. More fundamentally is indeed "epistemological." Ok, to be more clear, it's theoretical. Even Keen admitted that in that paper he was criticizing that Krugman wrote with Eggertsson the real problem was not Krugman's main policy points. On that Keen agrees with him. It's his methodology that is being objected to.

      I sometimes refer to Sumner and Company as being on the Right in economics whereas Krguman and Delong or in the Center while MMT is on the Left. That makes intuitive sense on one level it's not wrong. Yet it's not what Krugman calls a "political issue in the normal sense" but on the methodloglical level of doing ecomomics. There is I must admit, a certain inappositeness in Krugman down through the years. On the one hand he is always the resident Keynesian in the group. If you read his Peddling Prosperity back in the early 90s-I was browsing it the other day, really interesting, he was all about fighting the attacks on Keynes.

     Yet this same Krugman who I always feel such an affinity for-after all he always has my back I feel. He's a liberal Democrat, a Keynesian and can always be counted on to use his considerable brain power to fight back against the Right wing bullies. Yet this same Krugman who argues that you can't say Keynesianism doesn't work as it's never been tried is a self-described Neo-Classical economist.

     Wasn't the whole point of the General Theory to go beyond the Classical School? That then is the trouble that MMT has then I think. Yes his heart is in the right place and he is always ready to fight for Team Keynes. He is passionate about this and I believe wholly sincere. However, the MMT argument is that he lacks the theoretical toolbox to make it happen.

     I'm not entirely sure if I wholly accept this argument. Not yet anyway. I can't imagine not liking Krugman-no matter what I always will. But it is easier for me to get around this by putting the question of Krugman aside and considering the school from which he resides-New Keynesianism. I have for awhile had the suspicion that this school lacks something essential, that they give up too much of the baby with the bathwater.

     If I am to look at everyone else in NK other than Krugman I have no trouble saying maybe something is missing, they accept to much from Monetarism and DGSE. After all even now all they can say is that in a liquidity trap situation-essentially in near depression levels-fiscal policy has some value in stimulating the economy. Any other time they agree with Sumner and friends entirely. Krugman even among the NKers is the one most unorthodox, the one most willing to think outside the box. However does he go far enough?

       I guess it's a question that Team Keynesianism must answer. I will point this out in favor of the idea that he has changed and grown. Here are two more paragraphs from the 1996 piece he wrote that Williamson liked when he "stood up for macro"

     "James K. Galbraith, a constant critic of the profession (and a frequent contributor to the American Prospect), urges economists to emulate "vibrant humanities faculties" in which "departments develop viciously opinionated, inbred, sometimes bitter and tyrannical but definitely exciting intellectual climates." Economics, in short, would be a better field if the MIT economics department were more like the Yale English department during its deconstructionist heyday."

     "Academic economics, the stuff that is in the textbooks, is largely based on mathematical reasoning. I hope you think that I am an acceptable writer, but when it comes to economics I speak English as a second language: I think in equations and diagrams, then translate. The opponents of mainstream economics dislike people like me not so much for our conclusions as for our style: They want economics to be what it once was, a field that was comfortable for the basically literary intellectual."

     Krugman certainly has changed in this at least. Then he defended economics as something that was now too complicated for the non-specialist to have any hope with it. Since he has begun his regular column in the New York Times since 1999 he has been very clear. I don't think anyone can say that he has not been able to write good, quality prose that is also understandable for any interested adult with normal intelligence. In other words he has clearly, contrary to the Krugman of 96 been the leading economic popularizer. In this at least he has succeeded in-making economics more accessible to the layman. Not falling back on the crutch that if you don't have 3 advanced degrees in macroeconomics you don't belong in the conversation.




  1. If I had to put a finger on it, the thing I think Krugman gets the "most wrong" is banking and its role in the economy. (Not just Krugman but virtually all non MMT economists) This, I think, is the strongpoint of MMT/MMR. Because banking is all about balance sheets and accounting ....... which is what MMT/MMR looks at. I think the DSGE vs IS-LM debate is mostly a sideshow. It doesnt really get at the heart of the matter. A monetary economy is all about money...... in spite of the fact that money is considered a "neutral veil" by much of the econ profession. If you dont follow where money is created (either banks 80% or govt 20%) you dont follow economics.

    Too many economists think banks are a place where people "put their money"(and then banks lend it) when in fact they are a place where people "get their money"....( thanks Randy Wray)

    Banks dont need my money to lend, the money I get in my paycheck is already in the banking system (my bosses account). It either is created by the bank (in the form of a loan) or added by the govt.( a govt "injection") There is no way for ME to add money to banks. I can only remove it from banks. Money comes from two places today, the bank or the govt. (mostly from the bank)

    Krugman is one of the good guys but I think its demonstrable that he gets banking mostly wrong. If you get banking wrong you miss 80% of the money in the modern economy. How can you miss 80% of the money and get a monetary economy right?

    Good thing is, (for Krugman) market monetarists are even worse on banking.

  2. See Greg the trouble is that for me it's the big picture that counts. That's why I think it's a disagreement on the theory level. Obviously the banking issue is a big part of it in the mind of MMT.

    For me you have to conivince me what I gain by understaindg banks in the way that you do. Now, the idea from Minsky-and the MMTers are really entirely Minskyan Post-Keynesians-and Schumpeter-is that that money and credit creation are a big part of growth is more interesting to me. Wray I think said that he defines AD as income + the change in debt. That is certainly important to understand when we try to grasp how growth and wealth are created.

  3. Greg,
    What do you mean, there is no way I can add money to the bank? I think you mean that I can increase the supply of money. No?

  4. Not to sound picky but it was Keen who said that about AD, income and change in debt.

    I agree about the big picture. And the sooner we can get banking correctly framed in the picture we will make great progress.


    What I mean is this; when you hear people talking about putting their savings in a bank (as if they are adding something to the banking system that wasnt already there) and giving the bank money to loan out, you need to realize that the money that got put in your account this week by your employer was a simple transfer of names attached to the money. When you decide to leave the money in your account and not spend it you havent "added" anything, it was already there. How did it get there? Either a loan created these deposits OR the govt deficit spent into the system somewhere. Those are the only two ways money can enter the modern money system.

    To hear some folks talk, it seems like they think we are walking around choosing which bank to add our money to so they can make loans. Our money is already "in" the system, we can only change which banks name gets attached to the money. Now, we can remove cash from the system and put it under our bed and that certainly is happening but that amount is estimated at less than a trillion dollars world wide. Much of it outside the US.
    So the idea that we, by depositing our money at a bank, are giving it money to lend is just ....... absurd. Its so absurd, it seems to me, that they shouldnt even be allowed to discuss money and the affects of money on our economy til they get this right.

    It would be like someone in my field thinking that the only way for a person to get more red blood cells is by receiving a transfusion form someone else, ignoring the fact that bone marrow is creating RBCs by the minute.

  5. Greg
    I meant to say I cannot increase the supply of money. I understand your explanation, and I think it squares with my original comment. (revised.)

  6. Thanks for the clarification Greg. I wasn't certain it was Wray-and was wondering if it was Keen in fact. I guess for me I feel like MMTers-and I have a good deal of regard for MMT-seem to get more excited over this than anything.

    And if your're right-and much of what you say about it makes sense-for me I want to figure out what the real payoff is. What is it that we are now unable to understand/do because of not undersanding the banking system?

    Honestly I like going to the source a lot-which in this case means reading Minsky directly. I find that he's able to explain things in an intiutitve way where you can also see what the implications are.

    What I get from Minsky and that Keen quote above is that in our capitalist system banking is like government for Minsky is also a "blessing and a curse" in that without a healthy financial system the real economy would stagnate too. However just the same the financial system is necessarily unstable. Hence "blessin and a curse."

    In my latest post I argue that Minsky has enabled me to finally get a handle oon the fiscal-monetary debate as well. Basically monetary operations are the finanacial economy and fiscal operations relate to the real economy.

  7. Well I can only speak for myself, but I do think many MMT/MMR folks might agree, but if you see the banking system as "within", wholly a part of the private sector..... a part which takes savers and loans to borrowers (like a more respectable pawn shop/loan shark) you are essentially modeling the system as a zero sum game.

    When you view the banking system properly, as outside the system, issuing credit based money (as opposed to govt money which isnt credit ) you can appreciate the non-zero sumness of the activity. Banks in fact add money to an economy. That money comes with a price and the price can vary. The banks price (interest) should, IMHO, be viewed the same way we view taxes. As a drain or a cost. Difference being when a govt taxes more than it spends (runs a surplus) the surplus doesnt go into anyones pocket. In banks the surplus goes right into someones pocket, meaning there is a lot of incentive to keep that going.
    So I am on board with your comment;

    "in our capitalist system banking is like government "

    Get Krugman and Sumner and Rowe to say that and it will be a huge step.

  8. The idea that banking is not a zero sum game is very thought provoking. So despite all the anti bank rehetoric many feel today we do need a strong finanaical sector-which is not to say it dones't need significant reforms.

    I defintely want to go futher down this road in understanding stuff like this.

  9. Well, lets just say that its not a zero sum game when times are good. During growth periods everyone has more. However, during contractions they start acting zero sum.

    It seems to me that banking is(must be) a procyclical operation, while govt spending (fiscal) can(and should) be a countercyclical operation.

    I agree we need a strong financial sector but it needs to understand its place and let fiscal do the job it best can do.
    Banks cannot extend more credit to people when incomes are falling. That would mean MORE defaults, which is bad for the banking business model. Govt on the other hand CAN increase transfers when incomes are falling and add to incomes and soften the blow.

  10. See this is why Sumner and the rest of the Monetarists are quite wrong in thinking that monetary policy can do it all-monetary policy is mostly related to the banks. Fiscal policy is about the real economy.

    It's whole reason for being is make the banking system stable. It is understandble that the Fed was very active during the crisis. What could be argued is the objective was wrong-simply tryint to get the credit market back to the heyday of 2003-05 rather than working to ensure it's longer term stability but not expecting lending to come back quickly.

  11. Agreed and well put.

    Now govt spending accounts for only about 25% of our GDP so its banks that drive the rest, obviously they are an important aspect of the monetary economy. But the fact is when banks run into trouble they need the govt. The banking system cannot save itself because it is zero sum during contractions.

    I like the fiscal= real, monetary =banks angle you are working on.

  12. Cool. For me it's a decent way to understand it. I mean that's what I've wanted fo figure out for a while-what is the difference between fiscal and monetary policy.

  13. This is such an awesome blog... I'm telling everyone to check you out. You & and readers would like:

  14. Thanks very much Dunbar! I'm glad you like it and really appreciate your support.

    That looks like a great link. I will certainly will check it out and encourage others to do the same.