Krugman Apologises!

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Sorry, that was a belated April Fool's joke. He hasn't, of course—though there has been an apology of sorts from Nick Rowe, which is duly noted and accepted.

The best Krugman could manage is the following update to his original diatribe "Oh My, Steve Keen Edition“:

Update update: Ah, so Keen didn’t mean DSGE — a term that refers only to New Key­ne­sian mod­els — when he said DSGE; he meant New Clas­si­cal, which he some­how regards as the under­ly­ing prin­ci­ples for mod­els that aren’t New Clas­si­cal at all. OK. Any­way, enough of that. I’m all for lis­ten­ing to heretics when they offer insights I can use, but I’m not find­ing that at all in this con­ver­sa­tion, just word games and con­tin­ual insis­tence that the mem­bers of the sect have insights denied to us lesser mor­tals. Time to move on.

Gee, thanks Paul. So I’m play­ing word games, am I—and you’re not? Let’s take a closer look.

Click here for this post inPDF

Mark­ing Krugman

Paul, your com­pre­hen­sion of my piece failed on at least two counts.

Fig­ure 1: Krugman’s Last Word

Firstly, in the excerpt you quote, I refer to “under­ly­ing prin­ci­ples to the DSGE mod­els that now dom­i­nate Neo­clas­si­cal macro­eco­nom­ics”. Some­how you read that as being a state­ment about “about New Key­ne­sian mod­els”.

No it wasn’t Paul: I was refer­ring to the gen­eral class of post-IS-LM neo­clas­si­cal mod­els, which includes the “Fresh­wa­ter” New Clas­si­cal mod­els about which you have made such a song and dance in the past—contrasting their unre­al­ity and con­ser­vatism with your real­is­tic pro­gres­sive­ness. Remem­ber “Fresh­wa­ter Rage”, “How did Econ­o­mists get it so wrong?” or “Dis­agree­ment among econ­o­mists”? You might dis­like them Paul, but they’re your Neo­clas­si­cal cousins, and it was their “pure” the­ory, which forms the foun­da­tion for your NK mod­els, to which I referred in that excerpt.

Yes, I know that Mark Thoma claimed in a Tweet that New Clas­si­cal mod­els weren’t DSGE models—and that by impli­ca­tion, DSGE was reserved for NK mod­els exclu­sively and there­fore my Fail grade was wrong. I’ll get to that later.

Sec­ondly, directly below the sec­tion you quote, I con­tin­ued as follows:

If that were actu­ally the real world, then not only would there not be a cri­sis now, there would never have been a Great Depres­sion either—and reces­sions would sim­ply be minor sta­tis­ti­cally unpre­dictable but inevitable events when the major­ity of shocks hit­ting the econ­omy were neg­a­tive, and they would rapidly be resolved by adjust­ments to rel­a­tive prices (wages included, of course).

So econ­o­mists like Krugman—who describe them­selves as “New Keynesians”—have tweaked the base case to derive mod­els that “ape” real-world data, with “sticky” prices rather than per­fectly flex­i­ble ones, “fric­tions” that slow down quan­tity adjust­ments, and imper­fect com­pe­ti­tion to gen­er­ate less-than-optimal social outcomes.

This is Ptole­maic Eco­nom­ics: take a model that is utterly unlike the real world, and which in its pure form can’t pos­si­bly fit real world data, and then add “imper­fec­tions” so that it can appear to do so.

So Paul, not only did I dis­tin­guish between NC mod­els and NK ones, I even men­tioned you by name in that sec­tion as some­one who has added imper­fect com­pe­ti­tion, sticky prices and so on to that base NC model. And yet you implied that I was a moron who didn’t even know that NK mod­els include imper­fect com­pe­ti­tion, sticky prices and so on—and you won­der why you got a Fail?

Oh all right, yes I’ll con­sider Thoma’s argu­ment. I see that’s what you’re claim­ing in your attempt to weasel out of an apology:

so Keen didn’t mean DSGE — a term that refers only to New Key­ne­sian mod­els — when he said DSGE

Fig­ure 2: Thoma’s Tweet

So you and Thoma believe that DSGE mod­els exclu­sively refer to NK mod­els? Frankly I think that’s like a wrin­kled pea claim­ing that it’s unre­lated to a smooth one: they’re still both peas. And the Wikipedia entry on DSGE mod­els—which I’m sure has been checked over pretty care­fully by fans of Neo­clas­si­cal economics—makes no such dis­tinc­tion. In fact, it treats RBC/NC and NK as schools of DSGE mod­el­ling, pre­cisely as I do:

Schools of DSGE modeling

At present two com­pet­ing schools of thought form the bulk of DSGE mod­el­ing.[1]

Real busi­ness cycle (RBC) the­ory builds on the neo­clas­si­cal growth model, under the assump­tion of flex­i­ble prices, to study how real shocks to the econ­omy might cause busi­ness cycle fluc­tu­a­tions. The paper of Kyd­land and Prescott (1982) is often con­sid­ered the start­ing point of RBC the­ory and of DSGE mod­el­ing in gen­eral.[2] The RBC point of view is sur­veyed in Coo­ley (1995).

New-Keynesian DSGE mod­els build on a struc­ture sim­i­lar to RBC mod­els, but instead assume that prices are set by monop­o­lis­ti­cally com­pet­i­tive firms, and can­not be instan­ta­neously and cost­lessly adjusted. The paper that first intro­duced this frame­work was Rotem­berg and Wood­ford (1997). Intro­duc­tory and advanced text­book pre­sen­ta­tions are given by Galí (2008) and Wood­ford (2003). Mon­e­tary pol­icy impli­ca­tions are sur­veyed byClar­idaGalí, and Gertler (1999).” (Wikipedia Entry)

So I won’t accept Thoma’s excuse for your behaviour—and nor do some of his own fol­low­ers, judg­ing by his sub­se­quent Tweets.

Fig­ure 3: Thoma’s sub­se­quent Tweets

You should also read that Wikipedia entry, by the way—it includes some crit­i­cisms of DSGE mod­el­ling by your senior Robert Solow that you clearly haven’t paid atten­tion to (Robert M. Solow, 2003, 2001, 2008). I know you don’t like read­ing what other peo­ple write—“I Don’t Care” I think you said—but that’s why you make mis­takes like the one you’ve made here. Since I know from your past form that my advice here is prob­a­bly falling on deaf ears, here’s Solow as quoted in the crit­i­cal sec­tion of the Wikipedia entry. At least read that; I’ll wait:

Con­tro­versy

The United States Con­gress hosted hear­ings on macro­eco­nomic mod­el­ing meth­ods on July 20, 2010, to inves­ti­gate why macro­econ­o­mists failed to fore­see the Finan­cial cri­sis of 2007–2010Robert Solow blasted DSGE mod­els cur­rently in use:

I do not think that the cur­rently pop­u­lar DSGE mod­els pass the smell test. They take it for granted that the whole econ­omy can be thought about as if it were a sin­gle, con­sis­tent per­son or dynasty car­ry­ing out a ratio­nally designed, long-term plan, occa­sion­ally dis­turbed by unex­pected shocks, but adapt­ing to them in a ratio­nal, con­sis­tent way… The pro­tag­o­nists of this idea make a claim to respectabil­ity by assert­ing that it is founded on what we know about micro­eco­nomic behav­ior, but I think that this claim is gen­er­ally phony. The advo­cates no doubt believe what they say, but they seem to have stopped sniff­ing or to have lost their sense of smell alto­gether.’ (Solow’s state­ment to Con­gress, July 2010)

Now stop com­plain­ing about the mark: frankly, get­ting a fail for this essay is the least of your wor­ries. You seem to have alien­ated a large part of your peer group by this behaviour—who are you going to have lunch with after this per­for­mance? Butta­fuc­cin­who (yes, his nick­name sounds rude, but at present you’re in no posi­tion to accuse some­body else of rude­ness), for exam­ple, seems unlikely to ever want to play ball with you again:

I’m cer­tainly not in a posi­tion to deter­mine who’s right and wrong, and frankly don’t really care, but did you even read Keen’s post? Two para­graphs below the part you excerpted: “So econ­o­mists like Krugman—who describe them­selves as “New Keynesians”—have tweaked the base case to derive mod­els that “ape” real-world data, with “sticky” prices rather than per­fectly flex­i­ble ones, “fric­tions” that slow down quan­tity adjust­ments, and imper­fect com­pe­ti­tion to gen­er­ate less-than-optimal social outcomes.”

Is there a four-letter word for some­one crit­i­cizes another per­son in a very pub­lic forum with­out read­ing what they’ve writ­ten? Or would a seven-letter word fit bet­ter? (Butta­fuc­cin­who)

No, that isn’t all. I believe your gang calls itself “New Key­ne­sian”, doesn’t it?

Well I am going to ban you from using that term in future: find another one.

Why? Well, for starters, the Post Key­ne­sian gang claims that you’re den­i­grat­ing their gang by claim­ing to be related to them, when you’re not. And I’ve done a bit of Tal­mu­dic research and found that they’re right: the SLIME model you use—what? Oh, sorry, yes I meant IS-LM, my apologies—anyway, the IS-LM model wasn’t devel­oped by Keynes at all.

Yes, I know you know it was devel­oped by Hicks, but it wasn’t as an inter­pre­ta­tion of Keynes—it was a “Wal­rasian” model devel­oped before Hicks had read Keynes at all. Look, Hicks says so right here:

that model was already in my mind before I wrote even the first of my papers on Keynes.’ (John Hicks, 1981, p. 140; empha­sis added)

And he also traces the model to Wal­ras, not Keynes

the idea of the IS-LM dia­gram came to me as a result of the work I had been doing on three-way exchange, con­ceived in a Wal­rasian man­ner. I had already found a way of rep­re­sent­ing three-way exchange on a two-dimensional dia­gram (to appear in due course in chap­ter 5 of Value and Cap­i­tal). As it appears there, it is a piece of sta­t­ics; but it was essen­tial to my approach (as already appears in “Wages and Inter­est: the Dynamic Prob­lem”) that sta­tic analy­sis of this sort could be car­ried over to “dynam­ics” by rede­f­i­n­i­tion of terms. So it was nat­ural for me to think that a sim­i­lar device could be used for the Keynes the­ory.’ (Hicks 1981, p. 141–142)

So at best,you’re a Hick­sian econ­o­mist. But actu­ally, even that won’t do, because Hicks dis­owned IS-LM in that same paper, on the basis that macro­eco­nom­ics can’t be mod­elled as an equi­lib­rium process:

I accord­ingly con­clude that the only way in which IS-LM analy­sis use­fully survives—as any­thing more than a class­room gad­get, to be super­seded, later on, by some­thing better—is in appli­ca­tion to a par­tic­u­lar kind of causal analy­sis, where the use of equi­lib­rium meth­ods, even a dras­tic use of equi­lib­rium meth­ods, is not inappropriate…

When one turns to ques­tions of pol­icy … the use of equi­lib­rium meth­ods is still more sus­pect. … There can be no change of pol­icy if every­thing is to go on as expected—if the econ­omy is to remain in what (how­ever approx­i­mately) may be regarded as its exist­ing equi­lib­rium. It may be hoped that, after the change in pol­icy, the econ­omy will some­how, at some time in the future, set­tle into what may be regarded, in the same sense, as a new equi­lib­rium; but there must nec­es­sar­ily be a stage before that equi­lib­rium is reached. There must always be a prob­lem of tra­verse. For the study of a tra­verse, one has to have recourse to sequen­tial meth­ods of one kind or another.’ (Hicks 1981, p. 152–153)

So I think you could call your­self some­thing like “Old Hick­sians”; that would be OK. Or maybe “New Wal­rasians” when you do that DSGE thing.

Yes, I know you don’t like either of those names. But, to coin a phrase, “I Don’t Care”.

Ref­er­ences

Hicks, John. 1981. “Is-Lm: An Expla­na­tion.” Jour­nal of Post Key­ne­sian Eco­nom­ics, 3(2), 139–54.

Solow, Robert M. 2003. “Dumb and Dumber in Macro­eco­nom­ics,” Festschrift for Joe Stiglitz. Colum­bia University:

____. 2001. “From Neo­clas­si­cal Growth The­ory to New Clas­si­cal Macro­eco­nom­ics,” J. H. Drèze, Advances in Macro­eco­nomic The­ory. New York: Palgrave,

____. 2008. “The State of Macro­eco­nom­ics.” The Jour­nal of Eco­nomic Per­spec­tives, 22(1), 243–46.

 

 

About Steve Keen

I am a professional economist and a long time critic of conventional economic thought. As well as attacking mainstream thought in Debunking Economics, I am also developing an alternative dynamic approach to economic modelling. The key issue I am tackling here is the prospect for a debt-deflation on the back of the enormous debts accumulated in Australia, and our very low rate of inflation.
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