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:


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“.


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 Professor of Economics and Head of Economics, History and Politics at Kingston University London, 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 private debts accumulated globally, and our very low rate of inflation.
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128 Responses to Krugman Apologises!

  1. NeilW says:

    Kambridge Kontroversy – round 2

    Seconds out.

  2. alainton says:

    Good luck at LSE tonight – sorry will miss live broadcast as speaking at another event. Though frankly getting pissed with a bunch of London creative types at Cany Ash, beats having to be in the same space as the neo-con lse economists like Tim Leunig and Henry Overman any day.

    Alas will fall on deaf ears – Krugmans final word seems to be ‘talk to the hand’ ‘show me the money, show me the money’

  3. Bhaskara II says:

    “Everything reminds Milton Friedman of the money supply. Everything reminds me of sex, but I try to keep it out of my papers.”

    –Robert Solow Quoted in you Wiki Link.

  4. Bhaskara II says:

    Would you please include the question and answers in the videos. In addition to your talks, the questions and answer parts are also very interesting.

  5. Frank says:

    I wonder why suddenly all the cognitive load and [negative] attention in the run up to these presentations at INET and LSE?

    Frankly, these debates are a waste of time. Until the likes of Krugman et al actually do some obvious things, such as:
    a) Consult the evidence
    b) Ask risk management and credits management chiefs at commercial banks exactly what affects their decision making

    it’s all dogma. You can sit and debate until your blue in the face, but what’s the point?

  6. Steve Hummel says:

    Theory IS important. If you never stop utilizing flawed theory you’re off course from the get gat. Of course my main complaint is that economists fail to consult the underlying philosophy of the science itself which has lead to several centuries of Humanity serving the economic system. If they would realize that the truest and most primary purpose of the economic system was to facilitate the meeting of goods and services with consumers instead of profit or work…..we’d be well on our way toward reversing that relationship.

  7. RickW says:


    Just to let you know you have another viewer.

    I am confident that Steve’s Minsky model will provide necessary insight on the best levers to tweak in an economic system that has debt-based money.

    I am gradually getting an understanding of what is wrong with the current reserve bank system and I can appreciate the frustration that Steve has in getting other economists understand his work.

    Reserve banks, focused on employment and prices, have been oblivious to rising private debt. Its contribution to demand, particularly on the soft target of housing, has hidden structural flaws in developed economies that will take decades to rectify. Financialisation of the US economy is sucking the life out of it. Countries in Europe have given sovereignty to the banks – it is a disaster slowly unfolding.

    Steve should be flooded with support to get Minsky up and running to include all key sectors in the tangible economy. Then maybe expand to the intangible so that too is not a destabilising factor.

    As adverse as Steve’s insights can be for some it has been liberating for me because they give clear understanding of how things are unfolding. His insights are based in scientific method not unreal assumptions.

    You would think the least inquisitive economist would be delving deeply into Steve’s work to grasp how he could be so accurate with his forecasting of debtdeflation. The consolation for me in all of this is my poor mark in Economics 101 in my business degree. The wishy/washy “maths” did not gel with an engineer so I just regurgitated what was wanted to pass. So to find an economist using the mathematical precision needed for the task is refreshing. In due course many more will recognise what Steve has achieved.

  8. Endless says:

    Wood and trees! The general consensus on the feedback under Krugman’s post seemed to be that he was in fact in error. The damage had been done.

    In the end, Krugman refers to you as a heretic, which is of course is fair accusation, for in his eyes we are talking religion not science (however, loosely described). Facts ain’t going to help him shift faith…

    Not sure you carry the masses with this latest post, apart from some academic point scoring. You had a wide audience there for a while thanks to Krugman, be a shame to turn them off.

  9. alainton says:

    An aside now the row is over, and irrespective of the merits of the case

    Arguing on the internet is like Boris Johnson and Ken Livingstone being stuck in a lift together – there is no place to hide – and four letters words come freely.

    Believe it or not there is something called ‘politeness theory’ and it was even invented by a couple of aussie anthropologists.

    Its all about ensuring you argue the logic of the case without ensuring that your protagonist does not loose face and damage social relations..

    The classic example is the Ricardo Malthus correspondence – people have written long treatises on the logical structure of polite argument in this epic correspondence (though of course snail mail meant that theoretical arguments took a decade). At one point Ricardo wrote to Malthus on a dinner in Hereford where Joseph Hume Mp (who Ricardo considered a loud drunken bore) was to be presented with a hogshead of cider – rather than expressing this directly however
    ‘I hope everything will be conducted in an orderly and peaceable manner. I have a great aversion to a row. ‘

    Less than a decade earlier resolving rows through pistols at dawn was common, even for prime ministers. The incredible politeness of this Jane Austin Age was a reaction against the bloodthirsty and wild regency period when whole estates were lost betting on races of beetles and dinner parties could become baccinalian orgies lasting a week.

    Etiquette arose to serve this purpose (as well as because of snobby fashion) and Hereford Hall today is where the Etiquette school used in ‘laddette to lady’ (on the tele now) is based.

    Of course Krugman would have in effect said, hey I cant be bothered to open the letter, so here’s a rude postcard back on what I thinks inside – but you get the point.

  10. Steve Hummel says:

    History is replete with heretics ensconced in pantheons. What we need in economics and money systems, besides and even more than science is not religion, but spirituality. We need that in everything in a joyous and thoroughgoing way in fact.

    A wise man once said that the intention to be right is the strongest force in the universe, and that is why even though it might be a momentarily necessary thing to address the Krugmans, the Gary Norths or their socialist counterparts its ultimately non-productive because it only makes the adage that Steve correctly espouses that “sciences advance one funeral at a time” more of an iron law. Better to fuse economic science and spirituality (not religion) and take that message to the people with whom it might actually resonate….like the mass of individuals who are still the effect of unconscious slavery even amidst supposed plenty.

    I’ll end this little vignette with the heretical declaration that the quantity theory of money and the velocity of its “circulation” is a myth so far as monies directed at retail sale are concerned. So all you have to do to positively change the consumer financial paradigm from accounting convention scarcity to sufficiency/abundance is mandate an appropriate amount of individual finance toward that freely chosen end and reduce those prices again to the individual with a statistically valid discount/equivalent rebate to retailers and freemoving economic freedom will begin to sprout up all over. How do you best effect both individual economic security and reduce the power of TBTF financial entities? Put cancellable money in the hands of individuals.

    Ban obvious speculative financial stupidities, regulate with differential equations the rest of purely financial enterprise and encourage innovative investment in technologies that will make production more efficient….and let the good times roll.

  11. cyrusp says:

    “it’s all dogma. You can sit and debate until your blue in the face, but what’s the point?”

    Krugman’s mind won’t change, you can’t teach an old dog new tricks.

    But the next generation of economists reading this will be open to new ideas.

  12. mahaish says:

    kill them kindness, politeness and the facts alainton,

    and if that fails , run them over ?

  13. koonyeow says:

    Title: Finally, Steve In The Much Awaited Armani And RayBan

    We need this debate, in honour of Galileo, who was put under house arrest.

  14. Iñaki Aldasoro says:

    It seems that Prof. Krugman is posting at an increasing rate on unrelated topics in the last hours in order to send his controversial posts into oblivion as soon as possible.

  15. Pingback: Steve Keen en Paul Krugman botsen | MRWONKISH.NL

  16. alainton says:

    Alan Blinder at above which could almost be a response to why Krugman’s teachable moment should be taught as is.

    ‘Our teaching about monetary policy must be completely revamped. Specifically, students must now learn something about “unconventional” monetary policies.

    Remember “conventional” monetary policy? The Federal Reserve shortens recessions by creating more bank reserves (“printing money”), which fuels a multiple expansion of the money supply and credit because banks don’t want to hold excess reserves. So they get rid of them making more loans and deposits, which also lowers short-term interest rates. Compare that to current reality: Banks are content to hold over $1.6 trillion in excess reserves, short-term interest rates are stuck near zero, and Fed policy often works on long-term interest rates instead. No, this is not your father’s monetary policy, and the old ways of teaching about it simply won’t do.’

  17. alainton says:

    And Taleb suggests a career move for PK

    ‘we would have great jumps in knowledge if we avoided teaching these models, and replaced them with anything, even gardening classes.’

  18. alainton says:

    Wolfson Prize shortlist where are the neo-classical economists?

    This was a prize for the worlds ‘best and brightest economists’ on a country could orderly exit the eurozone without triggering a global chain of defaults.

    1 submission by an engineer – Catherine Dobbs
    1 by two mathematicians
    1 by the worlds leading expert on currency hedging – an economist
    2 by global macro firms – one of which is run by an historian not a trained economist.

    Of those Roger Bootle in 2003 predicted the Financial crash on the same basis as most of the others who did such as Keen, Hudson and Magnus

    From a 2003 review
    Publisher: Nicholas Brealey Publishing (2003), ISBN: 1857882822
    “Money for Nothing” is a somewhat controversial book written by the (London) City economist Roger Bootle. The author is a well known doomsayer who regularly hits the headlines with predictions of impending deflation and housing price crashes, never mind stock market crashes.
    I’ve never taken seriously any economist spouting opinions on the real estate market (always dramatic, always wrong – witness the numerous press articles and parroting real estate agents), let alone about deflation.’

    And Johnathen Teppler seems to hold firmly post-Keynesian views on debt and money. which you can find in his well known book Endgame. He qualification is as an Historian not an economist.

    So in short not one neocon economist amongst them, no one who would have got a phd at freshwater or saltwater these days – part from perhaps Neil Record who is difficult to classify as he is an expert in a specialist field outside the mainstream that he largely invented.

    It would seem that this is the week that we can call as the end of the beginning of the end for neo-con economists. They cant model the real world and they have nothing to say about the most pressing economic policy issue of today – the eurozone crisis.

    I was thinking the DGSE argument above was all about semantics, however thinking again DGSE’rs had nothing to say, as they could not model global debt and counterparty chains. At the point of a global crisis (eurozone debt) which as Catherine Dobb’s wonderful entry shows could be ‘seven times bigger than Lehman’ they quite literally had nothing of value to say.

    Of course im no fan of Lord Wolfson, he is a frequent figure of fun on my website, and he surely would have wanted lots of Austrian entries (none on shortlist) – but the judges were balanced – unlike Lord Wolfson and the shortlist is telling.

    If you want a laugh though read Neil Records proposal for a secret German plot to force a country out – writing a script for Wolfgang Schäuble – the cats out of the bag now.

  19. NeilW says:

    They all seem to boil down to ‘dump the Euro on Saturday, shut the banks on Monday and have it straightened out by Tuesday’.

    It’s then all down to who is dumping whom.

  20. Steve Hummel says:

    “They all seem to boil down to ‘dump the Euro on Saturday, shut the banks on Monday and have it straightened out by Tuesday’.

    It’s then all down to who is dumping whom.”

    Or they could do Hummel’s simultaneous bailout of the Banks AND the individual I posted awhile back, and just put the speculative control percentages I have alluded to or Steve’s jubilee shares etc.devices. That would get this crisis solved pronto. Of course the financial authorities/Banks would lose the biggestmarket they have……..but what price freedom, right?

  21. barrythompson says:


    Mark Thoma on DSGE models needing improvement/competition:
    “But to be useful in a crisis like we just had the models have to be amended to better connect the real and financial sectors — the connection between breakdowns in financial intermediation and the real economy needs to be improved — and people are working hard to try to solve problems.”

    Meanwhile, Nick Rowe and Scott Fullwiler seem to be having a very civil discussion that has made progress:

  22. ChicagoSchoolPhysicist says:

    It was fascinating to read Paul Krugman’s reply (only today because I was away from net for a couple of days). I started to read Paul Krugman about 10-12 years ago but there were always questions that were unanswered. for example, how can the central bank “target” a certain inflation just by stating it? I even bought a used Economics texbook (Lipsey, Steiner, Purvis, Courant) that I simply could not understand. The only economist that I can actually follow (and I wish in a future book Steve would boldly put the equations in center stage, not in words) is Steve. I can actually read papers from many sciences and follow the line of thought and the results, only economics seemed like witchcraft to me before reading Steve. Paul does not realize, but being mentioned in a paper by Steve is a compliment. Steve shows Paul that Paul tries to think different, but Paul does it in a “within the framework way” that is not “doing it”. Anyway, the data and the time will show who is right and who is wrong and my money is on the empirical approach.

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