Krugman, Keynes, Kalecki, Konczal

Paul Krugman’s recent columns, responding in various ways to JM Keynes, Michal Kalecki and Mike Konczal have made interesting reading, signalling a marked shift to the left both on economic theory and on issues of political economy.[^1] Among the critical points he has made

* Endorsement of Kalecki’s argument (which he got via Konczal) that “hatred for Keynesian economics has less to do with the notion that unemployment isn’t a proper subject of policy than about the notion of shifting power over the economy’s destiny away from big business and toward elected officials.”

* Rejection of the Hicks-Samuelson synthesis of Keynesian macroeconomics and neoclassical microeconomics and advocacy of (at a minimum) comprehensive financial controls

* Abandonment of the idea that the economics profession is engaged in honest intellectual debate, in favor of the conclusion that the rightwing of the profession, including leading economists, is characterized by denialism and bad faith. As he says, while many economists would like to believe otherwise ” you go to economic debates with the profession you have, not the profession you want.”

A few observations:

First, as with most intellectual shifts, it is hard, and not particularly helpful to assign a precise date. These themes have been evident for a while, but for me at least, this is the first time the points have been made so clearly.

Second, while Kalecki’s article is getting new attention, it’s not all that obscure. Among my first ever publications in the 1970s (in a long-lost magazine) was a piece citing him on the way in which “business confidence” had been restored to pride of place by the abandonment of Keynesian stabilization.

Third, Krugman is certainly going to upset plenty of people in the econ profession with this. But as with most partisan debates in recent decades, it’s a case of sauce for the gander. The public choice school has routinely represented economic arguments for government intervention as the product of rent-seeking by interest groups, and the economists who make such arguments as pawns or hirelings of these groups.

Still, this marks a striking shift in macroeconomics, where only five years ago, the leading figures were congratulating themselves on the convergence between saltwater and freshwater schools, under the banner of dynamic stochastic general equilibrium. As I argued in Zombie Economics, it’s precisely the centre ground of convergence that has been rendered most thoroughly untenable by the crisis. Yet that is still where the majority of academic work being published in journals is grounded.

[^1]: Pro tip from Krusty. Alliterative titles should always use an even number of K’s.

22 thoughts on “Krugman, Keynes, Kalecki, Konczal

  1. Papers on the politics of the profession have titles such as Is there a republican on the house?.

    Tom sargent is a lifelong democrat. Lucas voted for obama.

    Popper says knowledge grows by critical discussion. Who people vote for does not matter.

  2. “Rejetion of the Hicks-Samuelson synthesis of Keynesian macroeconomics and neoclassical microeconomics and advocacy of (at a minimum) comprehensive financial controls”

    Interesting. It took more than 30 years for macroeconomists to acknowledge an insight from Radner’s mid-1970s work on a sequence of commodity and financial markets. From Roy Radner’s work (an extension of the work by Arrow and Debreu) it was quite clear that an economy with financial markets has very different properties to an otherwise identical economy because there is no lower bound on short sales of financial securities. The work by O. Hart, Jacque Dreze and hundreds of others (mainly in the EU from the 1980s onward) in math econ. has ostensibly been ignored by macroeconomists. To recall, Tobin’s work on financial transactions tax is also established within a general equilibrium framework. And what about W. Hildenbrand’s work on mean demand (income distribution). It is a pity so many people consider only one notion of ‘equilibrium’, namely ‘market clearing’ by a magic invisible hand.

    I cannot agree with the suggestion that: Quote: As he (Paul Krugman) says, while many economists would like to believe otherwise ” you go to economic debates with the profession you have, not the profession you want.”

    Paul Krugman was invited to the 2011 Lindau Nobel Laureate Meeting in Germany. He did not come. Professor Stiglitz was present.

    Despite all the work since 1950s, macro-economic policy debate is stuck on government deficit financing, yes or no. No courage as yet, it seems, to talk about wealth distribution and taxation. Environmental matters, eg ghg emissions, don’t fit into the macro-economic framework at all, but they can be treated within the theoretical framework of general equilibrium models with incomplete markets.

    Considering the recent ICAC case in NSW and the US government’s reaction to the GFC, Public Choice Theory seems to me to offer relevant insights. Any theoretical framework can be used for special interest purposes (eg publishing a lot of papers which sound right to the ears of people in power). But then, what can one expect when some universities come up with faculty names such as ‘business and economics’.

  3. Dunno, John

    I’d say that no progress whatsoever has been made since the GFC.

    What was obvious to you and me at the start of the GFC is a bit more “obvioser”, but the economies of most countries are still heading in the wrong direction, and there are no signs that things are going to change anytime soon.

  4. I, for one, miss the old Paul Krugman. His readers used to be able to depend on both his razor-sharp wit and a willingness to slash *anyone* who was making foolish arguments, independent of party affiliation. Now we have neither.

    The opportunity cost of his switch from analysis to dogma is staggering. A simple efficiency argument demands that he return to analysis, leaving the redistributive polemics to people with less socially-valuable alternative activities.

    Paul, if you’re reading this, please come home. It’s not too late. Your mind still has many admirers and friends in the profession and there are many years left to contribute.

  5. It seems to me that the intellectual shift required is not happening where it counts. It is not happening among the general populace nor in public political discourse. The shift to the right wing has not been reversed.

    Economic and social policy is still based on notions of small government, the infallibility of free markets, ignoring the unemployed, homeless and refugees and the denial of science and even of logic. With regard to that last point, even when the science (e.g. AGW) is accepted in some quarters, public pronouncements and policy remain in logical contradiction to the steps actually required to deal effectively with the problem. Example: statment A “We care about stopping global warming.” and statement B “The new coal port will boost export earnings and that’s good for Australia.”

    Economic policy and propaganda are still dominated by the needs of capital, especially corporate capital. Their stranglehold on public discussion, even public conceptions, is still near absolute.

    I see no signs of change on these substantial issues. It is remarkable following the GFC there is no change, no sign of a real new debate as Ernestine Gross says “about wealth distribution and taxation”. Even less is there a debate about the shift from democracy to corporate power which charcterises our current society.

    All these are signs to me of a sclerotic, ossified society which cannot change or adapt even when change and adaptation are necessary for long term viability. This supports my analysis and conclusion that only a serious crisis which places the key issues right there in people’s pay packets and on people’s dinner tables (in the form of poverty and food shortages) will change the debate. In other words, people are not capable in the main of seeing the nosedive we are in. We will have to crash and burn before people believe it’s a crisis. Then of course it is too late as Egypt is now finding out. Egypt has many serious problems but the precipitating conditions for widespread unrest are in the final anlayis always about resource shortages, especially of food, fuel and other necessities.

  6. There are a few bad eggs in the economics profession but the conspiracy theory that economics is a slave to business interests and that economists argue in bad faith is, at best, inaccurate. Its an attempted though inadequate shortcut to dealing with the real problems that do exist in modern economics. Krugman has gone off the boil a bit.

    Economists got it wrong – too much math, too little focus on the world, excessive hubris etc.

    But the Tea Party and the set of economists are largely disjoint.

  7. On the question of Egypt and its political economy, I note one article in the Australian was in favour of the military coup. It said the coup was necessary to save the economy and save Egypt (with outside help thrown in). It said we can’t let Egypt fail or words to that effect.

    It just shows how out of touch the Australian newspaper is with reality. It’s advocating military coups and murder over democracy. Sure Egyptian democracy was imperfect and Morsi may have been going too far in some respects but a coup is not the answer to that. If Morsi and the Muslim Brotherhood were turning Egypt into a state with theocratic law and that was the will of the majority then it should stand. I wouldn’t agree with that myself and I would also think it would not be that good for Egypt but if it is the will of the majority then it should stand.

    We can’t save Egypt. Such thinking is grandiose vanity. Egypt must save itself if it can. Any attempts to “help” Egypt by the West would really just be buying into the conflict and taking sides (with the military dictatorship in effect) and would make things worse. We should leave Egypt alone to work out its own destiny. Egypt is unsavable in any case. The resources they depend on are just about gone.

  8. @Ikonoclast
    Apologies for dragging this thread further off topic, but this has been bugging me: the media coverage of the Egypt situation has been very wanting in my opinion. I was under the impression that one of the (if not the primary) political platforms the Muslim Brotherhood was campaigning on for the recent election was the promise to maintain a secular political structure and to not push fundamentalist Islamic agendas, policies, constraints etc on the greater population of Egypt. That’s certainly the way I remember it being reported during the campaigning, but I’ve heard absolutely nothing mentioned about what was or wasn’t promised from the Muslim Brotherhood through our MSM here. Surely this is a critical point to the conflict?

  9. Apparently the Australian economy is about to return to strong growth. What if it doesn’t? No doubt sinister forces will be blamed but for some reason they can’t be dealt with. For example there may be booby traps set by the socialists. At no point will high expectations and thinly spread resources have anything to do with it.

  10. I’d rather like Prof Krugman to discover Sraffa next. The core insight that I took from Production of Commodities by Means of Commodities is that the division of surplus between labour and capital is determined by factors exogenous to production/distribution/consumption, not the “marginal productivity” of the various factors. Sraffa thus provided a rigorous way to incorporate non-economic power into economic analysis. Krugman still seems to struggle with this issue when he needs a rebuttal for those like Mankiw who say “if the 1% have grabbed the lot, it must be because their marginal productivity is huge” (not a direct quote, obviously, but not far off). The only explanations he has put forward for the declining labour share of GDP are
    “capital biased technological change” and an increase in monopoly power. From his column “Robots and Robber Barons”:

    “Why is this [declining labour share] happening? As best as I can tell, there are two plausible explanations, both of which could be true to some extent. One is that technology has taken a turn that places labor at a disadvantage; the other is that we’re looking at the effects of a sharp increase in monopoly power. Think of these two stories as emphasizing robots on one side, robber barons on the other.”

    Now I would have thought just about anyone could come up with a third plausible explanation, which is the US’s relentless smashing of organised labour since the Reagan era (including/combined with increased use of illegal migrant labour, offshoring, etc) has dramatically weakened worker bargaining power and led to a macro shift in the distribution of surplus. Furthermore, the evidence for the war on the US working class and their organisations can be seen everywhere and in every newspaper, unlike automation-gone-mad or the reincarnation of massive monopoly trusts. But that means letting Sraffian extra-economic class power dynamics be a macroeconomic determinant. And Prof Krugman doesn’t seem capable of doing that yet. Maybe if he reads some more Kalecki. Still, Samuelson was at least partially convinced by Sraffa, so there’s hope.

  11. Ernestine Gross,
    Moral hazard, adverse selection, costly state verification, a Fed Funds rate of 1% and a long deviation from the Taylor rule are less tempting arguments than ‘round up the usual suspects – republicans all’.

    Many of the key issues about what modern macroeconomics has to say on financial crises are discussed at Interview with Thomas Sargent where he says:
    1. It is just wrong to say that this financial crisis caught modern macroeconomists by surprise: Allen and Gale’s 2007 book Understanding Financial Crises collects many of the dynamic models of the causes of financial crises and government policies that can arrest them or ignite them.

    2. Stern and Feldman’s Too Big to Fail doesn’t have an equation in it, but wisely uses insights gleaned from the formal literature to frame warnings in 2004 about the time bomb for a financial crisis set by regulations and government promises.

    3. Two polar models of bank crises and what government lender-of-last-resort and deposit insurance do to arrest them or promote them. In the Diamond-Dybvig and Bryant model, deposit insurance is purely a good thing, while in the Kareken and Wallace model, it is purely bad.

    4. Bryant-Diamond-Dybvig model has been very influential generally, and in particular that it was very influential in 2008 among policymakers. Many policy authorities correctly noticed that a Bryant-Diamond-Dybvig bank is not just something that has “B A N K” written on its front door. It’s any institution that executes liquidity transformation and maturity transformation.

    5. Policy makers saw Bryant-Diamond-Dybvig bank runs all over the place. The logic of the Bryant-Diamond-Dybvig model persuaded them that if they could arrest runs by convincing creditors that their loans to these “banks” were insured, that could be done at little or no eventual cost to the taxpayers.

    6. The Diamond-Dybvig and Bryant model makes you very sensitive to runs and very optimistic about the ability of insurance to cure them.

    7. The Kareken and Wallace model’s prediction is that if a government sets up deposit insurance and doesn’t regulate bank portfolios to prevent them from taking too much risk, the government is setting the stage for a financial crisis.

    8. The Kareken-Wallace model makes you very cautious about lender-of-last-resort facilities and very sensitive to the risk-taking activities of banks.

    p.s. Dan klein found that 8 percent of American Economic Association members can be considered supporters of free-market principles, and less than 3 percent may be called strong supporters!

    p.p.s. Klein also found that registered democrats outnumber registered republicans 44:1 in ivy league sociology departments. do we ignore sociology because of this political bias?

  12. @Jim Rose

    The ECB warned of financial instability in 2005.

    Deposit insurance doesn’t solve the problem of an unbounded economy.

    You ask: “do we ignore sociology because of this political bias?” I don’t know. You can do what you like. I don’t know whether I have ever met a democrat or a republican and I don’t know whether any of the people I met studied sociology.

  13. Abandonment of the idea that the economics profession is engaged in honest intellectual debate

    I think the right in general often operates in bad faith . Maybe I am just a whinging Leftist sick of losing but from my time on right wing blogs I have seen self conscious bad faith in abundance . The end seems to justify the means ,moral or idiological concistency comes second . Its not surprising that those who valorise the selfish individual above all else end up there- why not ,after all ?. It feels to me like the left is getting taken for a ride and it comes down to basic personallity types – one side thinks it is ok not to care about others , the other does not .

  14. Totally fair and utterly brilliant to include Konczal on the list. I had been thinking of commenting on the Keynes, Kalecki, Krugman school of thought, but refrained from fear of the acronym.

  15. This was long ago and far away (actually right here in this room now thatt I think of it*) but Keynesian economics was also hated by Marxists who couldn’t stand the idea that capitalism would work fine with a bit of tinkering around the edges. Imagine the gloating cyclist who sees a bunch of cars that won’t start, concludes that internal combustion has had its day, and then learns that they just need a jump start.

    I am in a very nice room by the Mediterranian where I have photographed the leading Italian Trotskyite. Also Enrico Berlinguer was often a very welcome guest here, and he was *not* always as moderate as he became in his later years.

  16. Hey there seems to be no limit on comments here. My first comment was typed before I read the footnote. But, if I didn’t know at least I strongly suspected. You note that DSGE is still the mainstream of academic research. How long do you think it will last ? The profession seems to be Wile E. Coyote who hasn’t looked down yet. I’m pretty sure it can keep running along in mid air for a decade. Anyone for a betting pool ?

  17. Tails we win, heads you lose. Has noone read William K. Black on accounting control fraud? S & L crisis, GFC: why were many prosecuted after the former, none after the latter? Citigroup, Goldman, JPMC, et sl. learned their lessons and taught their captured regulators well.

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