There are many brands of Keynesian economics, both orthodox and heterodox ones. The orthodox ones are usually called New Keynesians, and they used to be divided for convenience into three kinds, depending on their focus: nominal price rigidities, real rigidities, and coordination failures. These distinctions may only be partially relevant today as several New Keynesians seem to be enamoured with the new classical dynamic stochastic general equilibrium model DSGE , amended with rigidities, thus arriving at the New consensus model, or the so-called New Neoclassical synthesis, where money, if any is needed, is endogenous and central banks set interest rates, but where decisions are taken by forward-looking agents who maximize inter-temporal utility into the nearly infinite future.
Other New Keynesians, of the Stiglitz and Greenwald variety, hang on to monetary economics, on the basis of information deficiencies, and focus on credit markets and the possibility of loan defaults, thus showing some resemblance with heterodox Keynesians concerned with financial fragility. I will say no more as I have explained elsewhere how I see the links between these various strands of heterodox Keynesianism Lavoie, This being said, what defines Keynesianism?
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Asking the question and providing some answers obviously shows further that there is a wide variety of Keynesianism out there. A belief in any of the statements put below would probably qualify his or her holder to be part of some of brand of Keynesianism. The existence of involuntary unemployment. The principle of effective demand and the paradox of thrift. The existence of an independent investment function. That capitalism is the best system but that it needs to be tamed.
That markets, especially financial markets, are inherently unstable. The need for fiscal counter-cyclical policies. The need for capital movement impediments, managed exchange rates. The role of animal spirits and fundamental uncertainty. The non-neutrality of money, the significance of liquidity. The dangers of wage and price deflation. The existence of path dependence, multiple equilibria, and hysteresis. The existence of imperfections that thwart price adjustments. At this stage, it may be highly useful to make use of the distinction provided by Roger Backhouse He argues that economists can be divided into two broad groups: the mainstream and the dissenters.
But the dissenters themselves can be subdivided into two additional groups: the orthodox dissenters and the heterodox dissenters. Those three groups are represented in Figure 1 , with the heterodox dissenters in black on the left, the mainstream in dark grey on the right, and the orthodox dissenters in light grey or white, in between the other two groups.
Heterodox dissenters are unlikely to become part of the mainstream, and their position in the pecking order is likely to remain precarious, despite the fallouts of the subprime financial crisis. By contrast, orthodox dissenters may turn into heterodox dissenters or may become part of the mainstream, either from their own volition or because the bulk of the profession moved towards the propositions of these dissenters.
Keynes himself, with the publication of the General Theory in , may be perceived as an orthodox dissenter. Milton Friedman was certainly a dissenter in the s, but then his views became mainstream in the late s. Similarly, the New consensus model, based as it were on a central bank reaction function involving the rate of interest, instead of the money supply stock, was certainly considered as orthodox dissent in its beginning, but as we pointed out earlier, it is now the bread and butter of central bank researchers.
Indeed many of these authors have explicitly stated that they certainly did not want to rock the mainstream boat. Thaler for instance, is cited as saying that he did not want "to lay waste to the entire mathematical, hard science apparatus that economists had built after World War II" Fox, , p. Obviously getting a Nobel prize seems to be helpful for a dissenter to be heard.
But it may also be that orthodox dissenters are the "cutting edge" of orthodox economics, the really serious and innovative people arising out of the mainstream they are represented by the small area in white in Figure 1. For Colander and his co-authors , p. If this is true, then it is likely that the financial crisis will make Keynesian orthodox dissenters - mainly New Keynesians of the third kind - more likely to be taken seriously by their mainstream majority colleagues than it will ever be the case for Keynesian heterodox dissenters. The question as set up in the title of this essay would seem to presuppose that at least some of the statements defining Keynesianism, as outlined in the previous section, had been abandoned by many, perhaps even most, economists.
It implies that Keynesianism is having a resurgence. But was Keynesianism ever set aside?
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It is hard to give a clear yes or no answer. Clearly, in academia, Keynesianism was nearly a dirty word as economists like Robert Lucas spoke of the "death of Keynesian economics" or are reported to say that "at research seminars, people don't take Keynesian theorizing seriously anymore; the audience starts to whisper and giggle to one another" Mankiw, , p.
After its eclipse in the late s with the generalization of the Friedmanian expectations-augmented Phillips curve, rational expectations and compulsory micro-foundations, Keynesianism did make a comeback and became more respectable when New Keynesians turned the tables on New classical authors and provided infinite possibilities for doctoral dissertations by providing micro-foundations for all kinds of imperfections or self-fulfilling prophecies.
Things may be entirely different at the policy level, at least in the rich industrialized countries. Gregory Mankiw , p. He believes that the New consensus model, based on particularly outrageous assumptions, has had no impact on macroeconomic engineering. However, Michael Woodford, who has written the Bible of this New consensus model, as one would expect begs to differ. He argues that "it is now widely agreed that macroeconomic analysis should employ models with coherent intertemporal general-equilibrium foundations" Woodford, , p.
As some quotes that we will provide later show, there is no doubt that the New consensus model, which at best contains the sticky price variety of Keynesianism, is the key inspiration in central bank modeling. But does this mean that Keynesianism was dead? It was certainly surviving in this weakened form. Fifteen years ago, James Galbraith , p. And it is the anti-Keynesian economists, the high priests of rational expectations, Ricardian equivalence, and other mumbo-jumbo, who have failed to connect with the common sense of ordinary people.
Anyone who has tried to explain to undergraduates why virtually all unemployment must be voluntary knows how hard this is". While it is certainly true that the ordinary persons in the street can't fathom Barro's argument that they should reduce their current consumption expenditures because current public deficits will induce higher future tax rates, these same persons can easily be persuaded that public deficits are bad under all but the worse circumstances because the government should behave like a household and tighten its belt when times are rough.
Whether governments were recently pursuing Keynesian policies, or whether they ever did pursue Keynesian policies in the past, meaning the pursuit of strong counter-cyclical policies along the lines of Abba Lerner's functional finance, or whether their policies came closer to the principles of sound finance, is now a moot point. We know that when a serious economic crisis did hit the major industrialized countries, as it became clear in the autumn of , there was a complete turnabout of the major actors. The IMF, which had at all times relied on the policies advocated by the Washington consensus and imposed harsh deflationary policies to the countries that were bad-lucked enough to fall prey to a financial or currency crisis, recanted from its previous pronouncements.
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During the recent subprime financial crisis, the IMF very strongly advocated low interest rates instead of high interest rates to regain confidence, and it was at the vanguard to promote government stimulus packages with large public deficits. I strongly recommend his work. Tom Woods is one of my dearest allies in the struggle against wrong-headed and dangerous economic policy. During these times that challenge our freedoms there is no one more qualified to make U. Share this post: Digg. Ron Paul term U.
If you can imagine fiscal policymakers in Congress allowing the economy to be run in such a way, then you too can be a neo-chartalist. Clearly the tea-partiers who would not party with Mr Mosler during his Senate bid will have none of this. Mr Paul thus shows his colours as an advocate of Austrian economics—a resurgent school of thought that, unlike market monetarism, has not been doing much to change the minds of most mainstream economists but, unlike neo-chartalism, has built up a broad constituency on and through the web. Its adherents including Mr Paul's fellow Republicans Paul Ryan and Michele Bachmann differ a lot in their preoccupations and prescriptions.
But they agree that interest rates should reflect the fundamental forces of thrift rather than the whims of central bankers. By keeping interest rates artificially low, central banks trick entrepreneurs into believing that society is more abstemious than it really is. The entrepreneurs then embark on ambitious, long-gestation investment projects, only to discover that the men and materials they require are otherwise engaged in the production of more immediate gratifications. Once this realisation dawns, the entrepreneurs abandon their follies, firing their workers.
If wages are flexible and workers mobile, this bust need not be too bad. But misguided attempts by the government or the Fed to prevent unemployment will delay the necessary reshuffling of labour from industries too tied up in the future to those catering to the needs of the present.
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To make these liabilities credible, free banks would probably have to make them redeemable into something else, such as gold. As a consequence, banks will hesitate before expanding too quickly, lest their gold reserves come under threat. This, Mr White argues, would impose a natural check on overexpansions of credit. The resurgence of Austrian analysis is not merely a web-based phenomenon.
In Margit von Mises approved the establishment of an institute in the name of her late husband, Ludwig von Mises, one of the giants of the Austrian tradition of economic thinking. From early days in the shadow of the football stands, the institute now boasts its own amphitheatre, conservatory, recording studio and library. Yet the institute's impressive web presence, with ever more signing up for its online classes, makes its ideas, if not its ambience, available to all. Austrians still struggle, however, to get published in the principal economics journals.
Most economists do not share their admiration for the gold standard, which did not prevent severe booms and busts even in its heyday. And their theory of the business cycle has won few mainstream converts. While it provides insights into booms and their ending, it fails to explain why things must end quite so badly, or how to escape when they do. Low interest rates no doubt helped to inflate America's housing bubble.
But this malinvestment cannot explain why America is suffering from a shortfall of spending. Both market monetarism and the neo-chartalists are right about that. They disagree about whether the best response is monetary or fiscal. The market monetarists argue that fiscal stimulus should be redundant, because a central bank can always revive spending—if it sets its mind to it.
If the Fed's efforts have disappointed, it is not because market monetarism is wrong, but because the Fed is not sufficiently committed to the cause. This is probably true.
But it makes it hard for the market monetarists to clinch their case. Until a central bank truly commits to their policy, they cannot prove their point. But until they prove their case, central banks will be reluctant to commit to their policy. The market monetarists do not fret about the side effects of the activism they seek, which can misdirect capital, inflate bubbles and seduce people into over-borrowing. But these side effects give Austrian economists the heebie jeebies—and also worry the neo-chartalists, who are not convinced that private spending stimulated by easy money will restore full employment.
Yet Austrians and market monetarists are united in their distaste for neo-chartalist fiscal stimulus. Mr Sumner considers it wasteful; the Austrians, downright harmful. Meanwhile mainstream economists continue to look at all the options askance, though not equally so. Some, particularly on the left, are getting quite enthusiastic about the market monetarists' NGDP targeting.
Few are as keen on neo-chartalism. The late Bill Vickrey, a Nobel prize-winner, had sympathy for its take on debt, but it remains largely confined to academic redoubts in Kansas City, Missouri and Newcastle, New South Wales. As for the Austrians, Brad DeLong, a Keynesian Berkeley professor who also blogs, has called an acquaintance with their ideas a useful part of a diversified intellectual portfolio. His analogy implies that economics, like chemistry and physics, makes enough intellectual progress to allow economists to ignore some old thinkers.
But is economics that kind of science? Its practitioners cannot run controlled experiments on whole economies. The natural experiments that might help falsify theories do not come around often.
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And when they do, the refutations provided are only ever partial. What is more, intellectual schools are not simply about the rights and wrongs of specific cases. Compared to the oxygen theory that replaced it, quasi-alchemical phlogiston provided a poor account of combustion. But it captured an idea about the tendency of the world to require replenishment on which its immediate successor was silent, and which prefigured some ideas that thermodynamics would bring to science most of a century later.
The bygone and the marginalised always look strange. But would it not also be strange to imagine that, in 30 or 50 years, economic historians will look back on the current crisis and say that mainstream macroeconomics offered the best analysis and prescriptions that could have been conceived?
If they agree that it did not, then there seems a chance that they will think perspectives outside the mainstream might have helped. Things then became more rigorous and refined: disagreements remained, but within set limits. Now, on the blogs, the economic conversation boils and bubbles again. That ferment is surely spreading into the academy—and in time some new quintessence will be brought forth, perhaps from materials now considered base.
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