Posts Tagged ‘Paul Krugman’

Murner.Nerrenbeschwerung.kind

Mainstream economics has been a disaster, especially since the crash of 2007-08. It wasn’t able to predict the onset of the crisis. It didn’t even include the possibility of such a crisis. And it certainly hasn’t been a reliable guide to getting out of the crisis.

And yet economist after economist has been stepping forward—even on the liberal side of things—to try to convince us that things are pretty much OK in the land of mainstream economics.

Just the other day, Paul Krugman tried to convince us that, leaving aside the failure to predict the crisis or even envisioning the possibility of a crisis occurring, mainstream models “did a pretty good job of predicting how things would play out in the aftermath.” The problem, for Krugman, all comes down to the “bad behavior” of some economists who have been more interested in defending partisan turf than in getting things right.

Now, Mark Thoma wants to argue that the macroeconomic models—including the “dynamic stochastic general equilibrium” models that have become the stock-in-trade of mainstream macroeconomics for the past couple of decades—are just fine. The problem, as Thoma sees it, is not with the theory or the models but with the questions economists have been asking.

What neither Krugman nor Thoma wants to admit is those very same models—hydraulic IS-LM in the case of Krugman, the rational expectations, dynamic optimizing, and representative agents of DSGE—actually direct the behavior of economists and delimit the questions they can ask. Those models are so many theoretical lenses on the world, which determine how the economists who use them interpret the world.

I understand: Krugman and Thoma desperately want to keep the precious baby. But that also means we’re stuck with the increasingly dirty bathwater.

26up-jared-master675

 

You know the story: Xi and his San tribe are “living well off the land.” They are happy because of their belief that the gods have provided plenty of everything, and no one among them has any wants. One day, a Coca-Cola bottle is thrown out of an airplane and falls to Earth unbroken. But the bottle eventually causes unhappiness within the tribe, leading the elders to believe it’s an “evil thing” which the gods were “absent-minded” to send them. Xi then travels to  the edge of the world and throws the bottle off the cliff. He then returns to his tribe and receives a warm welcome from his family.

I wonder if Paul Krugman expects to receive a warm welcome from the economics family after throwing the prediction bottle over the cliff.

Hardly anyone predicted the 2008 crisis, but that in itself is arguably excusable in a complicated world. More damning was the widespread conviction among economists that such a crisis couldn’t happen. Underlying this complacency was the dominance of an idealized vision of capitalism, in which individuals are always rational and markets always function perfectly.

I actually agree with Krugman on this point. Economic prediction is, in fact, impossible and the really crazy feature of mainstream economic models is the fact that endogenous crises simply can’t occur. Exogenous factors, sure, but nothing internal to the models can lead to a crash. Their idealized vision of capitalism, absent an external event (such as a credit crunch or an increase in the price of oil), simply leads to a full-employment, price-stable equilibrium.

But, wait, doesn’t the entire edifice fall when—on its own terms—the ability to correct predict is dispensed with? The whole rationale of giving up realistic assumptions about the economic system has been the ability to accurately and correctly predict the movements of the economy. That’s the mantle of predictive science that has been used, since at least the mid-1950s, to expunge all other economic theories and approaches from the discipline.

Mainstream economists can’t have it both ways: to celebrate their models for their predictive ability and then to dispense with prediction when, as in 2007-08 (just as in 1929), their models clearly failed. We need something better.

As for their track record since the crisis broke out, well, they haven’t fared much better—at least to judge by where we stand right now. Krugman, for his part, wants to stick with the hydraulic mechanisms of the textbook economic models, which “did a pretty good job of predicting how things would play out in the aftermath,” and declare that “too many influential” economists must be crazy.

NYT-economists-and-recession-cartoon

Right now, mainstream economists are both congratulating themselves and bemoaning their fate.

Mainstream economists (such as Justin Wolfers and Paul Krugman) are congratulating themselves for having achieved a virtual consensus on the positive effects of fiscal stimulus. But they’re also complaining about the fact that the rest of the world (such as politicians, central bankers, and others) doesn’t seem to be listening to their expert advice.

Just two quick comments on this approach to consensual economics:

First, of course there’s a consensus among mainstream economics! That’s what their theories and models are supposed to do: produce and reproduce a consensus in terms of the basic analysis of macroeconomic events (although, of course, there can still be disagreements about particular aspects, such as the exact size of the fiscal multiplier and so on). And anyone who doesn’t use those models, and therefore reaches a different set of conclusions, is declared to be outside the mainstream, and therefore not worth reading or being listened to.

Second, how is it possible to declare—in the midst of the Second Great Depression—that mainstream economics has been an unqualified success? To arrive at such a conclusion would mean to overlook, at a minimum, the role that mainstream economics played in creating the conditions for the crash of 2007-08, in failing to include even the possibility of such a crash in their models, and in confining themselves to a package of monetary and fiscal policy measures—and not to even consider the possibility of larger, structural changes—as tens of millions of people lost their jobs, were stripped of their wealth, and were pushed further and further down the economic ladder.

Those engaged in consensual economics are, it seems, too busy congratulating themselves and bemoaning their fate to want to recognize the gorilla in the room.

dyrenfurth_fig07b

I know. I wrote I wouldn’t be able to comment on Thomas Piketty’s book, Capital in the Twenty-First Century, until I found the time to read it, which won’t happen until the semester is over.

But the debate about the book is taking off and I simply don’t have the patience to wait until my lectures are over and final grades turned in. So, permit me, for the time being, to comment on the commentary.

Thomas Palley has observed that “Neoclassical economists have always talked of capital (K). The forbidden subject is capitalism.” Yes, but, even in talking of capital, they have a problem, one that was addressed during the 1960s in the Cambridge capital controversy. As Joan Robinson argued (and as my students used to learn in Principles of Microeconomics), capitalist income (total profit as the return on capital) is defined as the rate of profit multiplied by the amount of capital. But the measurement of the “amount of capital” involves adding up quite incomparable physical objects – adding the number of assembly-lines to the number of shovels, for example. That is, just as one cannot add heterogeneous “apples and oranges,” we cannot simply add up simple units of “capital,” unless one knows the price of capital, which is the rate of profit. Thus, you can’t use the amount of capital (as in the neoclassical aggregate production function) to determine the rate of return on capital—unless you already know the rate of profit.

That’s the thorny problem Paul Krugman simply sidesteps in defending Piketty’s use of the aggregate production function. Even Paul Samuelson had to concede the validity of Robinson’s critique.

But Krugman is right in arguing “you really don’t need to reject standard economics either to explain high inequality or to consider it a bad thing.” I agree. What’s interesting is that, as Piketty shows, it’s possible to analyze and criticize inequality using some of the tools of neoclassical economics. Not easy but it’s possible. Which means that neoclassical economists, for the most part, choose not to try to analyze and criticize inequality. In other words, the fact that they don’t spend much of their time—in teaching, research, and offering policy advice—in analyzing and criticizing the grotesque levels of inequality we’ve seen in recent decades is, in part, an ethical question. They could but they don’t.

And that’s perhaps an even more damaging critique of mainstream economics than the capital controversy itself.

tumblr_mi4ksm7O2h1r6wmavo1_1280

Is there any academic economics book that has elicited as much interest in the past decade (and perhaps longer) than Thomas Piketty’s Capital in the Twenty-First Century?

All kinds of friends, colleagues, and former students have been asking me about it and sending me links. And, everywhere I turn, there seems to be a new review of the book.

To be honest, I just received my copy of the book. I haven’t read it yet and probably won’t be able to find the time to do so until the semester is over. (But, as I indicated, I will be teaching it in the fall.) So, while I’ll hold off on commenting on the content of the book itself until I’ve had a chance to carefully work my way through it, I do want to mention a couple of things.

First, my sense is the book is generating so much attention precisely because of a certain nervousness out there, the fact that capitalism is facing a legitimacy crisis right now. The capitalists’ project of becoming a universal class seems to have become derailed in the midst of the Second Great Depression, and Piketty’s discussion of the return of inherited wealth in the second Gilded Age speaks directly to that concern.

Second, many of the reviews I’ve read imply—and often explicitly state—that “our” views about capitalism are being challenged by the general rise in inequality and, in particular, by Piketty’s focus on the returns to capital. Paul Krugman’s essay in the New York Review of Books is a good example: “The result has been a revolution in our understanding of long-term trends in inequality.” “This is a book that will change both the way we think about society and the way we do economics.” “We’ll never talk about wealth and inequality the same way we used to.” (Emphasis added in all cases.) And so on.

Excuse me but who is this “we” and “our”? I expect I’ll learn a lot from reading Piketty’s book (especially since it includes such evocative phrases as “the past tends to devour the future”) but, please, there are a lot of us who have been writing and teaching about capital and inequality for a very long time. They are central to how we’ve long understood and analyzed the changing dynamics of capitalist economies. I doubt, therefore, that Piketty’s book will contribute to a revolution in our understanding of long-term trends in inequality or in how we think about society and the way we do economics.

But clearly Piketty’s book may have that effect on how other people make sense of capital and inequality—economists who have spent their careers ignoring what their less-orthodox colleagues have been writing and teaching for many, many years.

_56346784_stagnation

It’s a sad commentary on contemporary economics that Larry Summers’s belated, poorly thought-out, population-driven “discovery” of the possibility of secular stagnation continues to receive such accolades. Paul Krugman gives him credit for “forcefully” offering such a “radical” idea at “at the most ultrarespectable of venues, the I.M.F.’s big annual research conference.” Jared Bernstein, for his part, finds it “compelling.” And then there’s Gavyn Davies, who considers Summers’s speech “a tour de force that demands to be watched.”

Oh, please!

Let’s give credit where credit is due, starting with Paul Sweezy, who offers an appropriate history lesson, explaining how and why the issue of secular stagnation was raised during the First Great Depression and then “so abruptly interrupted by the outbreak” of WWII. And while I’ve never been entirely convinced by Sweezy’s own explanation of the stagnationist tendencies of “monopoly capitalism,” he certainly offers much more food for thought than we’ll find in the present discussion. In fact, Sweezy’s observation about the state of the debate, offered in 1982, is even more accurate today:

I have the feeling that if you ask an economist how we got into the mess we are in, he or she, while not denying that it is indeed a mess, will reply by giving advice as to how to get out of it but will not have anything very enlightening to say about how we got into it.

For my part, I’m all in favor of resuming the long-interrupted debate over capitalism and stagnation, especially about how we got into the current mess. But, if we’re going to take the discussion seriously, let’s open up the terms of debate, in terms of both the history of economic thought and the range of ideas that exist today, which Summers and his colleagues have worked so long and hard to keep on the “radical fringe.”

econ_mitcharticle04__01__960

My better half has insisted for years that I not be too hard on Paul Krugman. The enemy of my enemy. Popular Front. And all that. . .

But enough is enough.

I simply can’t let Krugman [ht: br] get away with writing off a large part of contemporary economic discourse (not to mention of the history of economic thought) and with his declaration that Larry Summers has “laid down what amounts to a very radical manifesto” (not to mention the fact that I was forced to waste the better part of a quarter of an hour this morning listening to Summers’s talk in honor of Stanley Fischer at the IMF Economic Forum, during which he announces that he’s finally discovered the possibility that the current level of economic stagnation may persist for some time).

Krugman may want to curse Summers out of professional jealousy. Me, I want to curse the lot of them—not only the MIT family but mainstream economists generally—for their utter cluelessness when it comes to making sense of (and maybe, eventually, actually doing something about) the current crises of capitalism.

So, what is he up to? Basically, Krugman showers Summers in lavish praise for his belated, warmed-over, and barely intelligible argument that attains what little virtue it has about the economic challenges we face right now by vaguely resembling the most rudimentary aspects of what people who read and build on the ideas of Marx, Kalecki, Minsky, and others have been saying and writing for years. The once-and-former-failed candidate for head of the Federal Reserve begins with the usual mainstream conceit that they successfully solved the global financial crash of 2008 and that current economic events bear no resemblance to the First Great Depression. But then reality sinks in: since in their models the real interest-rate consistent with full employment is currently negative (and therefore traditional monetary policy doesn’t amount to much more than pushing on a string), we may be in for a rough ride (with high output gaps and persistent unemployment) for some unknown period of time. And, finally, an admission that the conditions for this “secular stagnation” may actually have characterized the years of bubble and bust leading up to the crisis of 2007-08.

That’s where Krugman chimes in, basking in the glow of his praise for Summers, expressing for the umpteenth time the confidence that his simple Keynesian model of the liquidity trap and zero lower bound has been vindicated. The problem is, Summers can’t even give Alvin Hansen, the first American economist to explicate and domesticate Keynes’s ideas, and the one who first came up with the idea of secular stagnation based on the Bastard Keynesian IS-LM model, his due (although Krugman does at least mention Hansen and provide a link). I guess it’s simply too much to expect they actually recognize, read, and learn from other traditions within economics, concerning such varied topics as the role of the Industrial Reserve Army in setting wages, political business cycles, financial fragility, and much more.

And things only go down from there. Because the best Summers and Krugman can do by way of attempting to explain the possibility of secular stagnation is not to analyze the problems embedded in and created by existing economic institutions but, instead, to invoke that traditional deus ex machina, demography.

Now look forward. The Census projects that the population aged 18 to 64 will grow at an annual rate of only 0.2 percent between 2015 and 2025. Unless labor force participation not only stops declining but starts rising rapidly again, this means a slower-growth economy, and thanks to the accelerator effect, lower investment demand.

You would think that a decent economist, not even a particularly left-wing one, might be able to imagine the possibility that a labor shortage might cause higher real wages, which might have myriad other effects, many of them really, really good—not only for people who continue to be forced to have the freedom to sell their ability to work but also for their families, their neighbors, and for lots of other participants in the economy. But, apparently, stagnant wages (never mind supply-and-demand) are just as “natural” as Wicksell’s natural interest rate.

And then, finally, this gem:

The point is that it’s not hard to think of reasons why the liquidity trap could be a lot more persistent than anyone currently wants to admit.

No, it’s not hard to think of many such reasons. But when the question is asked in the particular way Krugman poses it—in terms of natural rates of this and that, of interest-rates, population, wages, innovation, and so on—the only answers that need be admitted into the discussion come from other members of the close-knit family (and thus from Summers, Paul Samuelson, and Robert Gordon). All of the other interesting work that has been conducted in the history of economic thought and by contemporary economists concerning in-built crisis tendencies, long-wave failures of growth, endogenous technical innovation, financial speculation, and so on is simply excluded from the discussion.

It is no wonder, then, that mainstream economists—even the best of them—are so painfully inarticulate and hamstrung when it comes to making sense of the current economic malaise.

I’ll admit, it wouldn’t be so bad if it was just a matter of professional jealousy and their not being able to analyze what is going on except through the workings of a small number of familiar assumptions and models. They talk as if it’s only their academic reputations that are on the line. But we can’t forget there are millions and millions of people, young and old, in the United States and around the world, whose lives hang in the balance—well-intentioned and hard-working people who are being made to pay the costs of economists like Krugman attempting to keep things all in the family.