The freshwater backlash (boring)

So Justin Fox reports that Chicago really, really didn’t like my article. Surprise.

What I think you have to understand here is that for a long time — in fact, for three decades — the Chicago position has been that Keynesian economics was nonsense that has been utterly refuted. Now, you might have thought they’d at least slightly reconsider that position with the rise of New Keynesian economics — an approach that involved plenty of math and lots of hard thinking, and generated a large literature in major journals.

I have my problems with New Keynesian analysis, but surely it demonstrated that Keynesian insights had something to them. When it comes to the current debate, the key thing is surely that New Keynesian models do, in fact, show that fiscal policy can raise output and create jobs.

That’s why the debate over fiscal policy has been such a revelation. It’s perfectly OK to question the desirability of a fiscal stimulus, or challenge the specifics of the Obama plan. But no macroeconomist who has been paying attention for the past 20+ years would assert that fiscal policy is useless as a matter of principle.

Yet that, of course, is exactly what the freshwater types asserted en masse — along with claims that nobody, or anyway nobody at a quality economics department, believes that fiscal policy can do any good. Sneers take the place of actually engaging the argument.

Brad DeLong does a yeoman job of collecting the fallacies. As he says, they show famous economists making sophomore-level errors, again and again. They also show that the Chicago School has spent the past generation looking entirely inward — paying no attention to ideas and research elsewhere. Basically, their worldview has been frozen in amber since around 1978.

And that, in turn, explains the sheer rage over my article. It was actually written in a fairly cool tone — but it did say that the emperor had no clothes, that people who have been posing as the sole guardians of sophisticated macroeconomics have, in fact, been revealed as being remarkably ignorant. Fury was the inevitable reaction.

Again, read those quotations Brad has collected. These are the reactions of people who just can’t accept that they might have missed something — having been caught out in elementary errors, their reaction is to try even more sneers and putdowns, in an attempt to retain their sense of superiority.

What a sad spectacle.

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Keynesianism is nothing more than an excuse for government to inflate the money supply and spend more money thinking they have a free lunch.

Monetarism and Chicago School, don’t go far enough in rejecting this.

We need to take away the governments ability to inflate the money supply by the printing press and controlling interest levels. Only then can we be rid of credit bubbles.

Well, I think it is hiliarious that when the Conservative Bush was plundering the country finances through tax cuts and 2 wars that they did not raise issues.

This to me means that Chicago is not a very principled economic think tank. What they say means squat.

Was is really “frozen in amber since around 1978″? I always thought that amber stuff took at least centuries to formulate.

You don’t have to explain why you left the country on vacation. We understood.

You are right about Keynes, but you are unwilling to make the next logical step – assume that equilibrium real interest rates may be negative not only in a recession, but also during an expansion (remember the global saving glut?).

If you make this assumption you will realize why Japan had its lost decade, and why the current fiscal stimulus alone will not save the US economy.

for your delight:
Richard Posner is becoming a Keynesian!

(seems like there is some sanity left at the great lakes)

//www.tnr.com/article/how-i-became-keynesian?page=0,0

Until last September, when the banking industry came crashing down and depression loomed for the first time in my lifetime, I had never thought to read The General Theory of Employment, Interest, and Money, despite my interest in economics.

We have learned since September that the present generation of economists has not figured out how the economy works.

By now a majority of economists are in general agreement with the Obama administration’s exceedingly Keynesian strategy for digging the economy out of its deep hole.

Not having believed that what has happened could happen, the profession had not thought carefully about what should be done if it did happen.

Baffled by the profession’s disarray, I decided I had better read The General Theory. Having done so, I have concluded that, despite its antiquity, it is the best guide we have to the crisis.

Professor,

Your article was quite entertaining, well written as always, and predictably Lord Keynes got to be the hero at the end. It’s quite obvious that both the monetarists and the Keynesians have failed. Now the finger pointing. Inflationary monetary policy in general has failed, the inter-recessionary periods are getting shorter, the recessions longer and deeper. We’ve already laid the foundation for the next bubble, any bets what it will be? Debating whether we should channel Milton or Maynard is akin to debating what stroke technique to use as we paddle our canoe towards the waterfalls….

I work for the World Bank and did a lot of macro work in grad school. I am glad to see your spot on assesment of modern macro, and I appreciate your revival of the intelligent mud slinging argumentation strategy of early 20th century economists.

Why have macro economists been so unwilling to learn from this? I might suggest that those that went into macro to begin with were a little off their rocker back before they had Nobel Prizes and then zoned out of the real world.

Could you cool economists please disambiguate the economic school of “Chicago” with all of us who live in the city and are horrified by the concept of being associated with such a reprehensible economic philosophy? We really aren’t all free market capitalists down here. Heck, Obama lives NEAR U of C and he’s nothing like that.

Thanks.

“I don’t know why Obama said all economists agree on [the need for a stimulus bill]. They don’t. If you go down to the third-tier schools, yes, but they’re not the people advancing the science.”

– Edward Prescott

Princeton in the third-tier? You guys have been moving up!

Thanks Paul,

The “frozen in amber” phrase gave me a good chuckle. Very appropriate. You’re article inspired me to read “A Life in our Times” and I’m in the process of rereading “The Affluent Society”. I’ve always associated John Kenneth Galbraith with Keynesian economics but didn’t realize what a major political figure and confidant of Presidents he was in the 1960’s. Thanks again for your great article. I’ll be keeping it close at hand.

Dear Paul,
Eagerly awaiting your response to this stunning development,
//www.tnr.com/article/how-i-became-keynesian. I guess if Posner says so, then the “freshwater” is starting to turn a bit salty. Well done to continue to create this estuary. Particular highlight is Posner’s early revelation, “I had never thought to read The General Theory of Employment, Interest, and Money, despite my interest in economics.” Right. And then he gives some funny and revealing excuses.

One can only hope that the recent crisis will finally put the freshwater economists out of our misery and allow Keynesian economics to finally start doing some good for our society

“When it comes to the current debate, the key thing is surely that New Keynesian models do, in fact, show that fiscal policy can raise output and create jobs.”

Great. So there is an economic theory that supports the use of fiscal policy. Apparently the so-called fresh-water theories don’t.

What exactly is there to recommend one theory over the other to those in the bleachers?

When the Soviet Union dissolved, the U.S. sent Chicago school economists to Russia to help the Russians learn the joys of capitalism. I thought at the time that it would have been better to send someone from the Galbraith school—a little less radical change. Given the kleptocracy that arose in Russia, it looks like the freshwater philosophy ruined Russia as well as our economy.

Fresh water economists claiming stimulus policy didn’t do the job since the money hasn’t really implemented yet sould look at China where the efficiency of non-democratic government showcases its advantage, sadly for democracy. China’s domestic spending undoubtly halted the downward spiral and even pull up many neigboring countries.

Another thing that those market economy fundamentalists should learn is the word “expectation”, part of behavior economy theory.

A. Hu

I’m with you, Paul. The freshwater economists are clearly more in the arena of “true believers” than serious academics, if this is their response.

Have you actually read their criticisms? If I hadn’t read the articles they wrote (posted by Mankiw) I would think that they were idiots. Having read them, you look foolish. I think you are hoping that most of your readers probably do not read the other side so that you can tell your readers what they wrote. What you tell them is exactly OPPOSITE of what they said!

That the Chicago School of macroeconomics missed some of the most obvious considerations is seen in the current efforts by some developing countries to undo some of the failures caused by embracing this theory. John Turnbull

Can we rework this into an update of “West Side Story”?

Its not economics alone which explains this BORING.

Its a philosophy in search of political phillosophy in search of an economic philosophy

If your only starting point is that liberalism is a descent into relativism of sex, drugs, rock and roll, multiculturalism, homosexuality, a breakdown in family values and the ability to get young men to die for king and country, then that is enough for party in search of a philosophy which is defined by what it is against.

Now you need a economic philosophy to match. The only answer is system that disempowers the majority of people so that they cant follow this permissive route. You need the powerful and rich to stay powerful and rich and to tell the rest what to do so that they dont get antsy and say they are not willing to die for King and Country.

Now you need economics to match. If you want a system that doesnt redistribute wealth, you want a system that doesnt redistribute useful information ,and you need to justify it by self iteratively by depending upon one of your own assumptions, that is that there is no such thing as too much information because people except for those born rich enough, will not make the most of it!

So it sort of Chicago School philosophy of what its against, justifies GOP defined by dying for King and Country, requiring Chicago School of Economics as its servant.

Dr. Krugman,

I’ve been following your blog and Dr. Mankiw’s blog with great interest recently. Are there any prolific bloggers of stature from the freshwater camp that you would recommend?

Don’t be so hard on yourself – this is not a boring post at all!

I graduated with an econ BA three years ago, have since gotten a master’s in public policy, and I’ve been working in DC doing a lot of labor economics research. I’ve always had plans to go back for an econ phd, and the last year has jarred me out of labor economics and into a deep passion to pursue macroeconomics (probably in combo with labor).

This is important stuff, it’s not boring – and your work and Brad’s work in highlighting exactly where we went wrong and what we need to do to rectify our understanding of the economy is very helpful for someone aspiring to enter the field.

Prof., I read Prof. DeLong’s post, and yowza! Some zingers in there, for sure (for nerdy econ. types like me).

A question: Does anyone in the freshwater schools recognize diminishing marginal utility as applied to dollars? My point: Ricardian equivalence (as I take it) does not seem to include diminishing utility of dollars for wealthier people vs. poorer people. A grand means a lot more to a person making ten grand than it does to a millionaire. Have they not seen that the money taxed from the wealthy can have a utility it would not have had, whereas taxing from the poor seems to diminish that individual dollar’s utility from where it would have been used?

“These are the reactions of people who just can’t accept that they might have missed something”

Are you the pot or the kettle here?