Mr. Krugman and the Moderns

|Peter Boettke|

Paul Krugman gave a presentation in Cambridge at a conference to celebrate the 75th anniversary of Keynes's General Theory of Employment, Interest and Money.  He titled his presentation "Mr. Keynes and the Moderns" and in it he walks through the basic argument for what I will call "nuts and bolts Keynesianism" as opposed to either Chapter 12ers or the Samuelsonian synthesis.  In the process, Krugman provides argument and evidence that challenges modern adherents of the "treasury view" and the "liquidationists".  He argues that we are rehashing many of the debates once again that he thought were settled by Keynes back in the 1930s.

I like Krugman's article for a variety of reasons.  For one, I am someone who believes the history of economic ideas is important for contemporary theory construction, so I have argued for what I term opportunistic readings of historical figures, see here and here.  Krugman buys into that use of history of ideas when he states: "Keynes was a great man, but only a man, and our goal now is not to be faithful to his original intentions, but rather to enlist his help in dealing with the world as best as we can."  This is Kenneth Boulding's idea of the "extended present."  Second, I think he has presented the argument clearly and given specific empirical claims that must be addressed.  Rather than wrestling with jello, Krugman provides a very clear argumentative target that is based on economics rather than political persuasion.  It is Krugman as an economist not as a political pundit.

No doubt, there are "perspective" issues --- Krugman's dichotomization of the Chapter 12ers and the Keynes as equilibrium theorist and the focus on the critique of Say's Law, does reveal an inability to deal with Say's Law as separate from Say's identity and as a process theory as opposed to an equilibrium condition.  The classics on this would be W. H. Hutt's A Rehabilitation of Say's Law and the classic article on this would be Axel Leijonhufvud's "Say's Principle: What It Means and What It Doesn't Mean", reprinted in Information and Coordination.  Bottom line: Say didn't confuse an accounting identity with causal relationships, and neither did Hutt or Leijonhufvud.  Say's critique of Malthus is as relevant today as it was then and simply amounts to a reaffirming that there are economic forces at work in an economy.  A huge mistake in perspective occurs when thinkers (and policy makers following them) assert either that we must deny these forces operational power (cut the story short so to speak as happens when agent rationality or relative price adjustments are denied) or assume they are represented by instantaneous adjustments so at any point in time everything is fully worked out.

But for sake of argument, let's put the differences in perspective aside.  Instead, focus on the causal relationships that Krugman identifies and the evidence he employs to illustrate his position.

Comments

[james mcclure]

Krugman reference list: 6 items: Keynes's Gen Theory and a piece by him in QJE, a couple newspaper articles, and two mimeos (one co-authored of his, another by Cochrane). How persuasive is it to argue, as Pete explain Krugman does, "that we are rehashing many of the debates once again that he thought were settled by Keynes back in the 1930s" without reference to ANY of the journal publications, books, newspaper articles, and mimeos by Austrian scholars since the 1930s?

[McKinney]

It’s classic Krugman. He ridicules criticism of Keynes and simply repeats what his master wrote as if repetition suffices for proof. He never bothers to defend Keynes; he only repeats him, and he never tries to debate critics. He just ridicules them.

And he pretends that the 1970’s never happened. Very strange that this guy could win a Nobel.

[Peter Boettke]

McClure and McKinney ---

Please for the sake of the argument, don't take the critique of perspective. Instead, take on the evidence and show how the difference in perspective (perhaps) would lead to different interpretation of the evidence to looking at different evidence.

Everyone here is pretty much on board with you guys about Austrianism being the superior framework. The question is how to get _others_ to learn from the current debate about that claim to superiority and to be persuaded by it.

Rather than dismissing Krugman, lets engage him with respect when he decides to leave behind his role as a political pundit and return as he is here to making economic arguments.

[Mario Rizzo]

A slightly side-point. The best work on Say's Law is by Stephen Kates. He goes beyond the Say's Principle, Identity, Equilibrium condition stuff and shows how the adherents of Say's Law focused on sectoral disturbances.

[Jim McClure]

Pete, I'll look at it again, setting aside the signal of blatantly biased "scholarship" sent by his reference list. Signals ARE generally not perfect ways of assessing things, but they conserve time. It will be interesting for me to discover by re-reading Krugman's arguments and by watching the discussion here the degree to which the signal of his Austrian-empty reference list did accurately predict his arguments' quality.

[Current]

I thought it was an informative paper because it showed the basics of his views on Keynesianism.

Anthony Evans and I are working on a paper about the Quantity theory of money. Along the way we've found out how in the 30s just before Keynes economics in Cambridge became regarded as much more about GDP flows than stocks.

Part of the problem here is that that view is still very mainstream, even amongst non-Keynesians. Mainstream economics has become something about GDP components ignoring everything else. The Niall Ferguson and John Cochrane quotes show the problem. Both of them *are* using the GDP equation to come to conclusions, which is all wrong.

[McKinney]

Pete, my point is that there is nothing substantive to take on. Krugman doesn't offer a defense of Keynes, only repetition. Many people have dealt with the Keynesian theories that Krugman repeats.

I guess we could just repeat the criticisms of Keynesianism that have amassed over the decades.

If Krugman had written something that explained why he thought Keynes was right, that would be different. We would have something to discuss. But he doesn't offer anything new, except in the last part where he talks about what Keynes left out.

[Jim McClure]

Pete, OK, so engaging him with respect on a specific from his talk: Krugman in figures 7 shows sharply rising federal debt 2009 to 2011 and in figure 8 shows a measure of interest rates going up and then down. He shows these to make the following point: "So those who were absolutely certain that large borrowing would push up interest rates even in the face of a depressed economy fell into the very fallacy Keynes went to great lengths to refute." The problem I see here is that Krugman is creating a straw man in saying "those who were absolutely certain that large borrowing would push up interest rates..." Does Krugman really think that the ONLY thing that changed from 2009 to 2011 was the amount of federal borrowing? Surely not; so why then does he claim Keynesian fallacy validation to a loanable fund theory prediction that he surely knows presumes ceteris paribus?

[Troy Camplin]

Never mind the Fed keeping downward pressure on interest rates as well, huh?

[Daniel Kuehn]

On Say's Law -
I've said in the past that Keynes's straw-man Say's Law is an important heuristic device for understanding Keynesianism. I agree with you that Say himself should be understood as a process theorist. I don't know if you've read all that DeLong has been writing about Say, but that's essentially the point he makes too.

But I still think the Say's Law of the General Theory is useful to have as a way of reintroducing the idea of effective demand into the lexicon of economics. In a sense, this is another sort of "opportunistic reading of historical figures". Unfortunately for J.B. Say, the creation of a useful heuristic sullies his good name!

I think Keynes knew he was doing this too. When he introduces his version of Say's Law he says quite clearly that he doubts anyone would explicitly put it the way he had just put it. But it's the heart of the fallacy of ignoring effective demand.

An excellent short essay on Keynes by Deirdre McCloskey praises Keynes as one of the best in the tradition of Sophists in economics. She doesn't mention the issue of Say's Law in the General Theory specifically, but I think her discussion of it as a dialogic book really gets at the heart of what Keynes was doing there.

[Daniel Kuehn]

Sorry - meant to link the essay: http://www.deirdremccloskey.com/docs/pdf/Article_298.pdf

[Mario Rizzo]

One of the problems with Keynes's Say's Law "heuristic" is that it makes the Keynes of the GT seem smarter than he really was. In the last chapter of Some Unsettled Questions (1844), the young John Stuart Mill says that no believer in Say's Law failed to understand that, in effect, people might decide to hold more in cash balances thus causing a decline in trade. Mill's analysis is so "modern" and important that you cannot excuse Keynes's treatment of Say's Law by calling it a heuristic.

I think his attitude toward Say was the same as his attitude toward Pigou. As he told Austin Robinson, we have to unfairly criticize Pigou to get our point across.

By "opportunistic reading" I do not think Pete meant this kind of thing.

[Daniel Kuehn]

Mario -
If the GT was just a leaky hydraulics treatise, I would agree with you. But I think the connection that Keynes made between earlier leaky-hydraulics types and the interest rate changes things.

Is Book 1 a great Cliff's Notes to Say, Mill, and Pigou? No. Definitely not. But it's a brilliant rhetorical introduction to what he has to present.

The whole Pigou thing was unfortunate. Mill and Say had the advantage of being dead by 1936. Oh well - what can you do.

[Richard Ebeling]

Keynes was a master of misrepresentation and deceitful caricature.

The best statement in making this case was Arthur C. Pigou, in his review of "The General Theory" (Economica, May 1936, pp. 115-116):

"The group of persons whom, on this occasion, he parades as a foil, are the 'classical economists,' with, as particular examples, 'Ricardo, Marshall, Edgeworth and Professor Pigou.' The device of lumping all these persons together is an ingenious one; for it enables the shortcomings of one
to be attributed to all.

"For example, Professor Pigou, in a book on Unemployment, which is 'the only detailed account of the classical theory of employment which exists,' (p. 7) has committed a variety of sins. Professor Pigou is a classical economist ; therefore the classical economists have committed these sins! Moreover, when one of the arraigned persons has palpably not made a particular mistake, the method of lumping enables Mr. Keynes to say that he ought to have made it, and that, in not making it, he has been false to the 'logic' of his own school-has allowed his 'good common sense to overbear his bad theory,' (p. 277).

"Finally, this device has, for anyone adopting it, the great advantage that it renders any complete reply impossible. When a man goes on a sniping expedition in a large village, nobody will have the patience to track down the course of his every bullet. . ."

This is no less true with Keynes' misrepresentation of Say's Law. Henry Hazlitt, in his "The Failure of the 'New Economics'," pointed out that much of Keynes misrepresentation came from quoting out of context, in particular from John Stuart Mill's essay 'Of the Influence of Production on Consumption,' included in Mill's 1844 volume, "Unsettled Questions in Political Economy," which Mario Rizzo referred in his comment, above.

As Hazlitt pointed out, if Keynes has quoted one more paragraph from Mill, the misrepresentation in Keynes' caricature would have been obvious. (I also highly recommend, as Mario did, Steven Kates' excellent study on Say's Law.)

For a brief exposition of what I consider to be a correct understanding of Say's Law, may I be so presumptuous as to link this short piece of mine on, 'Say's Law of Markets and Keynesian Economics,' from a lengthy series that I did several years ago on "Monetary Central Planning and the State":

http://www.fff.org/freedom/0698b.asp

Richard Ebeling

[FC]

The introductory economics texts I used did not discuss anyone after Keynes. No one after him was notable for they were merely tending the GT, which explained everything. This still seems to be the attitude of Krugman and the people who have been setting Obama's industrial policy.

[DR]

Why give Krugman the benefit of the doubt? It's not like he'll start taking his opponents seriously if we do. He doesn't even acknowledge the possibility of our being right on, what less aggressive Keynesians would consider, uncontroversial issues.

I'm afraid that taking him seriously would do nothing more than to baselessly acknowledge the "value" of a known belligerent who has shown himself to have no honest interest in reciprocating civil discourse.

This might explain why I don't feel too bad being so feisty.

[Niko]

I have to confess I'm tired and I have a head ache.

I don't understand why we should be polite to Krugman. He is not exactly a nice guy and sometimes you have to really scratch your head about his knowledge of economics. Also economics in the current form will never be free market oriented, so the austrians will remain at the fringes forever. So why bother?

About DK's remarcs. I don't understand the point he is trying to pass. What Keynes said about Say's Law is not only rhetoric, but the stepping stones on which he built a system. It is one thing to say that Keynes had some faulty premises, but if you are arguing that it is only rhetoric in order to say something, than the hole system falls apart. Basically all you have is words with no meaning.

Or maybe I didn't understand the message. Sleep deprived.

[Hair Extensions Online]

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[Daniel Kuehn]

FC - which text was that?

Niko - the point is this. Keynes wrote Essays in Biography and Keynes wrote Essays in Persuasion, and I think that's a good lens to look at this through. If you read Book 1 as biography it's very easy to get bent out of shape. I think he's wrong from that angle. I think Keynes probably knew he was wrong from that angle. If you think of it as persuasion - as a way of framing his contribution - I think it's very effective. Certainly others do the same thing when providing a caricature of Keynesianism to launch their ideas. Keynesians have the choice to read it as biography and get cranky or we can read it as persuasion and see what they have to say. I'm certainly guilty of doing both (the fact that some intend it as biography is certainly a motivating factor for me).

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|Peter Boettke| Paul Krugman gave a presentation in Cambridge at a conference to celebrate the 75th anniversary of Keynes's General Theory of Employment, Interest and Money. He titled his presentation "Mr. Keynes and the Moderns" and in it he walks...

[McKinney]

A couple of points I usually offer to mainstream economists:

1) Check out James Estey's 1950's book "Business Cycles". He has a great chart of cycles from 1790 to 1949. There's about 47 of them. The economy recovered just fine after each one without state help until 1929.

The first depression US history in which the state tried to save us was also the longest and deepest. Of course, they usually then hold up WWII as an example of how state spending saved us.

2) If WWII was such a great example of the power of the state to rescue us, then we should shoot the unemployed, build massive numbers of ships and sink them in the Pacific, and build thousands of aircraft and shoot them down.

3) What about the stagflation of the 1970's?

4) What haven't multiple rounds of stimuli saved us this time?

Of course, they respond to that one with a) the stimuli weren't large enough or b) it would have been worse.

For a, I ask them to provide evidence that the economy works like a neuron and has a threshold which stimulus must reach before it can fire.

For b, I ask "how do you know it could have been worse? They don't know, but if it got so bad that everyone starved to death except one progressive he would say "it would have been worse without the stimuli."

[Steve Horwitz]

What Niko said.

You can't have it both ways with Keynes. If the attack on Say's Law is meant to be merely rhetorical, then you have to throw out all of the analysis that's built on the argument against the strawman/misrepresentation he creates. If his attack on Say's Law is what it appears to be - a necessary piece of his argument for the importance of aggregate demand and the possibility of unemployment equilibria - then the fact that he created a strawman is fair THEORETICAL game and he deserves to be called out on it. And whatever part of the argument rests on it is under suspicion too.

If you want to argue it was rhetoric, then like illegally obtained evidence in a criminal trial, you can't use it as part of the prosecution.

Good to see that we're holding Keynes to the journalistic standard of "fake but accurate."

[Daniel Kuehn]

Steve -

re: " If his attack on Say's Law is what it appears to be - a necessary piece of his argument for the importance of aggregate demand and the possibility of unemployment equilibria - then the fact that he created a strawman is fair THEORETICAL game and he deserves to be called out on it".

If you want to treat Book 1 as an intellectual history of classical economics rather than an introduction to the General Theory, then obviously Keynes fails at intellectual history (or at least he presents an absurdly underdeveloped intellectual history).

Let's say we take this route - far less interesting in my mind, but let's say we take it. Where will that get you?

It'll get you where Mario took it and where Brad DeLong has taken Say, Mill and Bastiat - it'll take them much closer to Keynes then people popularly understand them to be.

The contrast helps Keynes make his argument. Maybe that was unfair on a personal level of him to do, maybe not. The DeLong point is that Keynes would have more allies if he gave Say a fairer hearing. That may be true. But I don't see how you can say you throw out the analysis because of it!

If he had called it "Acme Classical Law" rather than "Say's Law" there would be no strawman, you couldn't make this complaint, and you'd have to address the actual idea. What really changes when he mentions Say other than that we all have to agree this isn't very good intellectual history?

[McKinney]

Daniel, you seem to be accepting McCloskey's position that persuasion has its own rules. Persuasion should be based on truth. If it's not, it's sophism as Plato defined it.

Sophism employs all of the logical fallacies because they work to persuade naive people of the truth of something that is false.

In that sense, Keynes was a true sophist.

[Daniel Kuehn]

McKinney -
I'm not sure how profitable it is to get into the epistemological trenches here, but the point is that truth with a capital t is elusive in ways that a lot of Platonists and other remorseless logicians don't fully internalize, because of that, persuasion is important. Employing logical fallacies gets you nowhere. Highlighting how the word-games of logic can fool people into thinking they've hit on truth is the point.

Anyway - it's worth reading how McCloskey puts it. She says it better than I'll ever be able to. If you think the point is to employ logical fallacies and be relativistic with respect to "rules" then you've missed the point.

[Niko]

@DK
"Employing logical fallacies gets you nowhere."

Stop doing that then. I still don't understand what you are trying to say. What I get is: when Keynes is wrong, he is not wrong, just talking. Since he based all his system on this talk, logically he is never wrong, but he is always talking. But since, in your framework, we cannot use logic, but only " word-games of logic" (proverbs?), I cannot have an intelligent discussion with you. Have a good day.

[james mcclure]

I agree with McKinney about Keynes being a sophist and think that analogy Krugman draws about using different maps for different applications shows Krugman an present day disciple of the sophistic arts (see Krugman's talk-section on "Samuelsonian Synthesis"). Krugman's map analogy provides no logical bolstering to his claim that microeconomics rightly follows a set of principles that it is "deeply reasonable" to replace with "ad hoc" behavior assumptions when "doing" macro. An apt Austrian map analogy would be something like this: North, South, East and West are pertinent to both the topographical maps used for hiking and the road maps used for driving; similarly market process and relative prices are not less important for analyzing microeconomic or macroeconomic problems.

[Troy Camplin]

It makes no sense to argue that it is necessary to misrepresent peoples' ideas in order to make a valid point. If you start with false premises, you end up with false conclusions.

For example, I could make the argument that Keynes was in favor of deficit spending in order to keep the economy healthy (which misrepresents his view that deficit spending is needed in a recession to make it healthy) and that Krugman believes we need to restrict all trade with other countries (which misrepresents almost everything he has written as a scholar, but reflects a few things he has said about a few countries) to make the point that Keynesians are entirely for government control over the economy and for endlessly printing money. That would be silly, and no doubt DK would call me out on it. How, then, is it legitimate for Lord Keynes the Magnificent to do so?

[Justin Rietz]

I would be interested in seeing a point-by-point critique of Krugman's presentation. I'm not as up to speed on Keynesian economics as others here clearly are, so I'll have to leave it to someone else, unfortunately.

[Josh S]

Short, easy, empirical argument against Keynes:

Following Keynesian logic, high inflation and high unemployment are impossible. Then the 1970s happened.

QED