I am super busy with “day job” stuff so I can only do a hit-and-run: In the big blogosphere battle between Krugman and Steve Keen, the latter threw out some sweeping insults of New Keynesian economics. One of the things Keen said was:
Firstly, there are similar underlying principles to the DSGE models that now dominate Neoclassical macroeconomics, and as with Ptolemaic Astronomy, these underlying principles clearly fail to describe the real world. They are:
-All markets are barter systems which are in equilibrium at all times in the absence of exogenous shocks—even during recessions—and after a shock they will rapidly return to equilibrium via instantaneous adjustments to relative prices;
To which Krugman responded: What on earth? Point 1 is all wrong — NK [New Keynesian] models are all about sticky prices, so what’s that about “instantaneous adjustments”?
Longtime, wonkish readers should have laughed out loud at that.
Last point: When Krugman and MMT’ers (I don’t know if Keen is officially an MMTer, but his critique is) start going head-to-head, I think it’s best to let them blow each other up. However, if you forced me to choose a side, I’d say that Krugman has been mostly right. However, I think he made one major slip-up. Early on, he said that even if banks had no reserve requirements, they would still be limited in their ability to engage in credit expansion, because of the public’s desire to hold actual currency. But I think this is a little confusing, and I’m not sure Krugman realizes just how limited his statement was. Because a bank’s customers might want to hold currency and thus draw down their accounts, that forces banks to hold some reserves, even if the law doesn’t require it formally. But if there were no reason for banks to ever hold reserves, then the strong MMT claims would be right, and commercial banks could create an infinite amount of new money, regardless of Fed policy.
So I think Krugman is technically right, even on this point, but to me it sounded akin to him arguing, “I don’t care how fast the car is going when it slams into the brick wall, the occupants won’t be hurt so long as we cap the kinetic energy of the vehicle at a very low level.”