07 May 2011

A Bunch of Drunks Must Have Edited Wikipedia

Economics, Krugman 7 Comments

I am still trying to contain my disbelief that Paul Krugman has doubled down on his claim that Casey Mulligan must have gotten his views about New Keynesianism at a bar. Specifically, Noah Smith pointed out (and I paraphrase), “Gosh, well, I hate to disagree with the mighty Krugman here, but you know there are a whole class of New Keynesian models that focus on sticky prices… So maybe that’s what Casey Mulligan had in mind?”

But nope, Krugman will have none of it. Don’t show any sympathy for those Chicago School morons–they hate us for our predictions. You need to be tough with these guys. No mercy! They only respect strength.

Anyway, when I was looking into something unrelated, I came across the Wikipedia entry on “New Keynesian economics.” Apparently a bunch of drunks from Chicago got a hold of it and changed everything, because look at how it reads:

New Keynesian economics is a school of contemporary macroeconomics that strives to provide microeconomic foundations for Keynesian economics. It developed partly as a response to criticisms of Keynesian macroeconomics by adherents of New Classical macroeconomics.

Two main assumptions define the New Keynesian approach to macroeconomics. Like the New Classical approach, New Keynesian macroeconomic analysis usually assumes that households and firms have rational expectations. But the two schools differ in that New Keynesian analysis usually assumes a variety of market failures. In particular, New Keynesians assume prices and wages are “sticky”, which means they do not adjust instantaneously to changes in economic conditions.

Wage and price stickiness, and the other market failures present in New Keynesian models, imply that the economy may fail to attain full employment. Therefore, New Keynesians argue that macroeconomic stabilization by the government (using fiscal policy) or by the central bank (using monetary policy) can lead to a more efficient macroeconomic outcome than a laissez faire policy would.

Yes yes, we can all make jokes about the validity of Wikipedia, but give me a break. When Krugman says that Mulligan is getting his views on New Keynesian economics from hanging out at the bar, he is completely full of crap. If he weren’t such a bully, I think more of his colleagues would be standing up to him and pointing this out.

To clarify: Krugman of course can claim that Mulligan’s critique is wrongheaded, because we are in a liquidity trap blah blah blah. But to just keep ripping Mulligan as totally ignorant of New Keynesian economics is absurd.

7 Responses to “A Bunch of Drunks Must Have Edited Wikipedia”

  1. Martin says:

    If I recall my Krugman correctly, it’s that Keynes’ argument with regard to wages: 1. Sticky wages prevent a new equilibrium to be achieved in a crisis and that results in high unemployment. 2. If it weren’t for sticky wages a new equilibrium would be attained with Y-old >>> Y-new and Unemployment-old <<< Unemployment-new. There's a paper by Tobin arguing this as well.

    Casey essentially is arguing that a full-employment equilibrium would be attained, whilst NK merely argue that a new equilibrium would be attained if it were not for the sticky wages. Not that this equilibrium would be a full-employment equilibrium.

    Then again: "Similarly, you could argue that a sufficiently large fall in wages could restore full employment now — but it would have to be a very large wage decline, and the positive effects would kick in only after deflation had first driven just about every debtor in the economy into bankruptcy.

    The point is that making wages somewhat more flexible, as opposed to perfectly flexible, is not a good thing. And this in turn means that people arguing that what we need right now is more wage flexibility are actually pushing for a policy that would make things worse."

    I don't know enough about NK, to know whether 'sticky wages' are a modelling assumption or whether they actually believe in sticky wages is the real and ultimate problem to be solved. From the look of it, I don't think they do. Reading Krugman though is rather difficult as he mixes the normative with the positive.

  2. Daniel Kuehn says:

    I agree with you and I said something similar when I first posted Krugman’s response. Krugman could have said “New Keynesians do a lot more than price stickiness, and that other stuff they do is what’s performing so well right now so New Keynesians should think like me and worry less about price frictions and more about this other stuff”. But he can’t viably claim that Mulligan didn’t hit on the central point of New Keynesianism.

    I suppose I can understand the frustration – Mulligan has posts up every other week trying to be the ace in the whole against Keynesianism. This one on price frictions isn’t it. If anything it’s a point in Krugman’s favor and against other Keynesians, and if Krugman weren’t so defensive he’d realize that.

  3. von Pepe says:

    Its a miracle! Wikipedia confirms what your new keynesian teachers taught in your top ten (by several rankings) program at NYU. Bob, it is o.k., you can continue to practice economics.

    Why isn’t krigman a pariah in the econ department at princeton?

  4. TGGP says:

    Daniel Kuehn is too modest to link to his own post, it’s here.

  5. Joseph Fetz says:

    Eh… The Sticky wages/prices thing again. Having read just about everything that has come out from Keynesian (and, New-Keynesian) price theory, there is no doubt that “stickiness” is their game. That the only way to reduce this “stickiness” is to lower the real price/wage through inflation of the currency. That full employment, in their mind, is merely a problem of real prices (wages) vs. that of nominal (perceived) prices.

    Every economist knows that unemployment is a problem of price and utility. That nobody wants to reduce their selling price of labor, and that increasing real prices is what is strived for. The disutility of labor is forever a real phenomena that will never leave the human psyche; nobody likes to work. What people strive for is an increase in their labor price. While a free market economist would say that the best course of action is to allow the markets to adjust to current market conditions, the Keynesian would say that prices must now fall in real terms, but remain constant (or, increase) nominally.

    It often helps me to look at the entire economy, and its prices, in the lens of a barter economy. Sure, we have a general medium of exchange, but this medium of exchange (money) also has a price. If one looks at units of goods, capital, labor, land, money and services vs. other goods, capital, labor, land, money, and services, then one finds the answer to the problem at hand; the problem that Keynesians wish to disguise. This problem, as I see it, is that no matter how much you increase other prices against the wage-price, there is no way to perfectly raise ALL prices in order to allow the productive sectors to calculate in order to invest in further labor means; they are just trying to figure out how they will maintain their current capital and production while staring at increasing production and maintenance costs, or how to refit production in order to offer products at a price that is profitable. .

    Sure, it sounds good to increase capital and consumer prices in order to decrease the wage price. But, there is no calculation or metric available to know which prices will increase and which will not. In turn, all this activity of price increases does is confuse the prices within the markets that provide employ for labor. Further, due to the disutility of labor, the diminishing marginal utility of money going into necessities such as food and energy (whose demand is extremely inelastic), and the increase in government spending (which is entirely inelastic), it should be of no surprise that many in the labor sector would rather choose to go on the dole rather than work, or that business would be hesitant to increase production and add new hiring.

    I my estimation, the “sticky wage” theory is not something that cannot be rectified by monetary of fiscal policy, it can only be corrected by markets reaching stasis of current market valuations (prices must adjust to conditions). The implementation of such a policy of increasing demand has no way to direct the final results. All it ends up doing is further disrupting the prices of which a capitalist economy depends on to function.

    All the “sticky wage” theory does is focus on one price, then attempt to solve that problem by increasing other prices haphazardly without ever taking into account the destructiveness that those other prices do to the entire structure of production. It is like saying that my toilet is broken, and in order to fix it I am going to destroy the house around it and build a new one in hopes that the toilet fixes itself. It doesn’t work, and it will never work. Meanwhile, the homeowner is stretched beyond his means and never finishes the renovation.

    • Gene Callahan says:

      “In turn, all this activity of price increases does is confuse the prices within the markets that provide employ for labor. ”

      So markets cannot handle changing prices? Interesting…

      • Joseph Fetz says:

        Sorry, I was highly “liquid” when I posted that, and thus did not elaborate particular things as I should have (Bob, I apologize for effectively “drunk dialing” the comments section of you blog, please forgive me).

        In any case, what I was thinking of at that particular moment is the market clearing mechanism of prices. Obviously, if you are dealing with an inflation of the supply of money, the clearing of markets becomes nearly impossible due to injection of new money chasing goods that may or may not have increased in supply, but whose demand is inelastic with regard to cash balances of those who are the receivers of such liquidity. This clearing process becomes exacerbated by subsequent injections of money. More specifically, I was thinking in terms of commodities and producers goods (input costs) vs. the selling price of the finished goods thereof.

        Yes, markets can handle changing prices, that is what markets do (absent an inflation of the money supply). However, when you throw in inflation, it has the tendency to increase the price of goods beyond their clearing price dependent upon the demand of those whose cash balances increase due to such inflation, and whose marginal utility of money will diminish with regard to particular goods. If the inflation continues, this market clearing (equilibration) is never allowed to take place. Thus, there is a “confusion” of prices.

        The way I like to “idiotize” it is by using an example of a poker game including 5 players. Each starts with 100 units of chips. As the game goes on, additional chips (say, 10-20 at a time) are added to the player’s balances in a random fashion after each round. Obviously, a regular poker game will eventually come to an end (i.e. the poker market is cleared). However, this adding of chips in a random fashion will prolong this process, and may entirely change what the outcome would have been had such “chip-inflation” never occurred. Further, some of the players will have made bets that they may not have if such “chip-inflation” never occurred. In essence, the random infusion of additional chips creates distortions to the game. It confuses the pricing mechanism of the game that allows the game to end as it would had there not been additional chips added to the player’s balances.

        Anyway, that is all that I was saying.