03 Apr 2012

Paul Krugman Hits the Bar Before Answering Steve Keen

All Posts, Economics, Federal Reserve, Krugman, MMT 25 Comments

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.”

25 Responses to “Paul Krugman Hits the Bar Before Answering Steve Keen”

  1. von Pepe says:

    Oh, I was laughing out loud. His Kontradiction on this sticks with me to this day.

  2. Gene Callahan says:

    “and as with Ptolemaic Astronomy, these underlying principles clearly fail to describe the real world…”

    Sigh. Vulgar history of science.

    • Gene Callahan says:

      The point being, Ptolemaic astronomy “fit the real world” of observed facts pretty damned well, and could have been improved further. It was the increasing lack of modelling elegance that doomed it.

  3. Lord Keynes says:

    “When Krugman and MMT’ers (I don’t know if Keen is officially an MMTer, but his critique is”

    No, it he isn’t, he is a Post Keynesian. Nor is his critique somehow quintessentially “MMT”.

    Shows how little you know about heterodox economics outside your narrow Austrian cult.

    • Lord Mises or Lord Rothbard? says:

      Since I’m a member of the Austrian cult, I need a new name to show my cultish credentials? Which should I choose?

      • Major_Freedom says:

        I always laugh when statists like Lord Keynes call libertarians “cultists.”

        Who else but a cultist would name himself after the figurehead of an “economics” school, including the word “Lord”?

        It would be like a scientologist who calls himself “Lord Hubbard” calling someone else a cultist.

    • Anonymous says:

      Think about what LK considers to be a great interview: Mike Norman, MMT princeling:


    • Bob Roddis says:

      Think about what LK considers to be a “great interview”: MMT princeling Mike Norman:


  4. Bob Roddis says:

    Although I’m the world’s Crudest Austrian, I knew that Keen wasn’t an MMTer. I waste my time learning that stuff so you guys don’t have to.

    Mark Thoma says Keen doesn’t understand the models:

    Now let me back up. My point was fairly simple, I said that I didn’t consider New Classical models (i.e. information confusion models) DSGE* models. Keen claimed they were in trying to defend himself against a charge made by Krugman, and I disagreed. To me, DSGE refers to something different (mainly, but not exclusively, the classes of NK and RBC models). But I also said that I could see how someone could make this argument, especially since NC models provided the intellectual foundation for modern macro models (RE, microfoundations, and equilibrium analysis mainly). Nevertheless, I don’t think the term DSGE applies to NC models.

    More to the point, however, Keen showed a lack of familiarity with modern models and I am still not sure that he knows the difference between NK, NC, RBC, and NM models, NC and RBC in particular (New Keynesian, New Classical, Real Business Cycle, and New Monetarist). The discussion by Keen just before his figure 3 — the part that quotes Wikipedia for the authoratative answer as to whether NC models are DSGE — doesn’t even mention NC models. And Keen seems to imply that RBC=NC. That is, he thinks the statement in the Wikipedia quote that “Real business cycle (RBC) theory builds on the neoclassical growth model” means that the RBC model is the same as the NC model. That’s wrong (the NC model generates non-neutralities and business cycles through information confusion, the RBC model is driven by productivity and preference shocks, information confusion is not present in these models — also, the NC model has faded since its heyday a couple of decades or so ago and it’s not a model that macroeconmists generally use today).


    Got that? Even the very excitable perpetrators of our present system of theft and fraud cannot wrap their minds about its precise nature while remaining meticulously oblivious to basic Austrian concepts and analysis. All they are doing is attempting to put an overly complex scientific sheen on a relatively simple scam and ruse so that it is impenetrable to average people.

    BTW, the Omniscient Imperious Lord Keynes still insists that the market is what mathematical statisticians call a “nonergodic stochastic system”. In a nonergodic system, one can never expect whatever data set exists today to provide a reliable guide to future outcomes. In such a world, markets cannot be efficient. Doesn’t that mean we can never know in advance the impact of “stimulus”? And LK clearly still does not understand the concept of economic calculation.

    *dynamic stochastic general equilibrium

  5. Bob Roddis says:

    CNBC’s John Carney chimes in:

    A few hours and scores of blog comments later, Krugman returned to the debate to accuse Keen and the “Minskyites” of engaging in “banking mysticism.” (The Minskyites he most likely had in mind were Modern Monetary Theorists like economist Randall Wray, a former student of Minsky.) Krugman compared Keen and the Minskyites of being similar to Austrian economists in that both assign “unique powers” to modern banks.

    Of course, one of the best ways to pick a fight with a Minskyite is to compare him to an Austrian. The typically left-wing Minskyites typically despise what they regard as the right-wing quackery of Austrian economics. (Austrians, as far as I can tell, don’t spend much time thinking about Minsky or MMT at all.) Krugman no doubt knows this, which is why he decided to make the comment in the first place. He wanted to poke the bear.


  6. Patch says:

    Economics debates among prominent bloggers can get vicious. Makes the girl drama I saw in high school look like nothing. Soon we will be witnessing mob hits, Soprano style.

    • Bob Roddis says:

      Really? Who knew?

      Hayek: “You see, another political element was that, of course, politicians just lapped the argument and Keynes taught them if you outspend your income and run a deficit, you are doing good to the people in general. The politicians didn’t want to hear anything more than that “

      LK: Yeah, that’s Hayek the bitter old idiot re-writing history.


      • Major_Freedom says:

        That’s funny. LK just believes in the religion of the benevolent state, and he doesn’t like it when people insult his God.

  7. Bob Roddis says:

    John Carney of CNBC actually has some insight into both MMT and the Austrians:


  8. Demosthenes says:

    Keen nor Krugman are really correct.

    NK and RBC models are always in equilibrium, even in response to shocks. Markets continuously clear. Its the E in DSGE for goodness sake’s. Sticky prices don’t change that, they just make the adjustment back to the steady state (which is conceptually distinct from equilibrium) slower.

    • Jun Wei-Tan says:

      What are you saying? Are you saying that DSGE they doesn’t have than are way overblow for (which is not even need GE that don’t)?. It’s not qualify aspectly it doesn’t. In fact, an accounts refer point innovations are imporant, Austreaux’s gross of Austrian mumblings overstatemes. The largument in favor (which Austrians like DSGE these of why these of Austrians discussions have corporant, we doesn’t. In favor of which Austrian mumblings over DSGE that more way ident about Lachmannians have corrects refer point about “kaleidic” some ommissione

  9. Tel says:

    Steve Keen has a website so it’s easy to read his articles, but here’s my quick interpretation for the lazy:

    * Yes, Keen believes that banks can create credit money pretty much at will, and they do this with help of government, but very few governments have the stones to haul hard on the banks’ leash; so we might as well presume that banks are a force unto themselves. Keen generally models the banks as their own sector in the economy. I think most Austrians agree that this is what currently has been happening.

    * Like the MMTers Keen believes that credit money is the driving force of a modern economy, and intrinsic money (e.g. gold, or barter) is to all intents and purposes so tiny as to be irrelevant. Austrians probably disagree on this score.

    * Keen borrows from Marxist theory (and most “progressives”) to divide the economy into “workers” and “firms”, where the behaviour of these two groups is fundamentally different (especially w.r.t. available credit). That doesn’t make Keen entirely a Marxist, although he does seem to sympathize with the working class and the poor. Austrians try hard not to divide people into arbitrary classes, and we could argue a long time on this topic so I’ll go no further.

    * Unlike the MMTers, Keen does not naively follow the idea that more credit is always better, he believes that the system falls into unstable cycles of inflation and deflation, and then weird things start to happen when you get past the 100% aggregate debt / GDP ratio. This is not so far different from Austrian Business Cycle Theory, except that Keen has dynamic models demonstrating this in a quantitative way.

    * Keen predicted that the credit-driven Australian real estate bubble should crash much the same as the US bubble did, but so far this has not happened (primarily because of government intervention).

    • Beefcake the Mighty says:

      Based on his book (Debunking Economics), Keen seems to confuse weak assumptions with mathematical flaws. His supposedly more realistic, alternative modeling approach of dynamical systems is rather laughable to anyone who knows anything about modern probabilistic methods used in mainstream econ/finance. It’s hard to take him seriously, MMT/PK issues aside.

      • Tel says:

        Hmmm, quantum mechanics provides a well accepted statistical model of an electron, but when it comes to circuit modelling (e.g. the SPICE simulator) people are happy to switch to differential equations and numerical integration (and the electrons don’t seem any the wiser).

        I guess you have to ask whether an economy is more like a big sea of transactions that ebbs and flows down particular channels, or whether it is more like a bunch of agents bumping into each other at random. This reminds me of the difference between climate and weather, but that’s getting a bit off topic perhaps.

    • MamMoTh says:

      MMTers do not follow the idea that more credit is always better.

      • Anon says:

        Right, they just always happen to recommend more of it, haha

  10. The Analyst says:

    Steve Keen isn’t a Neo-Chartalist, he’s a Monetary Circuit Theorist.


    • Beefcake the Mighty says:

      The difference being…what, exactly?

      • The Analyst says:

        Modern Monetary Theory (Neo-Chartalism): Money represents an IOU from the gov’t to the populace. Taxes are the imposition of liabilities on the populace & are what gives fiat money values. Taxes aren’t needed to raise revenue, but they can serve an important function in preventing the economy from overheating. Generally, though, MMTers favour low taxes & money-supply expansion to finance government spending.

        Monetary Circuit Theory: Banks effectively create money by extending loans – they don’t need deposits to extend loans, but they sometimes look for deposits after the fact. Monetary policy is less effective in MCT than in most neoclassical theories.

        Neo-Chartalism is basically a theory saying that fiscal policy has less constraints than originally thought of, whereas MCT is a theory saying monetary policy is much more constrained than traditionally thought.

        • Beefcake the Mighty says:

          Sure, but they’re both nominalist schools of thought.

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