20 Dec 2012

New Keynesians, Casey Mulligan, and Sticky Prices: Krugman Must Be Hammered at This Point

Krugman 77 Comments

I realize some of you think I spend too much time detailing every little inconsistency in The Compleat Works of Paul Krugman, but with great power comes great responsibility. I happen to have a large amount of Krugman’s writings in my mind, and it causes me physical pain when I read his blog and see his almost daily transgressions against both property rights and human decency. It would be selfish to keep these matters to myself, don’t you think?

Anyway, let’s review a particularly sordid episode, to understand why Krugman’s post today is so scandalous.

==> Back in May 2011, U of Chicago economist Casey Mulligan wrote a critique of New Keynesians that contained the following:

Our labor market has long-term problems that are not addressed by Keynesian economic theory. New Keynesian economics is built on the assumption that employers charge too much for the products that their employees make and are too slow to cut their prices when demand falls. With prices too high, customers are discouraged from buying, especially during recessions, and there is not enough demand to maintain employment.

When the financial crisis hit in 2008, the New Keynesian “sticky price” story had some plausibility…

…but then Mulligan goes on to argue why this plausibility faded away, the longer the crisis dragged on and new data came in. My point isn’t to say whether Mulligan’s critique was good or bad. I am just pointing out that he said the New Keynesians had a “sticky price” story to explain long-term unemployment equilibrium.

==> Enter Paul Krugman. In a blog post titled, “Why Casey Can’t Read,” Krugman wrote that Mulligan…

…should try reading a bit of Keynesian economics — old or new, it doesn’t matter — before “explaining” what’s wrong with it. For the doctrine he’s attacking bears no resemblance to anything Keynesians are saying.

This is fairly typical of freshwater economists. They know that what the other side is saying is obviously stupid, so there’s no need to read it; they picked up enough about it talking to some guy in a bar, or whatever, to criticize it.

That last line–about “[t]hey know that what the other side is saying is obviously stupid, so there’s no need to read it”–is pretty rich coming from the same Nobel laureate who wrote this. But I digress. The important point is, Krugman is here biting off Mulligan’s head for claiming that New Keynesians hang their hat on a “sticky price” assumption. I flipped out at the time, explaining that I had been taught (by New Keynesians) at NYU that New Keynesianism was an attempt to reconcile old skool Keynesian policy recommendations with the rational expectations revolution, and the way it worked was by assuming sticky prices.

==> Today, in December 2012, while admonishing Noah Smith for showing mercy to the fools on the other side, Krugman writes:

I’m not saying that the NK [New Keynesian] approach is necessarily right; but it’s a serious intellectual effort, undertaken by people who thought they were part of an open professional dialogue. Oh, and there’s a lot of evidence for the price stickiness that is central to NK models; again, maybe it doesn’t mean what the theorists think, but surely that evidence ought to be part of any discussion. [Bold added.]

77 Responses to “New Keynesians, Casey Mulligan, and Sticky Prices: Krugman Must Be Hammered at This Point”

  1. Matt Tanous says:

    “with great power comes great responsibility”

    Not in the crappy NEW Spiderman movie. Wherein the “Peter Parker” identity is not hidden AT ALL, either.

    “Spiderman, where’s your mask?
    Oh, I just felt like taking it off”

    You can now return to your regularly scheduled discussions of economics.

    • Tel says:

      It is getting kind of uncomfortably non-politically-correct to have an Anonymous super hero these days. If you know what I mean.

  2. Keshav Srinivasan says:

    It looks like this was the main thing that Krugman thought Casey Mulligan got “in a bar”:
    “So Mulligan shows us a graph indicating how much prices would have to fall, according to New Keynesians, to restore full employment. No reference to anyone actually saying this, or any model that can be used to derive that line, is presented; nor is there any explanation of how Mulligan got that line. So what is it?

    It looks as if he’s assuming that nominal demand is constant, so that a fall in prices would lead one for one to a rise in real output. But where’s that coming from?”

    And I don’t think Krugman is criticizing Mulligan for ascribing significance to sticky prices. Rather, he’s criticizing the notion that you could get back to full employment just by eliminating price stickiness, mainly because there’s still the issue of sticky debt.

    • Bob Murphy says:

      Keshav Srinivasan wrote:

      And I don’t think Krugman is criticizing Mulligan for ascribing significance to sticky prices. Rather, he’s criticizing the notion that you could get back to full employment just by eliminating price stickiness, mainly because there’s still the issue of sticky debt.

      I agree he’d say that, but I never understood this move. “Yes, sticky prices are key to our explanation of recessions. But even if we didn’t have sticky prices, we’d still be stuck in this recession.” Huh?!

      • Keshav Srinivasan says:

        What’s wrong with saying that sticky prices is the central reason for the market failure, but that there are also other ancillary reasons, and those reasons could be made worse by deflation?

        • Dan says:

          How can price stickiness be central to his theory if his theory doesn’t need it to explain the depression?

        • Major_Freedom says:

          The problem is that if you don’t actually think sticky prices are central to the NK model that explains recessions, then don’t say sticky prices are central the NK model that explains recessions.

        • Silas Barta says:

          That, by then, you’re only superficially using an explanation based on sticky wages.

    • Daniel Kuehn says:

      I agree, Keshav. The answer lies in the rest of the post. Mulligan was wondering how the economy doesn’t fix itself, according to New Keynesians. Krugman told him precisely why. No big mystery here that maybe our extended problems have something to do with liquidty traps, debt overhangs, and financial crises this time around.

      It’s worth noting too that the primary purpose of frictions is less to demonstrate labor market shortages (like a naturally occurring minimum wage or something) and more to explain the upward slope of the SRAS curve that allows demand shocks to translate into unemployment. Same basic result, but I think a lot of people tend to focus only on sticky wages as a sort of minimum wage argument of unemployment.

      • Matt Tanous says:

        Liquidity traps, debt overhangs, and the rest have nothing to do with unemployment. The “sticky prices/wages” argument is solely that unemployment arises because people won’t accept pay cuts – I guess they’d rather stay unemployed. (Sticky prices, and not just wages, makes even less sense.)

        If wages drop by a certain amount, either in nominal terms, or through the Keynesian “solution” of inflation dropping real wages, then employment goes away. Deflation causing debt to be a larger burden would be a separate problem, causing not unemployment, but default.

        “upward slope of the SRAS curve”

        Among other issues with this nonsense, capital is not homogenous. Another is that, in the “short run”, supply must equal the stock already produced, no matter the price. Meaning that, at the very least, the SRAS curve is not talking about the short run.

        • Daniel Kuehn says:

          Who said capital was homogenous?

          I’m really not even sure this comment is worth getting into.

          • Major_Freedom says:

            I think, and I may be wrong, that capital has to be homogeneous in order for the SRAS curve to even be the singular concept that it is purported to be in practical terms.

            Maybe he can’t see how the SRAS concept can accommodate heterogeneity of the constituent components? Seems a valid beef.

          • Matt Tanous says:

            “Who said capital was homogenous?”

            Every single person who has explained the SRAS curve to me has included that as an assumption. Usually by saying something like, “During the short-run, firms possess one fixed factor of production,” which is obviously false unless we aggregate capital as a homogenous blob.

            If you would care to explain how one can arrive at the SRAS curve concept with heterogeneity of capital (and labor and land, of course), the by all means, please do.

      • Major_Freedom says:

        PK wrote:

        If he had read anything — anything at all — that Keynesians have written about policy at the zero lower bound, he would have learned that there is no reason to expect falling wages and prices to raise employment — in fact, quite the contrary in the face of a debt overhang.

        Seems to me that PK is just re-re-iterating the concept of sticky prices.

        Mulligan said that NK’s believe sticky prices prevent unemployment from falling.

        What beef does PK have with Mulligan (I am being serious)? Mulligan described NK in a way that made PK upset, but then PK goes on and says Mulligan doesn’t know what he’s talking about, that…NK is based on….sticky prices?

        How can you not see this?

  3. devo says:

    i swear the think tanks put krugman in the position he’s in just to keep you and the good ones busy chasing obvious stupidity that passes over just about everyone’s head. im glad though that krugman has an arch nemisis, or rather, that theres a super hero to defeat this monster lol

  4. Ken B says:

    1. Mulligan should challenge Krugman to a debate.
    2. “But the financial crisis was severe enough that the Fed’s best efforts would not be enough.” That sounds like zero lower bound speak to me. Is it? (Serious question.)

  5. Yosef says:

    So, Mulligan says that NK’s explain the recession with sticky prices, Krugman says that no, NK’s aren’t doing but there is generally evidence for sticky prices. And the issue is…what?

    If someone said “Oh these Austrians, they say that eating lots and lots of chocolate leads weight gain and malinvestment, which is how they explain our current problem.” And you respond with “What kind of drunken conversation did you over hear? Eating a lot of chocolate is not how we Austrians explain the current recession. But there is evidence that eating a lot of chocolate does in fact lead to weight gain.” Would you be committing the same Kontradiction as Krugman?

    • Dan says:

      Krugman said that there is evidence for sticky wages And it is central to NK models. That central to NK models is what the issue is. You probably didn’t see it because you left that part of his quote out of your response.

    • Bob Murphy says:

      Yosef wrote:

      So, Mulligan says that NK’s explain the recession with sticky prices, Krugman says that no, NK’s aren’t doing but there is generally evidence for sticky prices. And the issue is…what?

      That’s a very clever framing of the debate, Yosef. But in order for your defense to work, you conveniently left out the part where Krugman said “…the price stickiness that is central to NK models.”

      • Yosef says:

        Bob, English is not my first language (and I am not as fluent in Krugman as you are), but “central to NK models” and “central to this recession” are not the same thing. Sticky prices can be central to the NK model and worldview, while not being the source of the current recession, and not being their explanation for it. I believe Krugman was making the point that the main feature of this recession is the liquidity trap in the post you lined to.

        The engine is central to my car, but the reason I am stuck at the side of the road is a flat tire. Sticky prices are central to NK models, but not the reason the economy is stuck.

        • Christopher says:

          So you talk about a particular financial crisis and complain how your theory was not considered well enough during that particular crisis. Then you elaborate a little more on the details of your theory and say that sticky wages are central to it.
          And than you are surprised if someone gets the impression that you think sticky wages are central to that particular crisis…

          When you’re stuck with your car, would you call the wreckers and complain about how your engine makes trouble all the time on the phone but when they show up with all their tools for fixing engines you say: “gosh you guys just don’t take the time to listen carefully – I said that the engine makes trouble in general! I didn’t say that it was the reason I am stuck at the side of the road right now!

        • Major_Freedom says:

          Sticky prices are central to NK models, but not the reason the economy is stuck.

          Wait, I thought that according to NK it was sticky prices that are most responsible? Greg Mankiw writes:

          “According to conventional new Keynesian analysis, sticky prices are the ultimate market imperfection that makes aggregate demand matter. If you deny that prices are sticky and assume they can instantaneously jump downward to new equilibrium levels, many macroeconomic problems become much easier to solve. Indeed, you don’t need to solve them at all, as the market would do it.”

        • Bharat says:

          Yosef, models of what…?

  6. Dan Hewitt says:

    New Keynesian Greg Mankiw, rebutting none other than Bob Murphy, said this:

    …if prices are sticky, then the immediate deflation and concurrent increase in expected inflation won’t occur painlessly. Instead, it would take a while for the price level to fall, and as we wait, the economy would suffer through a period of depressed economic activity.

    According to conventional new Keynesian analysis, sticky prices are the ultimate market imperfection that makes aggregate demand matter. If you deny that prices are sticky and assume they can instantaneously jump downward to new equilibrium levels, many macroeconomic problems become much easier to solve. Indeed, you don’t need to solve them at all, as the market would do it.

    http://gregmankiw.blogspot.com/2009/04/instantaneous-deflation-as-macro.html

    • Major_Freedom says:

      It is the mother of all straw men for “sticky price” NKs, and those who are apologetic towards it, to accuse all those who have any quibbles at all with it, to be extremists who say prices and wages instantly and immediately adjust to every change in demand.

      Yes, if prices do not immediately adjust in the face of a changed demand, then there will be surplus inventory, surplus labor, and so on. No free market advocate, as far as I am aware, have ever charged that prices changes exist outside of time, that is to say, instantly correspond to changes in demand.

      Yes, if the demand for my labor fell by half, and yet I insisted I get paid the same as before, then I will end up on the street. The question sticky price NKs have an obligation to address is: By what right do you have in using state force to bring about non-market inflation of the money supply to coax my employer into hiring me at the same wage rate as before?

      If this really was about wertfrei economic science, that the goal is just raising employment, and all ethical qualms are treated as moralizing, then what if I said NKs are dogmatic ideologues who hate the poor, because they don’t advocate for the state to finance 100% of all wages, so that there never has to be any unemployment ever again? We can all work in government camps making potato soup and jackboots for our overlords. Too far? No it isn’t, because this is wertfrei economic science. I am proposing a way to eliminate unemployment forever, and any ethical quibble you have will be exposed for what it is: partisan or class demagoguery masquerading as economic science.

  7. Bob Murphy says:

    Hey everybody, I have to move on with my life. I point out what seem to be screaming examples of bullying by Krugman, and if you don’t see it, fine. Let me just say one more point: Especially in light of Krugman now saying that sticky prices are “central” to NK models, go and re-read Mulligan’s initial post. How in the world does one come off saying that Mulligan must have gotten his view of New Keynesians from talking to a guy in the bar?

    E.g. Yosef if you’re right, then Krugman should have said, “Mulligan’s approach might have made sense in the 1982 recession. But it doesn’t work now, because…”

    Instead of that, Krugman acted as if Mulligan was just making stuff up. At the time, Noah Smith jumped in and said that he didn’t get why Krugman was flipping out, that this indeed was the standard NK position, and Krugman (just like this time around) had to scold Noah for giving an inch of mercy to Mulligan.

    • Major_Freedom says:

      I guess I should meekly point out that I am not everybody.

      PK is party over principle.

    • Keshav Srinivasan says:

      Bob, as I said above, I think the specific thing that Krugman thinks Mulligan made up out of thin air is the “graph indicating how much prices would have to fall, according to New Keynesians, to restore full employment”.

      • Major_Freedom says:

        I see your point, but it looks like quibbling over nothing.

        For if NKs argue that price stickiness of extent X, is responsible for unemployment E in the face of falling aggregate demand Z, then by logical implication, according to NK theory, unemployment E could be eliminated in the face of falling aggregate demand Z if prices fell to X*.

        Just because NKs say “hey wait, that price change won’t happen like you say!” it doesn’t mean it is wrong to say “According to NK theory, IF prices fell to X*, THEN unemployment E could be eliminated.” That “if” doesn’t necessarily imply that’s what NKs actually believe will happen.

        It would be like someone saying to an Austrian “According to Austrian theory, IF inflation were to enter the market and be spent and influence prices and interest rates in this precise such and such a manner, THEN the business cycle will not occur.”

        Well yeah, that is technically correct. Austrians will of course say “Hey wait a minute, which Austrian ever argued that inflation will in fact do that?” But they wouldn’t be justified in saying “Whoever said that doesn’t understand Austrian theory.”

    • Yosef says:

      Bob, given that Krugman had at that point for a while been saying that this recession is different (say from 1982 and other recessions), and that the previous approach doesn’t work, then why should he have to say it again and again? As in, isn’t it reasonable for him at that point to go “Argh, don’t these people read? Do they just pick up this stuff at a bar?”

      (For example, here is one from 2010, a whole year before the Mulligan post: http://krugman.blogs.nytimes.com/2010/07/19/is-there-a-jobs-mystery/)

      Is it bullying because Krugman doesn’t repeat himself every single time?

      • Bob Murphy says:

        Yosef: Krugman said 2 days ago (maybe 3) that half of the economics profession is a cult because of the way they responded TO THIS CRISIS.

        Noah Smith came back 1 day ago (or whatever) and said I don’t think so, Dr. Krugman, because their models seem similar.

        Then Krugman said NO IN THIS CRISIS we see the difference. OH AND THE PRICE STICKINESS THAT IS CENTRAL TO THE NON-CULT 1/2 OF THE PROFESSION IS RIGHT.

        So who’s being coy here? Doesn’t Krugman bother to read anything about what New Keynesians have said about THIS CRISIS?

      • Bob Murphy says:

        Let me put it this way Josef: In his initial response to Mulligan, Krugman said (I may not have exact quote), “If Mulligan had read anything–anything at all–that a New Keynesian actually wrote about responding to an economy in a liquidity trap, he would know that falling prices won’t help.”

        In today’s post, Krugman is talking about the reaction of the 1/2 of the profession (the cultish freshwater guys) to THIS CRISIS, which is a liquidity trap. In today’s post, Krugman certainly sounds like he thinks the price stickiness assumption is essential, and is a dividing line between how the New Keynesians think vs. the RBC guys.

        So back when Krugman said, “If Mulligan had read anything–anything at all–that New Keynesians had written…” what he really means is, “If Mulligan had read at least 20 articles that any particular New Keynesian had written, then eventually he would see that once in a while we mention that sticky prices aren’t key. But in other things New Keynesians write, we describe our position exactly as how Mulligan has done here.”

        You yourself Josef are admitting that Krugman doesn’t make this point in everything he writes on the topic. So can you at least concede that Krugman was being ridiculously unfair when he said that if Mulligan had read “anything–anything at all” that a NK had written, then Mulligan wouldn’t have thought sticky prices were key to the argument?

        Anyway I really have to stop with this. If you truly don’t see why Krugman is being a jerk here, there’s no point in continuing. I’m not going to convince you with my 9th attempt.

        • Yosef says:

          Bob, if you want me to concede that Krugman saying “anything-anything at all” was being hyperbolic, then yes. I took it for granted that Krugamn was venting frustration in that statement. I don’t think Krugman meant that Mulligan could pick up any one random NK thing and gotten then NK position (anymore than picking up any one Austrian thing would work either). Krugman was hyperbolicaly saying that Mulligan was criticizing NK models without truly understanding them (making the point by the exaggerated statement that he hadn’t read anything at all).

          My reading of the Krguman posts in the past few days has been that half of the profession has revealed itself to be cultish, not in their reaction to this crisis in terms of policy (Krugman says opposition to fiscal stimulus is a defensible position), but in their absolute denial that the other side even exists. So, from Krugman’s perspective, half of the profession is a a cult because they don’t acknowledge the legitimacy of the other half. Smith’s point about using the same equations therefore misses the point.

          By all means, feel free move on from responding to me, or trying to convince me, You know the value of your time better than I do.

  8. Robert Fellner says:

    Free Advice has become a remarkably consistent illustration of Jonathan Haidt’s thesis in “The Righteous Mind: Why Good People are Divided by Politics & Religion.”

    Generally, people already have their priors and when you present them with an intellectual argument against, their brains are hardwired to respond as lawyers attempting to refute the new data. It is why we can pick, with remarkably consistency, how parties will react to your various examples of logical contradiction. That is to say, this guy will defend PK, this one will attack etc.

    I would imagine at this point, after so many instances over so many years, one must recognize that this avenue of approach – purely intellect/logic based – is not capable of changing your opponent’s mind. I mean if I was Bob and had suffered through the countless #s of this types of examples over the past 3-4 years, I’d feel like there is literally nothing the PK apologists wouldn’t rationalize away.

    • Bob Roddis says:

      We’re still waiting for that first anti-Austrian to understand economic calculation. The purpose of all this is simply to collect that assorted responses of the anti-freedom horde so we might know in advance what to expect.

  9. Jonathan M.F. Catalán says:

    I haven’t read through all the comments, but I don’t think either Keshav or Daniel have it right. There’s two separate arguments: (a) prices, including wages, are sticky; (b) balance sheet recessions, and the consequent liquidity trap, make price flexibility counterproductive, because falling wages will aggravate the process of deleveraging. The problem is that in Krugman’s latest post he forgets that (b) is more relevant than (a), suggesting that his post contra Casey Mulligan was more of a quick solution to a pretty good argument posed by Mulligan (prices may be inflexible, but after four years you’d think that if price inflexibility was the problem it would be, at least partially, solved). I think (b) should be judged on its own merits, but I wonder why Krugman didn’t mention (c): efficiency wage theory.

    • Jonathan M.F. Catalán says:

      If I’m right, it also makes Krugman quite the jerk. He was forced to drop the “sticky wages” argument and say “duh, we’re in a liquidity trap,” while essentially calling Mulligan ignorant — him dropping the liquidity trap point as the major facet of his model in consequent posts just reveals how much of an asshole he was.

  10. Keshav Srinivasan says:

    Bob, I think Krugman would say that there’s a difference between thinking that price stickiness is an essential part of the story and thinking that falling prices would help us right now. Look at this post:
    http://krugman.blogs.nytimes.com/2012/07/22/sticky-wages-and-the-macro-story/

    “A bit more methodology discussion. I’ve written quite a lot about sticky wages, aka downward nominal wage rigidity, which is one of those things that we can’t derive from first principles but is a glaringly obvious feature of the real world. But I keep running into comments along the lines of “Well, if you think sticky wages are the problem, why aren’t you calling for wage cuts?”

    This is a category error. It confuses the question “What do we need to make sense of what we see?” with the question “What is the problem?” So let me talk about that. …

    So when I emphasize nominal wage rigidity, I am defending an analysis of how the economy works, which is not at all the same thing as saying that this rigidity is the problem. On the contrary, for the US (though not for countries like Spain), wage stickiness is if anything good for us right now, helping stave off destructive deflation.”

    • Jonathan M.F. Catalán says:

      Krugman here isn’t making much sense, especially if you put this within the context of Krugman’s response to Mulligan. Mulligan’s argument is that sticky wages might make sense in the short term, but not so much after a few years have passed. In response, instead of writing “Mulligan hasn’t interacted enough with the evidence,” Krugman tacitly concedes this point (covering himself by claiming that Mulligan hasn’t read anything remotely New Keynesian), claiming that the major problem is the liquidity trap. If this is true, then sticky wages don’t explain “what we see;” further, “the problem” has to do with “what we see,” and so if sticky wages aren’t the problem, then why include them in the model? Note, models aren’t meant to “see” everything, but to abstract from things that aren’t related to “the problem.”

    • Bob Murphy says:

      Keshav, I’m aware of that post, and before I’ve asked Keynesians to explain it to me. How can it be an essential part of the story, if the story is true whether or not prices are sticky? That makes no sense to me.

      • Lord Keynes says:

        Bob Murphy:

        “Keshav, I’m aware of that post, and before I’ve asked Keynesians to explain it to me.”

        Your comment above makes me think you have a poor understanding of Keynes’s actual theory and heterodox (non-neoclassical) Keynesianism in general.

        The point of Krugman’s post is to question the whole neoclassical paradigm, just as Keynes did: Krugman is saying that, even if we had wage and price flexibility, there would no guarantee of full employment and no market tendency to full employment equilibrium either.

        Krugman is groping towards Post Keyensianism, just as he has said in 2009:

        “I really am gravitating toward a Keynes-Fisher-Minsky view of macro, although of the three I’d much rather read Keynes.”

        Paul Krugman, “Actually existing Minsky,” May 19, 2009, http://krugman.blogs.nytimes.com/2009/05/19/actually-existing-minsky/

        More discussion here:

        http://neweconomicperspectives.org/2009/08/keyness-relevance-and-krugmans.html

        Krugman even cites debt deflation in the original post above (as in Irving Fisher, Hyman Minsky, Steve Keen, and Richard Koo’s models and work) as a reason why wage cuts alone would devastate an economy with huge private sector debt.

        But reason why the whole neoclassical paradigm is wrong goes much deeper:

        http://socialdemocracy21stcentury.blogspot.com/2011/01/f-h-hahn-in-candid-moment-on-neo.html

        http://socialdemocracy21stcentury.blogspot.com/2011/05/keynes-on-special-properties-of-money.html

        http://socialdemocracy21stcentury.blogspot.com/2011/07/more-on-gross-substitution-axiom.html

        • Matt Tanous says:

          So, basically, sticky prices and wages aren’t a factor at all – the problem is debt deflation. Except that is a consequence of malinvestment, which you say doesn’t exist, and I see no reason why part of the liquidation that leads to falling prices and wages should not also include debt liquidation.

        • Major_Freedom says:

          Your post makes me think you have a poor grasp of the market process, and economics in general.

          Debt can be renegotiated.

          It’s easy to imagine all sorts of problems when you hold particular values fixed in the face of other values changing.

          If in a market there is frequent demand fluctuations, then it would be more likely that debt contracts would become more adapted to such fluctuations. The payments could become contingent upon various metrics, such as inflation rates or aggregate spending. There is no reason to believe that plain vanilla debt contracts will be cast into iron in every conceivable market.

          More importantly, neither Fisher, nor Minsky, nor Keen, nor Koo seem to understand that central bank demand management increases private sector debt, because the central bank encourages through reserve inflation, and relies on the banks through credit inflation, to increase aggregate spending.

          • Jonathan M.F. Catalán says:

            Debt can be renegotiated.

            Not always, sometimes there are high transaction costs (e.g. the financial crisis — early on they couldn’t even match debtors to creditors, because the loans had been sold, packaged, re-sold, re-packaged). In a different market, though,it may be the case that it’s easier for consumers and firms to declare bankruptcy.

            • Major_Freedom says:

              There are transactions costs in all trades.

              But yes, renegotiation presumes debtors can be matched with creditors. Capitalism can’t work without proper contracting.

              • Jonathan M.F. Catalán says:

                Capitalism has and will continue to work with imperfect property rights and contract law. The market process helps improve these featured, but we should assume that markets have perfected them. Meaning, rigidities can arise in certain situations, even in free markets, such as difficulty in renegotiating debt contracts.

                This doesn’t imply that interventionism is necessary, but these are real issues that markets deal with.

        • Jonathan M.F. Catalán says:

          Lord Keynes writes,

          The point of Krugman’s post is to question the whole neoclassical paradigm, just as Keynes did: Krugman is saying that, even if we had wage and price flexibility, there would no guarantee of full employment and no market tendency to full employment equilibrium either.

          There’s no similarity between Krugman and Keynes here.

          Keynes believed there can be an underemployment equilibrium because a fall in wages would lead to a fall in the price of output, meaning that real wages remain the same.

          That’s not Krugman’s argument. Krugman’s argument is that a fall in nominal wages will increase the real burden of nominal debt.

        • Bob Roddis says:

          Lord Keynes says:

          In a nonergodic system, one can never expect whatever data set exists today to provide a reliable guide to future outcomes. [so what’s all this talk about a “gap” that is claimed to exist due to variations in consumption levels during different periods of time?????]

          http://socialdemocracy21stcentury.blogspot.com/search?q=ergodic

          Then Lord Keynes says — as Keynes says and Krugman says:

          Even if we had wage and price flexibility, there would no guarantee of full employment and no market tendency to full employment equilibrium either.

          Thus, we learn from the Keynesians that there is only one thing in this life that is always certain and predictable: When omniscient bureaucrats spend oodles of money out their asses and dilute the money supply, prosperity must and always will invariably follow. Our lives would be a hopeless and radically uncertain mess without them. In fact, we would all just die.

          • Lord Keynes says:

            You have simply missed the fundamental essence of the whole argument about non-ergodic systems.

            In a nonergodic system – in the absence of intervention to stabilise or affect the state of the system – one can never expect whatever data set exists today to provide a reliable guide to future outcomes.

            But the existence of recessions (falls in real output) is a separate issue: it is an observable empirical reality. We identify them after they have happened.

            Perhaps you’re asking: how do we know stimulus will continue to work in the future?.

            That is a separate epistemological question. For those who think induction can be justified, inductive arguments justify us thinking that interventions that worked in the past will work in the future.

            If not, Popperian falsificationism provides an adequate method for testing the thesis the Keynesian stimulus will increase real output and employment.

            http://socialdemocracy21stcentury.blogspot.com/2010/12/risk-and-uncertainty-in-post-keynesian.html

            http://socialdemocracy21stcentury.blogspot.com/2011/10/how-can-government-overcome-uncertainty.html

            • Bob Roddis says:

              You have simply missed the fundamental essence of the whole argument about non-ergodic systems.

              I haven’t missed anything. I specifically expressed your totalitarian position that the process of average people peacefully buying, selling, trading and exchanging must invariably run off the rails and that the omniscient, benevolent, great and powerful OZ, I mean Keynesian bureaucracy, backed by its SWAT teams, must intervene “to stabilise or affect the state of the system”.

              You miss (or rather purposefully lie about and distort) the essence of the Austrian concept of unadulterated prices as the essential and irreplaceable source of society-wide information about supply and demand. That information is dispersed in everyone’s head and is not available to the bureaucracy. In fact, the phony attempt to “to stabilise or affect the state of the system” (which is really just a cover for massive looting by the elite) is the cause of our problems through its distortion of prices.

            • Major_Freedom says:

              You have simply missed the fundamental essence of the whole argument about non-ergodic system…in the absence of intervention to stabilise or affect the state of the system – one can never expect whatever data set exists today to provide a reliable guide to future outcomes.

              I don’t think Roddis, nor anyone else who reads the cartload of garbage you elicit, have “missed” the blatantly obvious truth that you are only whoring out the physics concept of “non-ergodicity” to JUSTIFY your a priori social ideology of state intervention and violence against innocent people, who aren’t atoms and molecules, but who cares, because it sounds sophisticated.

              Whatever serves for such justification of state intervention in the moment, this time it’s non-ergocity, will do, even if non-ergodicity is a concept that physicists use in the laboratory to study NON-ACTING subject matter.

              • Lord Keynes says:

                “non-ergodicity is a concept that physicists use in the laboratory to study NON-ACTING subject matter”

                And it – since it means systems governed by fundamental/Knightian uncertainty – can apply just as easily to systems with human action, e.g., trends in financial asset markets.

                Mises:

                “The uncertainty of the future is already implied in the very notion of action. That man acts and that the future is uncertain are by no means two independent matters. They are only two different modes of establishing one thing.”

                Ludwig von Mises, Human Action: A Treatise on Economics, 1998, p. 105.

                Unless you’re disputing the existence of uncertainty in this sense, your comment is just ranting nonsense.

            • Bob Murphy says:

              LK wrote:

              You have simply missed the fundamental essence of the whole argument about non-ergodic systems.

              Say what you will about Lord Keynes, but not too many people type sentences like this on the Internet.

              • Major_Freedom says:

                That’s probably because the people who do type sentences like those are writing in physics and thermodynamics journals, when they’re not drunk in a bar with their colleagues.

              • Bob Murphy says:

                MF wrote:

                …when they’re not drunk in a bar with their colleagues.

                Ah, so those are the people Casey Mulligan talks to.

              • Bob Roddis says:

                Actually, LK is just quoting another highfalutin Keynesian who uses big words to hide the fact that he doesn’t understand economic calculation and to give the impression that only Keynesians can understand the impenetrable mysteries of economics:

                Paul Davidson notes the nature of uncertainty in the Keynesian/Knightian sense:

                “Keynes’s description of uncertainty matches technically 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” (Davidson 2002: 187).

                “Keynes … rejected this view that past information from economic time-series realizations provides reliable, useful data which permit stochastic predictions of the economic future. In a world where observations are drawn from a non-ergodic stochastic environment, past data cannot provide any reliable information about future probability distributions. Agents in a non-ergodic environment ‘know’ they cannot reliably know future outcomes. In an economy operating in a non-ergodic environment, therefore – our economic world – liquidity matters, money is never neutral, and neither Say’s Law nor Walras’s Law is relevant. In such a world, Keynes’s revolutionary logical analysis is relevant” (Davidson 2006: 150).

            • guest says:

              Is it possible, in your view, for people to produce something that people don’t want, and thereby become poorer?

        • Justin says:

          If my screen name was “Lord Keynes”, I think I would hang myself.

      • Transformer says:

        Its an essential part of the story as without sticky prices the story would be different.

        That does mean that removing sticky prices is a “solution” to the problem as “debt/deflation” (the alternative story without sticky prices) would in Krugman’s opinion be worse that the current story.

        • Transformer says:

          Correction: That does NOT mean that removing sticky prices….

    • guest says:

      It seems to me that the only reason to EMPHASIZE downward wage rigidity (which CAN be derived from first principles, as Tom Woods will allude to in a video I will post) is if one thinks that is where the problem lies.

      Otherwise, he could point to lots of things, without emphasizing any one of them, that would help us “make sense of what we see”. For example, it’s colder in some places than others; it’s wetter over here; such and such a supply of x resource is more abundant over there, etc.

      Here’s that video where Tom Woods talks about sticky prices/wages:

      Answering the Same Old Arguments Against Sound Money | Thomas E. Woods, Jr.
      http://www.youtube.com/watch?v=h-PxMzSyujw#t=27m21s

  11. Tel says:

    Krugman only has to keep NYT readers interested. He knows they won’t go back and check out all his references. They don’t even want to know what Casey Mulligan was talking about, all they want to know is that he is wrong.

    All of our mass media has gone this direction.

    As I mentioned last time this topic came up, human plans are sticky, and all major projects require a certain obstinate determination to see them through, else they don’t get done at all.

  12. Transformer says:

    Keynesian theory posits that sticky wages combined with a low MPC can cause an under-employment equilibrium.

    They further believe that sticky wages are a empirically observable phenomenon and therefore the theory holds true in reality.

    In response to their critics who say that the appropriate policy should be to address the causes of sticky wages and they say that this proposed solution will not work because of the debt/deflation arguments that Krugman makes in response to Mulligan.

    I don’t agree with this argument but I don’t see it as in any way contradictory.

    • Jonathan M.F. Catalán says:

      Krugman’s response to Mulligan is not that the solution to sticky wages won’t work, it’s that even if wages were downwards flexible the real problem — the liquidity trap — will worsen, because lower wages make debts more difficult to pay (with the liquidity trap being a consequence of the “balance sheet recession”). So, the problem with the economy isn’t sticky wages, but the liquidity trap; but then, Krugman goes back to emphasizing sticky wages in this most recent post.

      • Transformer says:

        I believe Krugman’s view is that a lowering of aggregate demand combined with sticky wages is what led to the liquidity trap and consequent “unemployment equilibrium”.

        He thinks that If sticky wages did not exist then we would not have got into an “unemployment equilibrium”. but been in a much worse ‘debt/deflation” episode because a lowering of nominal wages combined with fixed nominal debts would only have led to further reductions in real AD. The liquidity trap would have got deeper.

        I don’t see any contradiction in that view, just questionable theory.

        • Tel says:

          I agree with your assessment of Krugman’s position, but the implication is that he wants inflation to come along and devalue real wages (which has actually happened in the past few years) but you won’t hear him announcing as much to his readership.

        • guest says:

          Once it is understood what money is, and what it’s supposed to do, then the problem can be seen as government intervention in the case of the boom and bust cycle.

          Money is what we use to value that for which we traded for the money against that which we want to spend it on.

          If money doesn’t represent these values, then it’s a poor currency. And a supply of money that keeps drastically changing can’t represent those values.

          Which is why one of the things that money has to be is a commodity.

        • Jonathan M.F. Catalán says:

          I believe Krugman’s view is that a lowering of aggregate demand combined with sticky wages is what led to the liquidity trap and consequent “unemployment equilibrium”.

          He specifically writes “deleveraging” in his response to Mulligan; this is a reference to the “balance sheet recession.” It is about AD, but it’s about depressed AD because everyone is paying down debt and nobody wants to borrow/lend.

          I don’t see any contradiction in that view, just questionable theory.

          The contradiction isn’t just about that one post. It’s about claiming that sticky wages don’t really matter, but then turning around and making sticky wages a central feature of the model again.

          • Transformer says:

            Agreed, he thinks that de-leveraging was a major cause of depressed AD.

            With regards to sticky wages, it seems that to be consistent with this debt driven model he has to see sticky wages as a good thing as they prevent a worse debt/deflation spiral from occurring. If so this would be be at odds with more conventional NK models where sticky wages are the thing that stops the economy self-correcting.

    • Keshav Srinivasan says:

      MPC stands for marginal propensity to consume, right?

      • Transformer says:

        Keshav,

        Yes. And having now read your earlier comments I think I am trying to say something similar to you.

  13. konst says:

    I happen to have a large amount of Krugman’s writings in my mind, and it causes me physical pain when I read his blog and see his almost daily transgressions against both property rights and human decency. It would be selfish to keep these matters to myself, don’t you think?

    You should uhm like challenge him to a debate or something.

  14. Head Stomp says:

    “For the doctrine he’s attacking bears no resemblance to anything Keynesians are saying.”

    Bob, Krugman makes absurd exaggerations like this as if they were a deflating currency that he was managing. It almost seems like you must just be playing dumb at this point.

    “The important point is, Krugman is here biting off Mulligan’s head for claiming that New Keynesians hang their hat on a “sticky price” assumption.”

    But, this is just wrong. Krugman was just saying the latest Keynesian models for this recession are more complex than sticky prices and that Casey’s point about time was irrelevant under them. I really don’t understand how you could have come to your understanding of the post. Honestly, it baffles me.

    • Tel says:

      Ahhh yess, all fixed in the latest Keynesian models. That’s exactly what Krugman way saying:

      The short answer is, he should try reading a bit of Keynesian economics — old or new, it doesn’t matter — before “explaining” what’s wrong with it.

  15. Mike Sax says:

    Bob in the quote of Krugman he doesn’t deny that sticky prices are important to the New Keynesian argument. You say you are not defending Mulligan yet criticizing Krugman for criticizing him. Yet what Mulligan claims NK says here is not claimed by any Keynesian school I’m aware of New Keynesian, Old Keynesian, Post Keynesian, etc.

    “New Keynesian economics is built on the assumption that employers charge too much for the products that their employees make and are too slow to cut their prices when demand falls.”

    Krugman never has said anything like that and I’d love to see anyone try to offer a quote where he does. Who has claimed the recession is based on greedy capitalists overcharging for their products? If you read that Krugman link you supplied in context, his real point is this:

    “If he had read anything — anything at all — that Keynesians have written about policy at the zero lower bound, he would have learned that there is no reason to expect falling wages and prices to raise employment — in fact, quite the contrary in the face of a debt overhang.”

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