Krugman and Keynes

Cambridge University is running a conference, commemorating the 75th anniversary of Keynes's General Theory. This certainly seems like a useful opportunity to look back on the last 75 years and ask what Keynes has done for us, and how his ideas have shaped modern macroeconomics. As one might expect, Woodford is on the program, and there are papers by Gali/Smets/Wouter and Koop/Pesaran/Smith that are representative of empirical research on New Keynesian models. You could argue with some of the choices on the program. Maybe the organizers could have reduced the average age of the speakers, and some Keynesian critics might have been helpful for the state of discourse in the science, but generally there is serious academic work being presented, and there are opportunities to learn state-of-the art work.

The plenary talk is another story. It’s Krugman, of course, and his talk is posted here. To his credit, Krugman understands that he may not be up to the task:

It’s a great honor to be asked to give this talk, especially because I’m arguably not qualified to do so. I am, after all, not a Keynes scholar, nor any kind of serious intellectual historian. Nor have I spent most of my career doing macroeconomics. Until the late 1990s my contributions to that field were limited to international issues; although I kept up with macro research, I avoided getting into the frontline theoretical and empirical disputes. So what am I doing here?

Now, if you thought that Krugman was going to be humble, there are two clues in this first paragraph that he won’t be. One is the use of “arguably” in the first sentence. The second is in the third sentence, where he claims to have “kept up with macro research.” We all know that Krugman has not kept up, let alone understood what happened in the 1970s.

Of course it’s all downhill from here. Krugman thinks he was invited, (i) because he knows what a liquidity trap is, and (ii):

The other reason I’m here, I’d guess, is that these days I’m a very noisy, annoying public intellectual, which means among other things that I probably have a better sense than most technically competent economists of the arguments that actually drive political discourse and policy.

What’s that “technically competent” about? Is Krugman telling us he is not technically competent? Surely not. He passed the MIT prelims, was granted a PhD from the same institution, published some papers, and was granted a Nobel Prize in Economics. I think he means that he is a member of the set of technically competent economists, but he has some special qualifications, which are apparently being noisy and annoying. I can also attest that he can produce several blog posts per day, two New York Times columns per week, and can use FRED. I’m a little puzzled as to what insight this gives him into the world of policymaking relative to say, the set of residents of Manhattan, most of whom could also easily be trained to use FRED and blog for the New York Times. However, maybe Krugman wrote this in a hurry, so we should a least give him a chance. Maybe he has something new to say?

There is some talk about the General Theory. Here’s a puzzler.

Chapter 12 is a wonderful read, and a very useful check on the common tendency of economists to assume that markets are sensible and rational. But what I’m always looking for in economics is intuition pumps – ways to think about an economic situation that let you get beyond wordplay and prejudice, that seem to grant some deeper insight. And quasi-equilibrium stories are powerful intuition pumps, in a way that deep thoughts about fundamental uncertainty are not. The trick, always, is not to take your equilibrium stories too seriously, to understand that they’re aids to insight, not Truths; given that, I don’t believe that there’s anything wrong with using equilibrium analysis.

Intuition pumps? Going beyond prejudice and wordplay? What is the man trying to get across?

There’s more in here. We are reintroduced to the Keynesian Cross and IS/LM, which Krugman feels are sadly neglected, by graduate students:

But you can see right away part of our problem: who teaches the Samuelson cross these days? In particular, who teaches it in graduate school? It’s regarded as too crude, too old-fashioned to be even worth mentioning.

Actually, I like to talk about the Keynesian Cross in intermediate macro. It takes about five minutes and, indeed, most students have never seen it. One student said that he saw it in the appendix to his book in a high school AP macro course, i.e. the Keynesian Cross was the deep model that was deemed too difficult for the average student. What I use Keynesian Cross for, though, is something that Krugman would not approve of. It's a vehicle for showing the students what an Old Keynesian sweeps under the rug. To "crude, too old-fashioned," we can add "wrong."

Section 4 of the talk is titled "The Strange Death of Keynesian Policy." Where do people get these ideas? Would they like a world where macroeconomists thought about nothing but Keynes? When did Keynesian policy ever die? Here is what Krugman has in mind.

It [central banking] worked in part because the political insulation of central banks also gave them more than a bit of intellectual insulation, too. If we’re living in a Dark Age of macroeconomics, central banks have been its monasteries, hoarding and studying the ancient texts lost to the rest of the world. Even as the real business cycle people took over the professional journals, to the point where it became very hard to publish models in which monetary policy, let alone fiscal policy, matters, the research departments of the Fed system continued to study counter-cyclical policy in a relatively realistic way.

Now, in how many ways can I show you that this paragraph is out to lunch in a severe way?

1. Central banks are intellectually insulated. A marked development in central banks since about 1970, in the United States and elsewhwere, is that central bank economists have become increasingly interactive with academics, and have become much more active participants in serious macroeconomic research. At one time, a central banking job was perceived to be a dead end for a macroeconomic researcher. Now, it is common for people to move between academia and central banking (as I have done myself), central banks have active programs for visiting academics, and they run conferences where high-level research is presented and debated. Further, the standards for publication in many central bank research departments are as high as they are in serious economics departments.

2. Central bankers are busy studying ancient texts, presumably the General Theory and such things. See (1) above. These people are as much on the frontier as anyone.

3. It is hard to publish models in which monetary policy matters. Here are some that slipped through, and they are just by one guy (and coauthors) - one of those dark age economists:

a) Expectations and the Neutrality of Money

b) Money and Interest in a Cash-in-Advance Economy

c) Liquidity and Interest Rates

d) Interest Rates and Inflation

e) Menu Costs and Phillips Curves

There is more whining in the talk about the "intellectual regression of too much of our profession," etc., but you get the idea.

I'm wondering how much the organizers of this conference paid for "Mr. Keynes and the Moderns?" Did Krugman get his usual $80,000 (or whatever) speaking fee, or what? If so, they didn't get much for their money, other than recycled blog pieces. Now, the key question is: What would Keynes think, if he were at this conference? He would be the guy with the mustache in the corner, muttering: "Who invited that obnoxious journalist?"