Ignorance or ill will? Stephen D. Williamson in denial about aggregate demand
from Merijn Knibbe
Last week I read the rightly famous Paul Krugman essay ‘How did economists get it so wrong’ (September 2, 2009). In this essay he suggests that present day ‘freshwater economists’, i.e. hard core market fundamentalists, are not only far to the right of people like Milton Friedman, de facto denying involuntary unemployment, but also do not know about Keynesian economics anymore. Krugman seems to understate the case. Even the accounting concept of ‘aggregate demand’, which is not rooted in Keynesian economics but in the statistics of National Accounting (the system which measures total wages, total profits, total retail sales, total exports and imports and the like), seems to be alien to at least one of them. In a discussion with Mark Thoma, in which Williamson calls Thoma 'Grumpy Thoma', Stephen D. Williamson states that he does not know what aggregate demand is – and he seems to be genuine about this:
Grumpy Thoma and Ill Will: a curious conversation between to well-educated gentlemen with some sobering remarks of innocent bystanders. Act one, scene one.
Says Williamson: Here is Thoma’s reply to my last post. Let’s see what he says.
Say Thoma: Saying that inflation is always and everywhere a monetary phenomena, and that prices depend upon the amount of outside money in the system, doesn’t answer the question about how we get inflation before aggregate demand kicks up.
Says Williamson: I don’t know what “aggregate demand” is. That’s in a language I can’t make any sense of.
Says anonymous 1 If you don’t like the concept of aggregate demand, then say so respectfully. No need to be so condescending and arrogant about it. Moreover, since most observers accept this notion or something similar to it, you need to explain why you are critical of it rather
Says Williamson: To use the term “aggregate demand,” I have to buy into a whole modeling framework that I think is not useful. To talk to me in terms that make sense to me, Mark has to get down to the economics of what the exogenous shocks or endogenous mechanisms are that he wants to think about.
Says anonymous 2: Aggregate demand: by accounting definition, this is C+I+G+Ex. It’s the way we measure the macro-economy. … You might try to take a refresher course in National Accounting, there is something like total investments, total consumption and the like – seems you can’t make sense of the language of National Accounting.
http://newmonetarism.blogspot.com/2010/11/more-thoma.html
http://www.nytimes.com/2009/09/06/magazine/06Economic-t.html?_r=1&ref=paulkrugman
P.S. 1. Krugman seems to have moved beyond his 2009 position and nowadays also mentions Minsky, deleveraging and National Accounting concepts in his blogs and op eds. Anonymous 2 is me – I had trouble getting my name on the blog.
Breaking news: Krugman indeed did move beyond his 2009 position, see this paper, which derives very ‘traditional’ Keynesian insights by adding debt and ‘a Minsky moment’ to neo-classical modelling – the ‘Minsky moment’ (a sudden realisation that debt levels are too high which leads to less credit, asset selling, lower asset prices, even less credit etc.) however does destroy neo-classical assumptions.
http://www.princeton.edu/~pkrugman/debt_deleveraging_ge_pk.pdf
The really interesting things of this paper: two new paradoxes.
1. The paradox of toil. When in a time of deleveraging and deflation people try to work harder and produce more (or when productivity rises fast, i.e. the thirties), this leads to even lower prices, therewith a higher real debt burden which has to be paid and therefore less consumption and more crisis.
2. The paradox of flexibility. As, in a highly flexible but severely indebted economy, prices are more flexibel than in a less flexibel and severely indebted economy, deleveraging and crisis lead, in such a flexible economy, to a faster fall in prices than and therefore a faster increase in real debt, lower consumption and more crisis than in a less flexible economy. UK vs. France?
I have not yet made up my mind on these paradoxes, but it is interesting. When we look at government deficits, it is remarkable that the USA, Ireland and the UK show (together with Spain) some of the fastest rises of the government deficit. As Krugman and Eggertsson do not provide empirical evidence, I’ll try to find some statistics which endorse (or not) these paradoxes.
An interesting Krugman blog also: http://krugman.blogs.nytimes.com/2010/11/17/austerity-in-action/
P.S. I do know the Williamson macro textbook.
I see that Williamson is still at it. He agrees that the Fed should be stripped of its mandate to mitigate unemployment; he attacked Krugman just yesterday for pressing a Keynesian line of argument, and so on.
Your last point is most important: Krugman, for all his prior views, is at least trying to learn and adjust as events dictate. His most recent paper leans very heavily on Minsky, and tries to go beyond the idea of the “Minsky moment”. By contrast, Williamson is stuck in his extreme neoclassical roots, and hasn’t changed one bit since the crisis blew the top off the neoclassical worldview. If his blog is anything to go by he still believes the same as he did before.
It just confirms in my mind how ideological economists like Williamson are: no amount of evidence can budge them. That the real world doesn’t conform to their wonderland conception merely means they have to change the real world.
That’s not science, it’s religion.
The paradox of toil. When in a time of deleveraging and deflation people try to work harder and produce more (or when productivity rises fast, i.e. the thirties)
Real world – People ‘work harder’ not to pay off debt but because they are afraid the boss will fire them in a time of high unemployment, when workers are a dime a dozen.
Right, good addition. Check out this one:
http://www.fox11online.com/dpp/news/wisconsin/harley-davidson-union-approves-contract
And this one:
http://www.nytimes.com/2010/07/26/business/economy/26earnings.html
“the accounting concept of ‘aggregate demand’, which is not rooted in Keynesian economics but in the statistics of National Accounting ”
I think that’s not entirely correct fro two reasons.
1) The development of National Accounting was strongly influenced (and motivated!) by Keynesian economic theory. For hardcore neoclassical economists, there is no reason to go through all the trouble of produced National Accounts because the market always sorts it out. Keynesian theory tells you the market may go wrong, therefore you should monitor what’s going on in the economy, and the way you do this is by constructing National Accounts.
2) The concept of “demand”, to my knowledge, never appears in the National Accounts. They are basedon the concept of “use” (final use, intermediate use and so on), the difference being that “use” means “what was actually bought”. “demand” is different: It’s what people would like to buy at a given price, and they may be able to do so or not.
Aside from that, excellent post!
@TK
on 1) My hypothesis is that there is more National Accounting in Keynes than vice versa.
2) But that’s a detail. I write: ‘it’s rooted in’, not ‘it’s the same’. In my view, a solid science, be it zoology or economics (see the Ruccio posts and comments) has a theoretical framework and a empirical framework which match each other (though there may be fruitfull anomalies). This was the case with Keynesian economics and National Accounting and also with the Friedman idea of ‘permanent income’ – indeed, this idea might be seen as a food addition to the Keynesian demand function (just this weekend I read in the ‘Economist’ that the average cost of a Japanese wedding is 40.000,–… Such live events indeed have to be included in any kind of demand function). It’s, alas, not the case anymore with ‘micro foundations’, which use ‘social welfare functions’ which (as far as I’m concerned) in no way match any kind of National Accounting and I do not know any proper way to estimate such functions. Hence the problems of Williamson. He lives in two worlds, the neo classical theoretical one and the National Accounting real one. He has to choose.