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New Keynesianism as a Club

from Thomas Palley

Club, noun. 1. An association or organization dedicated to a particular interest or activity. 2. A heavy stick with a thick end, especially one used as a weapon.

Paul Krugman’s economic analysis is always stimulating and insightful, but there is one issue on which I think he persistently falls short. That issue is his account of New Keynesianism’s theoretical originality and intellectual impact. This is illustrated in his recent reply to a note of mine on the theory of the Phillips curve in which he writes: “I do believe that Palley is on the right track here, because it’s pretty much the same track a number of us have been following for the past few years.”

While I very much welcome his approval, his comment also strikes me as a little misleading. The model of nominal wage rigidity and the Phillips curve that I described comes from my 1990 dissertation, was published in March 1994, and has been followed by substantial further published research. That research also introduces ideas which are not part of the New Keynesian model and are needed to explain the Phillips curve in a higher inflation environment.

Similar precedence issues hold for scholarship on debt-driven business cycles, financial instability, the problem of debt-deflation in recessions and depressions, and the endogenous credit-driven nature of the money supply. These are all topics my colleagues and I, working in the Post- and old Keynesian traditions, have been writing about for years – No, decades!

Since 2008, some New Keynesians have discovered these same topics and have developed very similar analyses. That represents progress which is good news for economics. However, almost nowhere will you find citation of this prior work, except for token citation of a few absolutely seminal contributors (like Tobin and Minsky).

That pattern of citation connects with my earlier exchange with Krugman regarding idea capture and gattopardo economics [Here and Here]. By citing the seminal critical thinkers, mainstream economists lay claim to the intellectual lineage. And by overlooking more recent work, they capture the ideas of their critics.

This practice has enormous consequences. At the personal level, there is the matter of vain glory. At the sociological level, it suffocates debate and pluralism in economics. It is as if the critics have produced nothing so there is no need for debate, and nor are the critics deserving of a place in the academy. That promotes exclusion which suppresses alternative views about issues central to economics, such as the determinants of growth and income distribution and the nature capitalism. At the policy level it also has consequences, creating a closed circle which is prone to groupthink that can contribute to disasters such as the 2008 financial crisis.

For almost thirty years, New Keynesians have dismissed other Keynesians and not bothered to stay acquainted with their research. But now that the economic crisis has forced awareness, the right thing is to acknowledge and incorporate that research. The failure to do so is another element in the discontent of critics, which Krugman dismisses as just “Frustrations of the Heterodox.”

  1. Hepion
    July 28, 2014 at 8:32 pm

    Do you think there is something like natural rate of inflation when some sectors experience constant raise in prices while others are bound by downward rigidity?

  2. Hepion
    July 28, 2014 at 8:34 pm

    Or maybe “inflation floor”, lowest inflation we can achieve

  3. Isembard
    July 29, 2014 at 2:39 pm

    Krugman and the mainstream operate in a self-referential apparently ‘real’ world where, essentially, the Heterodox world doesn’t exist except as a parallel often-absurd ‘fantasy’ world. It’s career suicide to take it seriously.

    To accept in any formal sense that the heterodox have valid insights outside the mainstream misapplied maths and pseudo-science is to challenge the bedrock of their universe (and paycheck). Can’t do that.

    It’s OK to refer to the ‘seminal contributors’ as they have been accepted into the real world ages ago as Very Serious People, they live in both worlds.

    Very Rich People will be upset if you try to change this state of affairs.

  4. Achilles
    July 31, 2014 at 9:44 pm

    Reading your 1994 paper on competing models for money supply, I wonder how the 3rd model should be updated in the light of the fact that most CBs now offer a discount AND a deposit facility and they can essentially control the funds rate with great precision.

    In addition, with the presence of a deposit facility what is the meaning of bonds as a “secondary reserve”?
    I believe MMT-ers (and others) have also made the point that bonds are not needed as an instrument by the CB to stabilize interest rates (through OMO), since the discount and deposit rates are precisely controlled by the CB.
    In fact government bonds are seen as institutional arrangements that stem from the fact that government expenses have to (by law in US) funded by issuance of bonds.

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