Home > Uncategorized > New Keynesian ‘tweaking’ won’t do the job

New Keynesian ‘tweaking’ won’t do the job

from Lars Syll

Whereas the Great Depression of the 1930s produced Keynesian economics, and the stagflation of the 1970s produced Milton Friedman’s monetarism, the Great Recession has produced no similar intellectual shift.

This is deeply depressing to young students of economics, who hoped for a suitably challenging response from the profession. Why has there been none?

tweakKrugman’s answer is typically ingenious: the old macroeconomics was, as the saying goes, “good enough for government work”  … Krugman is a New Keynesian, and his essay was intended to show that the Great Recession vindicated standard New Keynesian models. But there are serious problems with Krugman’s narrative …

The New Keynesian models did not offer a sufficient basis for maintaining Keynesian policies once the economic emergency had been overcome, they were quickly abandoned …

The problem for New Keynesian macroeconomists is that they fail to acknowledge radical uncertainty in their models, leaving them without any theory of what to do in good times in order to avoid the bad times. Their focus on nominal wage and price rigidities implies that if these factors were absent, equilibrium would readily be achieved …

Without acknowledgement of uncertainty, saltwater economics is bound to collapse into its freshwater counterpart. New Keynesian “tweaking” will create limited political space for intervention, but not nearly enough to do a proper job.

Robert Skidelsky

Skidelsky’s article shows why we all ought to be sceptic of the pretences and aspirations of ‘New Keynesian’ macroeconomics. So far it has been impossible to see that it has yielded very much in terms of realist and relevant economic knowledge. And — as if that wasn’t enough — there’s nothing new or Keynesian about it! 

counterfeit‘New Keynesianism’ doesn’t have its roots in Keynes. It has its intellectual roots in Paul Samuelson’s ill-founded ‘neoclassical synthesis’ project, whereby he thought he could save the ‘classical’ view of the market economy as a (long run) self-regulating market clearing equilibrium mechanism, by adding some (short run) frictions and rigidities in the form of sticky wages and prices.

But — putting a sticky-price lipstick on the ‘classical’ pig sure won’t do. The ‘New Keynesian’ pig is still neither Keynesian nor new.

The rather one-sided emphasis of usefulness and its concomitant instrumentalist justification cannot hide that ‘New Keynesians’ cannot give supportive evidence for their considering it fruitful to analyze macroeconomic structures and events as the aggregated result of optimizing representative actors. After having analyzed some of its ontological and epistemological foundations, yours truly cannot but conclude that ‘New Keynesian’ macroeconomics, on the whole, has not delivered anything else than ‘as if’ unreal and irrelevant models.

The purported strength of New Classical and ‘New Keynesian’ macroeconomics is that they have firm anchorage in preference-based microeconomics, and especially the decisions taken by inter-temporal utility maximizing ‘forward-looking’ individuals.

To some of us, however, this has come at too high a price. The almost quasi-religious insistence that macroeconomics has to have microfoundations – without ever presenting neither ontological nor epistemological justifications for this claim — has put a blind eye to the weakness of the whole enterprise of trying to depict a complex economy based on an all-embracing representative actor equipped with superhuman knowledge, forecasting abilities and forward-looking rational expectations. It is as if these economists want to resurrect the omniscient Walrasian auctioneer in the form of all-knowing representative actors equipped with rational expectations and assumed to somehow know the true structure of our model of the world.

And then, of course, there is that weird view on unemployment that makes you wonder on which planet those ‘New Keynesians’ live …

  1. January 24, 2018 at 1:41 pm

    Thanks for the Skidelsky reminder. As someone who has been writing about Knight, Coase, and uncertainty from a management perspective for over 40 years – with absolutely no impact whatsoever – I am not sure whether I find this hilarious or depressing. How can there be economics without managers – or managing without economics?

  2. January 24, 2018 at 4:54 pm

    Of course we might have added the Great Recession has depressed most students, not just those of economics.

  3. January 24, 2018 at 8:47 pm

    Thanks very much for this Lars. I’m not sure how or why I missed the Skidelsky post, since I’m subscribed to Project Syndicate.

    Interesting that Sir Robert did not mention Kalecki.

    My “sensitive” policy indicator, barometer for the New Keynesians is their attitude towards public intervention in labor markets. In almost all cases they will not cross the Rubicon of public job creation, giving affirmation to, even if just silent affirmation, the Republican Right/Libertarian Commandment that “only the private sector can create jobs.” Greece maybe be the most startling example, since the Greek numbers are as bad or worse than those of the Great Depression.

    That’s why I’m uncomfortable with Dean Baker praising the economy that Barack Obama left us, the one with the two great low numbers. Not only do those markers mask a lot of pain from substandard jobs that don’t pay well or have benefits, they mask the one-sided nature of our labor markets where the public and private sectors don’t meet the unemployed half-way; its very much one-sided, the individual citizen chasing training and opportunities through a daunting series of hoops, including a big geographical one, mobile labor. ” How bad do you want it?” an economic version of the coach’s halftime taunt to his/her players.

    • Rob Reno
      January 24, 2018 at 9:43 pm

      “Not only do those markers mask a lot of pain from substandard jobs that don’t pay well or have benefits, they mask the one-sided nature of our labor markets where the public and private sectors don’t meet the unemployed half-way; its very much one-sided, the individual citizen chasing training and opportunities through a daunting series of hoops, including a big geographical one, mobile labor. ”

      You deserve a standing ovation. How true. I’ll never forget an exchange between Obama (don’t get me wrong I like the guy) and a women whose engineer husband could not find a descent paying job. At the same time I was watching high-tech corporations shedding fulltime workers forcing them into the contingent market where they could further drive down wages (salary plus benefits evaporated the poor fellows become contingent workers) by playing a little game called death-of-the-middle-man as these third party vendors compete on price among each other. All the while the same tech companies are crying wolf they can’t find good workers lobbying politicians we need a ton more H-1Bs, the majority of which are sucked up by a transnational network of high-tech sweatshops setting up offices next to Redmond campus so the can feed cheap labor to the same company wiping out entire groups.

  4. Edward Ross
    January 24, 2018 at 8:59 pm

    Perhaps I am in danger of shooting of my uneducated mouth, but as a child growing up in a struggling family and then as a teenager I was very much aware that the Keynesian concepts lifted millions of people out of absolute poverty. On this basis I have regarded New Keynesians as idiots hiding behind the true Keynes. What gives me hope for the future of the severely depressed section of the population is as you and some others have done in exposing the new Keynesians as frauds. Because in my opinion this clears the deck of the deliberate confusing rubbish of the ruling main stream economic neo liberal economic rationalists or whatever else they are called. Then once this is done hopefully the real Keynes ideas can be re examined, by intelligent economists who are not locked into the neoliberal straitjacket.

  5. Edward Ross
    January 24, 2018 at 9:08 pm

    An omission on behalf of the struggling masses I thank all those economist’s who challenging the ruling mainstream ideology.

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