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Krugman’s Gadget Keynesianism

from Lars Syll

Paul Krugman has often been criticized by people like yours truly for getting things pretty wrong on the economics of John Maynard Keynes.

krugmanWhen Krugman has responded to the critique, by himself rather gratuitously portrayed as about “What Keynes Really Meant,” the overall conclusion is — “Krugman Doesn’t Care.”

Responding to an earlier post of mine questioning his IS-LM-Keynesianism, Krugman write:

Surely we don’t want to do economics via textual analysis of the masters. The questions one should ask about any economic approach are whether it helps us understand what’s going on​ and whether it provides useful guidance for decisions.

So I don’t care whether Hicksian IS-LM is Keynesian in the sense that Keynes himself would have approved of it, and neither should you.

The reason for this rather debonair attitude seems to be that history of economic thought may be OK, but what really counts is if reading Keynes gives birth to new and interesting insights and ideas.

No serious economist would question that explaining and understanding “what’s going on” in our economies is the most important task economists can set themselves — but it is not the only task.  And to compare one’s favourite economic gadget model to what madmen from Chicago have conjured up, well, that’s like playing tennis with the nets down, and we have to have higher aspirations as scientists. 

There is also a somewhat disturbing and unbecoming coquetry in his attitude towards great forerunners. It smacks not so little of hubris to simply say “if where you take the idea is very different from what the great man said somewhere else in his book, so what?” Physicists arguing like that when discussing Newton, Einstein, Bohr or Feynman would not be taken seriously.

The absolute all-time low in Krugman’s response is this remarkable passage:

Has declaring uncertainty to be unquantifiable, and mathematical modelling in any form foolish, been productive? Remember, that’s what the Austrians say too.

I won’t comment on the shameful guilt-by-association part of the quote, but re uncertainty it’s absolutely gobsmacking how Krugman manages to mix up the ontological question — is the economy permeated by calculable risk or by genuine and often incalculable uncertainty  — with the epistemological question — how do we manage to analyze and model such an economy. Here Krugman seems to say — much in the spirit of Robert Lucas — that if reality is uncertain and non-ergodic, well then let’s just pretend it’s ergodic and susceptible to standard probabilistic analysis so that we can go on with our mathematical modelling! In other areas of science that would rightfully be considered fraud, but in modern mainstream economics, it’s obviously thought of as an unproblematic and justified procedure.

Being able to model a ‘gadget world’ — a world that somehow could be considered real or similar to the real world — is not the same as investigating the real world. Even though all theories in a strict sense are false, they cannot be unrealistic or false in any way. The falsehood or unrealisticness has to be qualified.

Where does all this leave us? Well, I for one, is not the least impressed by Krugman’s gadget interpretation of economics. And if labels are as uninteresting as he says — well, then I suggest Krugman and other ‘New Keynesians’ stop calling themselves Keynesians at all. I’m pretty sure Keynes would have appreciated not having his theories and thoughts being referred to by people having preciously little to do with those theories and thoughts.

  1. paul davidson
    May 23, 2018 at 10:54 pm

    My paper on Keynes’s Finance demand for money indicates that if there is an exogenous increase in the demand for investment goods (i.e.,an outward shift in the IS function), then there must be simultaneously an inward shift of the LM function — as the increase in Investment demand at every interest rate results in an increase in demand for money to finance that investment at every interest rate. Therefore ISLM as hnadled by Krugman is wrong and not consistent.

    Of course my finance demand paper convinced Hicks that his ISLM model was not Keynes, and he published an article entitled “ISLM: an Explanation” in the JPKE to indicate he no longer believed in this ISLM model!

  2. May 24, 2018 at 2:29 am

    Thank you Lars, this has left us NO-WHERE-and will therefore lead us and all associated with us and this “Science” to NO-WHEREISM. It has long gone past the stage of neither here, no there.

    • Craig
      May 24, 2018 at 6:37 pm

      Even though Lars levels a well deserved critique of Krugman, you are correct. All current theories are merely perturbations of the orbit of Mars via imaginary epicycles. What is required is the fundamental breakthrough known as a paradigm change, and that is characterized by inversions of current realities like from monetary scarcity to abundance, from inflation to deflation, from inherently halting conflicted and confused unworkability to rationally and intelligently crafted free flowingness.

      And all it takes for such change is a new look in a place no one is currently looking, and a new realization about an economic significance that exists there.

  3. Prof Dr James Beckman, Germany
    May 24, 2018 at 12:47 pm

    As usual, Lars, a fine explanation. When I studied with Jerzy Neyman in the 1960’s, he stressed ‘estimator’ in our testing protocols. He would have nothing of what was “real”, but only what was measurable. Just as a construction engineer has to be accurate in their calculations before ordering re-bar & cement for the foundations of a high-rise structure, so a statisitcal engineer (economist) must be accurate in their calculations before advising a large bank on the possible effects of raising interest rates which it offers savers in a particular macro-economic environment. It is a “best fit” estimator (of REALITY) by various statisitcal models ONLY. Actualy, we did muse on whether there were interesting new probability density functions which could better fit the available data. We never found such in SOCIAL systems, because new variables were obviously coming into play from time to time while old ones seemed more muted. Thus, sector analysis by products, nation, level of education, etc. over time.

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