Well, it looks like I wasn’t the only one taking Krugman to task the other day for defending mainstream economics because he’s actually responded to some of the flak he has received. It’s a bland response (as usual) and more so resembles Krugman talking to what he imagines his opponents to be saying rather than what they are actually saying. (Fantastic way to stifle a debate…).
But there are a few points that I think should be brought out to show just what some of the problems are. I’ll keep this short and sweet. Krugman writes,
You may say that what we need is reconstruction from the ground up — an economics with no vestige of equilibrium analysis. Well, show me some results. As it happens, the hybrid, eclectic approach I’ve just described has done pretty well in this crisis, so you had better show me some really superior results before it gets thrown out the window.
According to Krugman if you throw out equilibrium analysis you get nothing. But of course there are two types of equilibrium in economics: market equilibrium and stock-flow equilibrium. The former is, for example, characteristic of the ISLM model in that the equilibrium is determined by the supply and demand of loanable funds (among other things). But then there is also the stock-flow equilibrium approach which is, for example, characteristic of the Godleyian SFC modelling framework. This is an entirely different approach to economics but Krugman has dismissed it on his blog before as being ‘old fashioned’. In his response to an article on Godley he wrote,
But it is kind of funny to see a revival of old-fashioned macro hailed, at least by some, as the key to a reconstruction of the field.
Funny that when you compare it to his latest,
But must we reconstruct all of economics? No. Most of what we need, at least for now, is in those old books.
Frankly though, I don’t think that Krugman is up-to-speed on these debates, he looks like a man flailing about in unfamiliar water. Why is this? Because he appears to live in something of an echo chamber. When he encounters Wynne Godley’s path-breaking work (which performed far better than ISLM garbage in the run-up to the crisis — remember Godley and others at the Levy Institute predicted the crisis) he pooh-poohs it as old fashioned (without examining it). Then when he encounters criticisms of the ISLM and like frameworks he complains that there are no alternatives. He asks to be “shown superior results” and then when he encounters them he calls them old fashioned… and then says that we have to go back to old fashioned ISLM models.
Let’s get this straight. According to Krugman its amusing to see something as old fashioned as SFC modelling being hailed as a way to reconstruct the field. But then he says that we don’t need to reconstruct the field because… we have old fashioned ISLM modelling. Bizarre.
Krugman is lagging in this debate badly. He looks like he’s in over his head. Here’s a thought: the only people that are being old fashioned are Paul Krugman and the other economists who, confronted with a crisis in mainstream macro, retreat to their schooldays and the very first macro lessons that they ever learned. Yawn.