I’m Pointing at the Moon, You’re Looking at My Finger: Janet Yellen on Post-Keynesian Economics

janetyellen

Here’s an interesting fact that I’ll bet many of you didn’t know: the current head of the Federal Reserve, Janet Yellen, wrote a short paper in 1980 examining the theories of the Post-Keynesians. You can find it here.

The paper is very clear and logically articulated. But it also manifests quite a few sicknesses of the mind that, for example, the current pluralist movement among students will almost certainly encounter in the coming months and years. Yellen cannot really think outside the confines of what she understands to be economics. So, the analysis is mainly an exercise in trying to reduce Post-Keynesian theories to their neo-Keynesian counterparts. She is not so much trying to find insights in the literature as she is trying to prove similarities between some aspects of the literature and the more mainstream neo-Keynesian literature.

This is a rather typical tendency in mainstream economists that I have pointed to before. We might call it ‘identity thinking’. That is, trying to reduce heterogeneous insights about the real-world to something that one already knows. “But we already know that”; “But we can get the same result using our model by making this and this tweak”; these are the hallmarks of identity thinking. Identity thinking is an inherently conservative mode of thought that academics should be very, very guarded against adopting. It is a mode of thought that shuns new insights — typically repressing them by pretending that they are already known or taken into account. It is an a priorist, anti-empirical and ultimately anti-scientific mode of thinking.

Another hallmark of such criticisms is the complaint that the model being examined is not “closed” or that the various “closures” used are inconsistent. I find this enormously problematic and frankly a bit irritating. If you read any of the classical macroeconomic texts there is never any interest in “closing the model”. Rather the idea is to lay out various insights, whether in algebraic or linguistic form.

Yellen, and most other mainstreamers, prefer to fetishize the model itself. They think that economics is not a discipline through which we gain insights about the real-world but rather a game in which we try to “close the model” and then other economists can discuss these “closures”. This is genuinely an attempt to turn economics from a discipline that gives its practitioners real-world insights into something more so resembling a Sudoku puzzle. Faced with this sort of rhetoric heterodox economists should not engage. Rather they should point out clearly the absurdity of what is being done and question why it is being done.

This annoys mainstream economists to no end. When faced with a challenge to the restrictive games that they play they typically cannot engage. Yellen, for example, annoyed that the authors she discusses do not do standard dynamic analysis writes at the end of her essay,

With respect to stability and disequilibrium behavior, the Post-Keynesian model could differ significantly from the standard textbook case, at least under certain conditions. Just what these conditions are however, we do not yet know, because Post-Keynesians have argued that events take place in ‘historical’ rather than ‘logical’ time and therefor have been unwilling to conduct the standard dynamic analysis. (p19)

Actually this is no longer true, although I wish it were. These days many Post-Keynesians are indeed playing this game. And in my opinion they have trapped themselves in doing so. There is a significant danger here in extricating the insights of thought experiments away from actual application in the real world and toward building toy models with little or no actual meaning or relevance. From there it is just one step away from ‘testing’ these toy models against the data using econometrics. At that stage the goose is truly cooked. Pack up and go home.

Yellen’s paper is particularly fascinating when it comes to one issue however: namely, income distribution. She fully recognises that the implication of the Kaleckian-style models that Post-Keynesians often use is that income distribution is set through the power of capitalists to control the mark-up price and hence the real wage. She also recognises that this is due to the assumption of monopoly/mark-up pricing as a matter of fact and the move away from marginalist conceptions of perfect competition and smooth factor substitution effects. But she makes nothing of this clear divergence from mainstream theory; namely, the divergence that, in contrast to the mainstream analysis, the ‘normal’ state of affairs is one in which income is distributed in line with relative social power. Again, she seems unable to get any insight from this because she is so focused on the  ins-and-outs of the model. The phrase “I’m pointing at the moon and you’re looking at my finger” comes to mind, as it so often does when addressing the inherently conservative mind of the typical mainstream economist.

When it comes to income distribution she also seems rather uninterested in the idea that different savings propensities among different income groups mean that different policies will have vastly different effects. This has massive implications but because it is not stressed in mainstream economics most policy economists seem not to appreciate this fact. Indeed, I found out recently that no government institution in the world has data that allows us to break down saving by income group and so this work had to be carried out independently by Barry Cynamon and Steven Fazzari. This means that institutions do not have information available using which you could estimate different spending multipliers for different income groups. Talk about a policy blindspot!

Yellen’s discussion of wage-led inflation is also myopic in the extreme. One thing that Post-Keynesian economics tries to show is that most inflation is likely to be wage-led. This is an empirical statement about the real world. The models just demonstrate how it might function. But Yellen is, again, totally focused on how the model might be “closed”. She writes,

In the Post-Keynesian model, higher money wage demands necessarily lead to higher prices without raising the real wage and so there is nothing to stop inflation once it occurs. Why inflation in these circumstances should not accelerate continuously I cannot understand. And since the real wage which is determined by the commodity market is only acceptable to labor by accident, it is hard to fathom why such an economy should not perpetually experience either inflation or deflation. (pp18-19)

Two things here. First of all, again notice the lack of interest in the statements made by Post-Keynesians economists as empirical statements. Again, the whole focus is on the model. And this is from the economist that now has the most influence over policy in the world! Secondly, Yellen “doesn’t get it”. But what is not to get? The model suggests that there are no price-equilibrating tendencies in real world capitalism which will usually be in a state of inflation or deflation. Well, that sounds about accurate to me! Zero inflation is the extreme exception, not the rule.

Yellen’s biases here are determined by her need to see the world as a self-equilibrating system. This is an a priori assumption on her part that is clearly not based on empirical experience of the real world and I gather that it is only after years of mainstream training that she has managed to assimilate it. These sorts of assumptions are ideology at its purest. The ideology that is fobbed off on the student is that capitalism is an inherently stable system. And once effectively indoctrinated they go into the world literally unable to comprehend an economist that says otherwise. Faced with the statement “capitalism might be inherently unstable” they reply “but how on earth do you close your model?”. Pointing at the moon; looking at my finger. Terrifying! Truly terrifying!

Most of the mainstream aren’t even aware of this. But every now and again this embarrassing fact bubbles up to the surface when the more honest and self-conscious among them engage in reflection. Thomas Piketty, for example, recently said,

“I was only too aware of the fact that I knew nothing about the world’s economic problems. To put it bluntly, the discipline of economics has to get over its childish passion for mathematics and for purely theoretical and often highly ideological speculation, at the expense of historical research and collaboration with the other social sciences.”

Indeed.

About pilkingtonphil

Philip Pilkington is a London-based economist and member of the Political Economy Research Group (PERG) at Kingston University. You can follow him on Twitter at @pilkingtonphil.
This entry was posted in Economic Policy, Economic Theory, Philosophy, Psychology. Bookmark the permalink.

26 Responses to I’m Pointing at the Moon, You’re Looking at My Finger: Janet Yellen on Post-Keynesian Economics

  1. MaciekG says:

    Hopefully she’s got a bit wiser since 1980…

  2. Funky says:

    “Why inflation in these circumstances should not accelerate continuously”

    “The model suggests that there are no price-equilibrating tendencies in real world capitalism which will usually be in a state of inflation or deflation”

    Epic failure: mistaking changes of prices for changes in inflation. You always get the basic stuff wrong. If you had ever done some undergraduate courses with that little bit of supposedly totally useless maths you would never ever confuse the first and second derivative with respect to time of a variable.

    • I don’t even understand this comment. The grammar is fine but I cannot derive any content whatsoever. This falls into the “not even wrong” category.

      Yellen is confused as to why the economy being examined doesn’t “perpetually experience inflation or deflation”. She writes,

      …it is hard to fathom why such an economy should not perpetually experience either inflation or deflation.

      Well, that sounds accurate to me.

    • dan says:

      Brother Funky, you need to make an appointment with Dr. Berkeley

  3. Funky says:

    And you half-wits gotta learn the difference between rising/falling prices and rising/falling inflation.

    • I know the difference. But that is not what I was discussing in the piece. I was discussing Yellen’s statement that such a model would predict an economy “perpetually experiencing either inflation or deflation”. Slow down. Read carefully. You’ll get it eventually.

  4. ivansml says:

    “Another hallmark of such criticisms is the complaint that the model being examined is not “closed” or that the various “closures” used are inconsistent. I find this enormously problematic and frankly a bit irritating.”

    Heh. Do you even understand what closing a model means? I think not.

    So here’s a version for dummies: a model has some variables and some relationships between those variables. Whether it’s written in math or words, doesn’t matter. But if you have more variables than relationships, your model is indeterminate – you cannot derive anything definite from it. Like if you have consumption function C = a*Y, can you say that increase in propensity to consume will lead to higher consumption? Not if you don’t specify rest of the model.

    Closing the model is not just some intellectual game, it’s a necessary condition for the model to be able to provide any of those “insights” you’re after. The closure can be as simple as specifying that some variables are set exogenously, but you can’t get far without it.

    And by the way, isn’t it interesting that in response to short and more-or-less descriptive overview of Post-Keynesian economics, you still feel the need to crank out 1000+ words about how dumb mainstream economists are? Obsessed, much?

    • Yeah, I know what closing the model means. It is a game. It’s boring and stupid. Sudoku puzzles. Yawn.

      • Pseudonymous says:

        “I know I’m wrong, but being right is _so_ boring!”

        Also, for a guy who chooses his economics based on his ideology, accusing others of ‘identity thinking’ is pretty hypocritical of you.

      • I can only assume that from the above comment you have no idea what “identity thinking” means.

      • w says:

        So, let’s suppose you knew what “closing the model” means. Please explain what you meant when writing this:

        “If you read any of the classical macroeconomic texts there is never any interest in “closing the model”. Rather the idea is to lay out various insights, whether in algebraic or linguistic form.”

        For example, perhaps you could give an example of a classical macroeconomic model that isn’t closed?

      • Keynes’ model, if you can call it that, in the General Theory is not closed. The investment function is, as is well known, left indeterminate. You can make a similar case for all his work, especially the Treatise on Money.

    • pontus says:

      It should be noted here that “closing the model” is necessary for a stock-flow consistent framework, so often hailed by Phil. But now it’s apparently “irritating, boring, and stupid”.

      • My endorsements of SFC modelling have always been opportunistic. Given that many people trained in economics cannot get away from certain deeply held ideas — such as the idea of a closed model as being a prerequisite of access to Truth — I figure that these models are infinitely more realistic and relevant than the mainstream alternative.

        I have always been clear on this issue when asked about SFC modelling as you can see, for example, in this recent Twitter exchange. But, of course, if you look for hypocrisy you will often find it. But it may well be you that put it there to be found in the first place.

  5. Pingback: I’m Pointing at the Moon, You’re Looking at My Finger: Janet Yellen on Post-Keynesian Economics « Economics Info

  6. GlassHammer says:

    “They think that economics is not a discipline through which we gain insights about the real-world but rather a game”

    – It is much easier to sell “a game” than it is to sell an “insight”.

    • Indeed. There’s also a sense that most academic economists know that they have no idea how the economy works so they don’t want to make any actual statements that they might be called on.

      • GlassHammer says:

        “There’s also a sense that most academic economists know that they have no idea”

        I can’t tell if this is a case of classical ideology i.e. “They don’t know what they are doing but they are doing it anyways” or cynical ideology “They know very well what they are doing but they are doing it anyways.”

      • I think that its a conspiracy of silence. One that is occasionally broken when someone like Piketty comes out and calls a spade a spade.

      • GlassHammer says:

        I agree, Piketty did open up a space for dialogue that was previously closed. (And this alone is worthy of some praise.)

        I remember watching Bill Moyers interview Paul Krugman about Piketty’s work. Krugman said: “I didn’t know that. I really was– I should’ve known it. I should’ve thought about it, but I didn’t.” Krugman went on to say the book was a “eureka book”.

        I know I should be happy that Krugman is now comfortable asking the same questions Pikkety asked but my initial reaction was laughter. I laughed at the thought that Krugman “didn’t know” and I laughed even harder at the thought that Krugman has been pretending that he “didn’t know” for all these years.

      • It’s a tactical maneuver on Krugman’s part. He’s a fascinating person to study if you follow him in debates. He blows with the wind in a very refined way. If he were more charismatic and articulate he would have made a good politician.

        What he is doing with Piketty is using him as a sort of shield. He puts Piketty — who is an honest, non-political type of person — out front and allows him to make the statements that need to be made. Then Krugman tentatively follows these statements up in a very gradual manner.

        He’s very good at what he does. But what he does is also very conservative. Frankly, it also shows the hollowness of the discipline at the moment. No other discipline would require this sort of politicking.

  7. Carlos says:

    “It’s a tactical maneuver on Krugman’s part.”

    Ehm, Krugman wrote about inequality back in the nineties …

    • Right… around the same time that he was pushing NAFTA.

      Krugman talked about income inequality like Clinton talked about income inequality. Pshh…

      • Carlos says:

        What utter nonsense, Krugman uses terms like “oligarchs” in nearly every second oped he writes for the times and as I just wrote above, he wrote about inequality already back in the nineties.
        You on the other hand only whine about evil mainstream economists and do not really give a shit about real world issues.

      • Yeah and he said it was caused by technological change rather than the policies that he was pushing. Back to sleep, Carlos. Back to sleep.

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