Krugman’s long essay in the New York Times Magazine last week continues to stir responses. (All of which are much more substantive and engaging than my supercilious remarks on Jane Smiley’s goofy Marxism in the Huffington Post. ADDED: For a more measured response to Smiley, see Steve Horwitz and Art Carden’s short explanation at Forbes.)
It’s difficult to respond; he’s a wonderful writer, and there’s some parts of the story he tells that are nicely expressed. But there are other parts that, from my viewpoint as an historian of economic thought and an economist watcher, he got quite wrong—sufficiently wrong to warrant a response.
The biggest general problem with the story Krugman tells is that it’s so black and white. There’s the good guys—the Keynesian gang, and bad guys—the Classical/Chicago gang. That, in my view, is seriously wrong. The real story is one of shades of grey, and full of nuances; it is a story in which it is hard to tell who are the good guys and who are the bad guys.
Colander asserts Krugman also misstates the position of the Classical economists, fails to clarify just which kind of Keynesian economics he prefers, and mistakenly claims math in economics is to blame for the crisis rather than the misuse of math in economics. Colander recently testified to a House committee on the role of economics and financial modeling in the crisis.
Vernon Smith, also posting at Causes of the Crisis, sees a surprising similarity in some of Krugman’s point and F.A. Hayek’s Nobel Lecture in 1974. Both Krugman and Hayek observe that economists’ views and policy recommendations may have contributed to the arrival of economic problems they did not foresee. Smith notes that Hayek’s response was one of fundamental intellectual modesty driven by his views of the nature of society. Smith quotes Hayek:
The recognition of the insuperable limits to his knowledge ought indeed to teach the student of society a lesson of humility which should guard him against becoming an accomplice in men’s fatal striving to control society – a striving which makes him not only a tyrant over his fellows, but which may well make him the destroyer of a civilization which no brain has designed but which has grown from the free efforts of millions of individuals.
Smith observes that, “Economic scientists have precious little understanding of this rule governed complex order, and how to keep it on its demonstrated long term path of growth and human betterment… Less pretence and a commitment to learn from the new data being generated… will be both humbling and informative, after the inevitable human political impulse to blame one’s long standing political adversaries has run its course.”
Jeffrey Friedman, in a post announcing the Causes of the Crisis blog, calls it “an experiment in scholarly discourse using what is usually the worst venue for careful discussion–the blog.” The contributors to the blog are authors of articles in a recent special issue of the journal Critical Review. According to the announcement, the blog is aimed at “the past – what caused the crisis? – not on the future – what should be done about it?” Friedman said, “We will leave the policy recommendations to the pundits.”
Elsewhere (and in a somewhat different editorial mood), University of Chicago economist John Cochrane offers his view of the Krugman essay:
It’s a disservice to New York Times readers. They depend on Krugman to read real academic literature and digest it, and they get this schlock instead. And it’s ineffective. Any astute reader knows that personal attacks and innuendo mean the author has run out of ideas.
And that’s the biggest and saddest news of this piece: Paul Krugman has no interesting ideas whatsoever about what caused our current financial and economic problems, what policies might have prevented it, or what might help us in the future, and he has no contact with people who do. “Irrationality” and “spend like a drunken sailor” are pretty superficial compared to all the fascinating things economists are writing about it these days.
Okay, so “personal attacks and innuendo mean the author has run out of ideas,” but what do personal attacks without innuendo mean? There is no innuendo in Cochrane’s reply; Cochrane is nothing if not direct in his personal attacks.
Cochrane goes on to conclude, “the problem [with macroeconomics] is that we don’t have enough math. Math in economics serves to keep the logic straight, to make sure that the ‘then’ really does follow the ‘if,’ which it so frequently does not if you just write prose.”
At ThinkMarkets, Mario Rizzo reacts to Krugman and the reply by Cochrane and finds himself in an uncomfortable middle ground – neither traditional Keynesian nor Freshwater rationalist. Rizzo finds the Austrian macro perspective more balanced.
Thus the Austrian view really is a middle ground. There are real underlying distortions – not simply animal spirits gone wild. They must be dealt with. But there are also secondary, subjective and expectational consequences induced by the original poor monetary policy. It is not so much that markets are inefficient and that actors can be irrational. Rather, in the process of market correction markets will seem inefficient but they are “trying” to correct errors.
ALSO: Alex Tarborrak on Krugman’s essay at Marginal Revolution: “It’s a good story–not the least because there is some truth to it–but there are also many omissions which cast doubt on the thesis.”)