Delong on Keynesianism and Monetarism, Old and New

      What is the difference between Monetarism and New Keynesianism? To hear Delong tell it not much.

      http://www.j-bradford-delong.net/Econ_Articles/monetarism.html

       The real big difference seems to be the liquidity trap-in a liquidity trap, fiscal stimulus again has a role. In the above mentioned link he suggests that "New Keynesianism" could be called "New Monetarism." One reason Sumner attacks the liquidity trap idea so much is that it is the only scenario NKers believe that fiscal stimulus is necessary under.  So when Tyler Cowen declares the liquidity trap refuted by recent events, if this is true it indicates total victory for the Monetarists-so the stakes are very large.

       Sumner however spends a lot of time attacking "Old Keynesianism" and suggesting that Delong and Krugman have slipped back to that. Listening to Delong in this paper he certainly seems to cede a lot of ground to Monetarists. On the other hand Krugman says he sees little to choose between "Old and New" Keynesianism. The only improvement according to him is NK is a good way to check your work.

      Understand, for Monetarists-be they "Market" or otherwise-the enemy is Keynesianism at least as far as Keynes might have recognized it. Delong never really does explain why it's called New Keynesianism at all besides the idea that there had already been too many different Monetarist schools of thought.

     The essence of true Keynesiaism I think is stated by Keynes in the General Theory-interestingly this quote was offered by Delong as well recently.

   "the essence of the situation is to be found, nevertheless, in the collapse in the marginal efficiency of capital, particularly in the case of those types of capital which have been contributing most to the previous phase of heavy new investment. Liquidity-preference, except those manifestations of it which are associated with increasing trade and speculation, does not increase until after the collapse in the marginal efficiency of capital. It is this, indeed, which renders the slump so intractable. Later on, a decline in the rate of interest will be a great aid to recovery and, probably, a necessary condition of it. But, for the moment, the collapse in the marginal efficiency of capital may be so complete that no practicable reduction in the rate of interest will be enough. If a reduction in the rate of interest was capable of proving an effective remedy by itself, it might be possible to achieve a recovery without the elapse of any considerable interval of time and by means more or less directly under the control of the monetary authority. But, in fact, this is not usually the case…. It is the return of confidence, to speak in ordinary language, which is so insusceptible to control in an economy of individualistic capitalism. This is the aspect of the slump which bankers and business men have been right in emphasising, and which the economists who have put their faith in a “purely monetary” remedy have underestimated."

      Let's quote the last sentence again for emphasis:

     "This is the aspect of the slump which bankers and business men have been right in emphasising, and which the economists who have put their faith in a “purely monetary” remedy have underestimated."

      This is where the real fight is. Keynesianism, at least the "Old" kind questioned this faith in a purely monetary remedy. This is what Sumner, et al, are still trying to kill. If the NKers are as sympathetic to Monetarism as certainly Delong makes it sound above where is the argument?

      In a very short post in October, Market Monetarist Bill Woolsley asked, Is Delong a Market Monetarist?"

     Nick Rowe declared,

     "Time to stop arguing, and recognise the big commonalities."

      Lars Christensen answers,

      "Nick, you are very, very tolerant. We are talking about KEYNESIANS here;-) But you are right - it seems like both DeLong and Krugman now are presenting views on Monetary policy that are quite monetarist."

       Lars is much less inclined than Rowe to talk about commonalities. Listen to the answer he gave me when I pointed out that Monetarists in a sense can be accused of government interventionism as well and does that in a way put them closer to Keynesians? I knew he would demur, which was exactly my point:

      "generally Market Monetarists and Austrians have much more in common than Market Monetarists and Keynesians. MM’ers and Austrians are generally pro-market and skeptical about government intervention. Furthermore, money is at the core of the understanding of the macroeconomy for both MM’ers and Austrians and they also agree that monetary policy should not be discretionary and instead be rule based."

      Despite the fact that Austrians and Monetarsits would seem to have some pretty significant differences they are really just two approaches to knock interventionism. It's easy for them then to paper over their differences.

      Again, it seems to me that true Keynesianism is as Keynes suggests above all skeptical of a purely monetary solution. The claim that Lars among other Monetarists has made that recessions are always and everywhere a purely monetary phenomenon must be questioned.

     As an aside, Delong speaks of "Political Monetarism" that held sway until it's failure in the early 80s to come close to controlling the money supply because of the erroneous belief in the stability of velocity whereas of course it introduced tremendous instability into the velocity of money. He largely gives Friedman a pass for this episode. However, Friedman was nothing if not a successful politician. If he was somewhat critical of it later-how could he not be, in light of it's irrefutable failure? Again, very good politician which accounts for his tremendous success.

      As I suggest in a further comment at Lars

     "I think you’re right to talk about the differences between Monetarism and Keynesianism. I’m no fan of “all cats are grey” analysis. either."

     "On a deeper level I think it goes back to the centuries old debate between the Metallists-represented by today’s Monetarists- and the Chartalists-best today represented by the MMMT school."

      This is the theme we must return to again and again-that the real battle is between Monetarism and Chartalism (MMT).