Keynes and His Enemies

       This means you, Scott Sumner, and Tyler Cowen no matter how much he hides behind the "New Keynesian" label, how can we forget his attempt to claim that last Friday's good job numbers vindicate Real Business Cycle? 

       As Brad Delong puts it, "I am still looking for a RBC theory that predicts that more than three years after an adverse monetary-financial shock the unemployment rate will still be elevated above trend by 3.5% points. I am still looking for an "Old Keynesian" who would take the fact that the unemployment rate is elevated above trend by only 3.5% points more than three years after an adverse monetary-financial shock as a failure to confirm their view of the world."

      As to the liquidity trap, Cowen calls it,

       "Another big loser is those liquidity trap theories which tell us that positive real shocks are bad for the economy because the AD curve has a perverse slope, etc., and that negative shocks might help spur recovery.  That theory is looking very weak, again.  I consider it the weakest economic theory that has any currency in the serious economics blogosphere."

       Sumner is of course always playing around with disproving "liquidity trap theories" but Cowen here has some impressively big claims. Maybe a little context could be helpful. Specifically let's take a look at what Keynes says as Delong actually quotes from the General Theory. Cowen-actually claims to read and value General Theory. Many so-called New Keynesians like Mankiw claim to hold Keynes' Magnum Opus in low esteem. A very common judgment is that it is 'hopelessly obscure and confused.' I wonder who is really confused-not Keynes. Actually if you want confused and-especially obscure- check out Hayek's attempt to debate Keynes and Sraffa back in the 30s.

       Cowen does say this regarding General Theory,

        "Krugman attacks me for being an anti-Keynesian when in fact I very much prefer New Keynesianism over Old, so the entirety of his critique is boxing at shadows.  As an aside, my first published article was in the Journal of Post Keynesian Economics, and as long ago as 1989 I wrote an essay arguing that Keynesian economics explained the Great Depression better than did alternative views; some of my libertarian and Austrian acquaintances still hold that piece against me.  Some MR readers also will recall the 12-part symposium I did on Keynes’s General Theory, full of praise for the book, though of course with some criticisms too.  I don’t expect Krugman to be an expert in the history of thought of me, but a) he has linked to previous posts of mine making clear my affinity for sticky price reasoning and other new Keynesian ideas, b) it is a rather simple proof that he has rather drastically misread me, as has DeLong, and c) if Krugman doesn’t know my views perhaps he should not attack them in such strident language.  By the way, to the extent I like Old Keynesianism, it is for the Shackle-Lachmann-Minsky strand, not IS-LM and the liquidity trap."

        Delong quotes Keynes, in Chapter 32 of the General Theory,

        "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."

        Please note the last two sentences particularly:

       "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."

       See this is why someone like Sumner trashes the General Theory in particular so much. This is a stake through the heart of Sumner and all the Monetarists-this claim of Keynes that economists are off who put their faith in a "purely monetary" remedy. So when people like Lars Christensen claim that a recession is always and wholly a monetary phenomenon this is what Keynes in General Theory-perhaps less so in his earlier work-flatly denies.

      Now whether you agree or disagree with the above is there anything either "confused" or "obscure" about it? No it just says what the anti-Keynesians don't want said-Tyler can call himself a New Keynesian all he likes here-as can Mankiw for that matter-I will in this context include them here.

      The real traumatic moment for guys like Sumner was Krugman's liquidity trap work of 1998. Don't get me wrong, Sumner has also claimed that Krugman said nothing in that essay that he himself had already said in 1993-but don't believe it.

       Krugman is right in what he says about the "Dark Age of Macroeconomics"-there are many things that we already knew that is now hidden under lock and key. Although Krugman and Delong can in some sense be considered NKers themselves they are not anti-Keynesians while a Tyler Cowen is though he too claims to be NK. Why is this? Well Krugman doesn't actually claim that New Keynesianism is right and "Old Keynesianism" is wrong, but rather that NK is kind of a useful tool, particularly in checking your work