Krugman on Hydraulic Keynesianism

     I'm in the middle of reading Keynes' GT again. This is the case of one book truly shaking the world's intellectual axis-there aren't too many we can think of in economics that has done that-certainly you would have to also place both Marx's Capital and Smith's Wealth of Nations-in that category. 

     It has certainly been a very maligned book. Even the rabidly anti-Keynesian Sumner always says that Keynes wasn't so bad-if you leave out GT.

     https://www.google.com/search?q=themoneyillusion.com+be+careful+what+&rlz=1C1ASUT_enUS524US524&oq=themoneyillusion.com+be+careful+what+&aqs=chrome..69i57j69i59.6138j0j7&sourceid=chrome&espv=210&es_sm=93&ie=UTF-8

     Many have tried to claim that we had another revolution in the 70s with Lucas and Friedman, but that was a counterrevolution that tries bring us back to the pre-GT age. 

     Krugman had a provocatively entitled post a few weeks ago entitled 'Wynne Godley and the Hydraulics.'

     "A slightly belated reaction to Jonathan Schlefer’s interesting piece on therevived influence of Wynne Godley. There will, I’m sure, be a lot of argument about whether Godley’s approach was actually superior to somewhat more mainstream approaches. But I was struck by Schlefer’s characterization of Godley’s approach:

In mainstream economic models, individuals are supposed to optimize the trade-off between consuming today versus saving for the future, among other things. To do so, they must live in a remarkably predictable world.

Mr. Godley did not see how such optimization is conceivable. There are simply too many unknowns, he theorized.

Instead, Mr. Godley built his economic model around the idea that sectors — households, production firms, banks, the government — largely follow rules of thumb.

     "What you might not realize from this passage is that Godley’s notion that we should represent behavior by rules of thumb isn’t something new — it’s something old, which got driven out of macroeconomics. The “hydraulic Keynesianism” of the 1950s was all about viewing the economy as a kind of mechanism in which consumer behavior could be represented by an ad hoc consumption function, investment behavior by an ad hoc investment function, and so on. This produced a more or less mechanistic view of the economy, and AW Phillips famously represented hydraulic macro with aliteral hydraulic mechanism."

      http://krugman.blogs.nytimes.com/2013/09/13/wynne-godley-and-the-hydraulics/?_r=0

     The idea of using convention and 'rules of thumb'  in making investment decisions goes right back to Keynes. However, by the 50s it was decided that optimizing behaviour had to be brought back. 

      ""So why did hydraulic macro get driven out? Partly because economists like to think of agents as maximizers — it’s at the core of what we’re supposed to know — so that other things equal, an analysis in terms of rational behavior always trumps rules of thumb. But there were also some notable predictive failures of hydraulic macro, failures that it seemed could have been avoided by thinking more in maximizing terms."

      "First involved consumption spending. Conventional Keynesian consumption functions suggested that the savings rate would rise as incomes rose — and this wasn’t just the Keynesian interpreters, Keynes himself made the same claim. This, in turn, led to predictions of rising savings rates after World War II, and hence a persistent shortage of demand — hence the secular stagnationtheory briefly prominent. (There was even an early Heinlein novel built in part around the secular stagnation theory. As I recall, it was pretty bad.)"

     Krugman finds it interesting that 'hydraulic Keynesianism' is making something of a comeback. 

     "You could argue, and I would, that the rebellion against hydraulic macro went much too far. It’s not at all clear how much good the whole apparatus of maximizing behavior in New Keynesian models really does, and to the extent that such models do seem more or less to work, it’s only by making some ad hoc behavioral assumptions that are grafted on to the rest of the structure."

     "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."

      I don't think Godley would answer to the name 'hydraulic Keynesianism' as post-Keynesians like him are critical of American Keynesianism right back to Hicks. Minsky certainly argued that the sole focus of American Keynesianism-'bastard Keynesianism'-on the consumption function was a mistake from the start. 

     What it seems to me is that the more time that went by the more Neoclassical concepts were sneaked back in to Keynesianism.