In the previous post we looked at Krugman's comments on the revised interest in Godley and what Krugman called 'hydraulic Keynesianism.'
http://diaryofarepublicanhater.blogspot.com/2013/10/krugman-on-hydraulic-keynesianism.html
Krugman also provided a link on 'HK' that was to a very short Wiki entry on it. Yet I don't know if Wiki describes it here as the term has been used, certainly not the way that Krugman and the larger NC school uses it.
"Initially, the phrase, "hydraulic macroeconomics", was associated with Keynesian economic models,[7] but more recently came to be used for any dynamic macroeconomic model in mainstream economics. For example, Arnold Kling describes hydraulic macroeconomics thusly:
Mainstream macroeconomics is "hydraulic." There is something called "aggregate demand" which you adjust by pumping in fiscal and monetary expansion.[8] http://en.wikipedia.org/wiki/Hydraulic_macroeconomics
Seems to me that HK refers to something much more specific-and as it has come to be used is in
pejorative way-and certainly much more specific than Wiki makes it sound. It refers to Keynesianism in the U.S. before 'maximization' and 'optimization' were smuggled back in. Godley is making quite a comeback, though, unfortunately he's not here to see it as he died in 2010.
He is given a lot of credit for not just predicting the crisis but having a model that clearly predicted it.
"In a 2011 study, Dirk J. Bezemer, of Groningen University in the Netherlands, found a dozen experts who warned publicly about a broad economic threat, explained how debt would drive it, and specified a time frame. Most, like Nouriel Roubini of New York University, issued warnings in informal notes. But Mr. Godley “was the most scientific in the sense of having a formal model,” Dr. Bezemer said.
http://diaryofarepublicanhater.blogspot.com/2013/10/krugman-on-hydraulic-keynesianism.html
Krugman also provided a link on 'HK' that was to a very short Wiki entry on it. Yet I don't know if Wiki describes it here as the term has been used, certainly not the way that Krugman and the larger NC school uses it.
"Initially, the phrase, "hydraulic macroeconomics", was associated with Keynesian economic models,[7] but more recently came to be used for any dynamic macroeconomic model in mainstream economics. For example, Arnold Kling describes hydraulic macroeconomics thusly:
Mainstream macroeconomics is "hydraulic." There is something called "aggregate demand" which you adjust by pumping in fiscal and monetary expansion.[8] http://en.wikipedia.org/wiki/Hydraulic_macroeconomics
Seems to me that HK refers to something much more specific-and as it has come to be used is in
pejorative way-and certainly much more specific than Wiki makes it sound. It refers to Keynesianism in the U.S. before 'maximization' and 'optimization' were smuggled back in. Godley is making quite a comeback, though, unfortunately he's not here to see it as he died in 2010.
He is given a lot of credit for not just predicting the crisis but having a model that clearly predicted it.
"In a 2011 study, Dirk J. Bezemer, of Groningen University in the Netherlands, found a dozen experts who warned publicly about a broad economic threat, explained how debt would drive it, and specified a time frame. Most, like Nouriel Roubini of New York University, issued warnings in informal notes. But Mr. Godley “was the most scientific in the sense of having a formal model,” Dr. Bezemer said.
"It was far from a first for Mr. Godley. In January 2000, the Council of Economic Advisers for President Bill Clinton hailed a still “youthful-looking and vigorous” expansion. That March, Mr. Godley and L. Randall Wray of the University of Missouri-Kansas City derided it, declaring, “Goldilocks is doomed.” Within days, the Nasdaq stock market peaked, heralding the end of the dot-com bubble."
"Why does a model matter? It explicitly details an economist’s thinking, Dr. Bezemer says. Other economists can use it. They cannot so easily clone intuition."
The list of those who is influencing is quite impressive.
"But his influence has begun to spread. Martin Wolf, the eminent columnist for The Financial Times, and Jan Hatzius, chief economist of global investment research at Goldman Sachs, borrow from his approach. Several groups of economists in North America and Europe — some supported by the Institute for New Economic Thinking established by the financier and philanthropist George Soros after the crisis — are building on his models."
This NYT article does a much better job than Wiki of defining the difference that Krugman as in mind between 'HK' and more mainstream NC Keynesianism:
"Mainstream models assume that, as individuals maximize their self-interest, markets move the economy to equilibrium. Booms and busts come from outside forces, like erratic government spending or technological dynamism or stagnation. Banks are at best an afterthought."
"The Godley models, by contrast, see banks as central, promoting growth but also posing threats. Households and firms take out loans to build homes or invest in production. But their expectations can go awry, they wind up with excessive debt, and they cut back. Markets themselves drive booms and busts."
" Krugman admits that what has come since the demise of 'HK' in economics hasn't necessarily been too impressive yet he claims that HK had some failures-he probably has in mind things like the failure of the crude version of the Phillips Curve. In any case, while that was crude, it's tough to see how Friedman's Permanent Income Hypothesis is any kind of improvement."
Godley certainly wouldn't consider himself part of pre U.S. Keynesianism with its sole reliance on a consumption function.
P.S. I often say that Sumner more than any other Neoclassical economist has done a good job of trying to save NC. His version of Rational Expectations-which is largely the mainstream version of Krugman, et. al as well-is that prediction is both
1). Impossible as expectations are rational.
2). Total dumb luck if they do happen. Being an economist in no way enables you or anyone to predict the future as no one person can be as smart as the market.
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