Palley and Krugman differ on what mainstream Macro did and didn't get right in the aftermath of the 2008 crisis. Both do agree that James Tobin was right though. So where is the difference?
Krugman:
"Thomas Palley argues that mainstream macroeconomists have been looking in all the wrong places for an explanation of the stickiness of inflation in the face of high unemployment; what they should do is consider the old Tobin approach that combines multiple sectors (so that some workers have rising wages even in an economy that’s depressed on average) with downward nominal wage rigidity."
http://krugman.blogs.nytimes.com/2014/07/18/james-tobin-and-aggregate-supply-implicitly-wonkish/?_php=true&_type=blogs&module=BlogPost-Title&version=Blog%20Main&contentCollection=Opinion&action=Click&pgtype=Blogs®ion=Body&_r=0
However, Palley is making a much broader argument. He's arguing that New Keynesianism is not Keynesian at all. Of course, this is where NKers like Krugman, Simon-Wren Lewis, and Brad Delong wonder at the futility of discussing what 'Keynes really meant.'
I must say I never cease to be puzzled by this complaint. Here Noah Smith also shows himself to be a charter member of mainstream econ: to be a member you have to find it puzzling why anyone could be interested in so futile a question as 'what Keynes really meant.' To ask this question you show yourself to be not an economist at all but something very sordid: a literary character.
"My instincts are with Cochrane on this issue. There is nothing more annoying than when you argue with some idea, and then some guy comes along and says "Go read Ludwig von Mises, then you'll understand everything." No you won't. You'll just get a warm glow of understand-y-ness, and you'll end up parroting words and phrases from the Old Master without being any better able to think critically and originally about the issues."
"Then again, a lot of those old folks were really smart, and there are probably insights embedded in their writings that are too vague or complex to be translated directly into math, but which contain information, the way the priors of a portfolio manager carry valuable information in a Black-Litterman model. But the flip side of that is that you probably have to be a really, really smart person to extract that deep-buried insight. Economic history, in other words, seems like very dangerous sauce to me - in the right hands it can be useful, but it is usually in the wrong hands."
http://noahpinionblog.blogspot.com/2014/07/how-are-macro-methods-changing.html
Krugman himself is a little apologetic about being a New Keynesian, calling himself a 'kinda, sorta, New Keynesian.' I think Smith denies that he is a Keynesian at all-or anything. This post is not supposed to be mostly about him but I will note in passing that I find him very smug here:
"When I started blogging a few years ago, I took a very confrontational and sometimes even insulting tone. That was because I thought A) this is the internet, B) everything on the internet is a joke, and C) everyone gets that it's a joke. I guess I had spent too much time in the bowels of the net. I always meant it as a joke, and I never imagined that top academic people would read, much less care about, my blog."
"Turns out I was naive. Over time, fellow bloggers like Tyler Cowen and Adam Ozimek convinced me that more civility was needed, so I try to confine my chain-yanking to those who are more used to getting their chains yanked. Academics need to be able to think clearly and objectively, without their cortisol levels being spiked."
"Basically, in the wake of the crisis, blogs have fulfilled the same role as the verbal debates between Keynes, Hayek, Sraffa, Robinson, etc. during the Depression. But like those debates, it has generated its fair share of acrimony."
I don't think he sounds too sympathetic either when he was just playing games with his blog, or his present, new, civil more serious posture-either way, he shows a fundamental lack of respect for ideas, I think. It's convenient that now that he's looking to get serious about his career, he's started worry that things shouldn't get too polarized and confrontational. What he ignores is that when everyone agrees it's easier for things to remain collegiate and nonconfrontational. Smith strikes me as being terribly smug and complacent. No doubt, while he sometimes wears the poise, he cares not a whit for the little guy-if he did he'd realize that the ideas of economics can be life and death-hardly the joke he thought it was coming in.
Back to Palley. What he's saying is that Krugman's preferred IS-LM Neoclassical Synthesis version of Keynesianism was already 'bastard Keynesianism' but that New Keynesianism is even worse, a genetic mutant of Samuelson's IS-LM Keynesianism.
It's hard to disagree with Palley here:
"New Keynesian economics is a genetic mutant of so-called IS/LM “bastard
Keynesianism” associated with Paul Samuelson’s MIT School of Economics."
"New Keynesianism abandons the Keynesian vestige and jumps the intellectual threshold, becoming rational expectations new classical macroeconomics with the addition of
imperfect competition and price and nominal wage rigidities. Consequently, it is better
labeled “new Pigovian” economics (Palley, 2009) as its emphasis on market
imperfections represents the approach of Arthur Pigou, who was Keynes’ great
intellectual rival at Cambridge in the 1930s. This means new Keynesianism has little to
do with Keynes and much to do with Friedman who is the intellectual father of new
classical macroeconomics."
http://www.thomaspalley.com/docs/research/milton-friedman-062014.pdf
I think, he's onto something here that Krugman and other NKers don't like to have to respond to. How can you deny that New Keynesianism has little do with Keynes? Greg Mankiw wrote a programmatic manifesto of NK in 1991 and it barely mentioned Keynes and had nothing but opprobrium for the General Theory-Noah Smith thinks you have to be some kind of 'really, really smart person' to be able to gain any insight from at all.
I don't see how you can deny that there is probably no book more hated among those who call themselves NKers-'sorta, kinda' or otherwise-than GT. Sumner of course, smugly pointed what Mankiw said to Krugman-'little mention of Keynes, nothing but contempt for the GT'
http://www.themoneyillusion.com/?p=12529
Could anything better make Palley's point that what is called New Keynesianism should really be called New Friedmanism?
P.S. With my apologies to Noah Smith with his contempt for all 'literary flourishes' and stylized facts, much less an actual look at one thing that 'Keynes really said', when you hear Krugman claiming that he and everyone he knows says what Palley says already from within the NK orbit, I think of one of Keynes many classic quotes.
'First they say you are totally wrong and then they say you have said nothing new.'
P.S.S. For his part, at least Sumner himself admits to being about stylized facts more than rigorously microfounded models. I wonder what mainstream econ guys like Noah have against literature. I mean it's quite debatable who has added more utility to the human spirit.
I don't get the criticism that GT is literature but while I understand the need for science to be science-assuming econ is a science-still, the antipathy that a Noah Smith has for literature is quite fascinating actually.
Krugman:
"Thomas Palley argues that mainstream macroeconomists have been looking in all the wrong places for an explanation of the stickiness of inflation in the face of high unemployment; what they should do is consider the old Tobin approach that combines multiple sectors (so that some workers have rising wages even in an economy that’s depressed on average) with downward nominal wage rigidity."
"OK, I guess I’m a bit puzzled. I very much agree with Palley that Tobin’s approach does a lot to help explain what we’re seeing; but I don’t know why he thinks this is such a radical notion. I’ve been telling more or less the same story for a while, explicitly name-checking Tobin; and the formal modeling of Daly and Hobijn (pdf), which I’ve cited several times, declared in its first paragraph that it’s building on Tobin’s insights."
http://krugman.blogs.nytimes.com/2014/07/18/james-tobin-and-aggregate-supply-implicitly-wonkish/?_php=true&_type=blogs&module=BlogPost-Title&version=Blog%20Main&contentCollection=Opinion&action=Click&pgtype=Blogs®ion=Body&_r=0
However, Palley is making a much broader argument. He's arguing that New Keynesianism is not Keynesian at all. Of course, this is where NKers like Krugman, Simon-Wren Lewis, and Brad Delong wonder at the futility of discussing what 'Keynes really meant.'
I must say I never cease to be puzzled by this complaint. Here Noah Smith also shows himself to be a charter member of mainstream econ: to be a member you have to find it puzzling why anyone could be interested in so futile a question as 'what Keynes really meant.' To ask this question you show yourself to be not an economist at all but something very sordid: a literary character.
"My instincts are with Cochrane on this issue. There is nothing more annoying than when you argue with some idea, and then some guy comes along and says "Go read Ludwig von Mises, then you'll understand everything." No you won't. You'll just get a warm glow of understand-y-ness, and you'll end up parroting words and phrases from the Old Master without being any better able to think critically and originally about the issues."
"Then again, a lot of those old folks were really smart, and there are probably insights embedded in their writings that are too vague or complex to be translated directly into math, but which contain information, the way the priors of a portfolio manager carry valuable information in a Black-Litterman model. But the flip side of that is that you probably have to be a really, really smart person to extract that deep-buried insight. Economic history, in other words, seems like very dangerous sauce to me - in the right hands it can be useful, but it is usually in the wrong hands."
http://noahpinionblog.blogspot.com/2014/07/how-are-macro-methods-changing.html
Krugman himself is a little apologetic about being a New Keynesian, calling himself a 'kinda, sorta, New Keynesian.' I think Smith denies that he is a Keynesian at all-or anything. This post is not supposed to be mostly about him but I will note in passing that I find him very smug here:
"When I started blogging a few years ago, I took a very confrontational and sometimes even insulting tone. That was because I thought A) this is the internet, B) everything on the internet is a joke, and C) everyone gets that it's a joke. I guess I had spent too much time in the bowels of the net. I always meant it as a joke, and I never imagined that top academic people would read, much less care about, my blog."
"Turns out I was naive. Over time, fellow bloggers like Tyler Cowen and Adam Ozimek convinced me that more civility was needed, so I try to confine my chain-yanking to those who are more used to getting their chains yanked. Academics need to be able to think clearly and objectively, without their cortisol levels being spiked."
"Basically, in the wake of the crisis, blogs have fulfilled the same role as the verbal debates between Keynes, Hayek, Sraffa, Robinson, etc. during the Depression. But like those debates, it has generated its fair share of acrimony."
I don't think he sounds too sympathetic either when he was just playing games with his blog, or his present, new, civil more serious posture-either way, he shows a fundamental lack of respect for ideas, I think. It's convenient that now that he's looking to get serious about his career, he's started worry that things shouldn't get too polarized and confrontational. What he ignores is that when everyone agrees it's easier for things to remain collegiate and nonconfrontational. Smith strikes me as being terribly smug and complacent. No doubt, while he sometimes wears the poise, he cares not a whit for the little guy-if he did he'd realize that the ideas of economics can be life and death-hardly the joke he thought it was coming in.
Back to Palley. What he's saying is that Krugman's preferred IS-LM Neoclassical Synthesis version of Keynesianism was already 'bastard Keynesianism' but that New Keynesianism is even worse, a genetic mutant of Samuelson's IS-LM Keynesianism.
It's hard to disagree with Palley here:
"New Keynesian economics is a genetic mutant of so-called IS/LM “bastard
Keynesianism” associated with Paul Samuelson’s MIT School of Economics."
"New Keynesianism abandons the Keynesian vestige and jumps the intellectual threshold, becoming rational expectations new classical macroeconomics with the addition of
imperfect competition and price and nominal wage rigidities. Consequently, it is better
labeled “new Pigovian” economics (Palley, 2009) as its emphasis on market
imperfections represents the approach of Arthur Pigou, who was Keynes’ great
intellectual rival at Cambridge in the 1930s. This means new Keynesianism has little to
do with Keynes and much to do with Friedman who is the intellectual father of new
classical macroeconomics."
http://www.thomaspalley.com/docs/research/milton-friedman-062014.pdf
I think, he's onto something here that Krugman and other NKers don't like to have to respond to. How can you deny that New Keynesianism has little do with Keynes? Greg Mankiw wrote a programmatic manifesto of NK in 1991 and it barely mentioned Keynes and had nothing but opprobrium for the General Theory-Noah Smith thinks you have to be some kind of 'really, really smart person' to be able to gain any insight from at all.
I don't see how you can deny that there is probably no book more hated among those who call themselves NKers-'sorta, kinda' or otherwise-than GT. Sumner of course, smugly pointed what Mankiw said to Krugman-'little mention of Keynes, nothing but contempt for the GT'
"Paul Krugman recently argued that Keynesian economics is alive and well, and linked to this paper by Greg Mankiw, which summarizes the principles of new Keynesian economics. Unfortunately it was typed back in the Stone Age, so I can’t cut and paste. And I’m too lazy to re-type, so I’ll summarize the gist of Mankiw’s explanation of new Keynesianism:
"1. It probably shouldn’t even be called Keynesian; don’t waste time with the General Theory."
"2 It uses lots of classical principles.
"3. Paradox of thrift? Fugetaboutit."
"4. Similar to the economics of Hume and Friedman."
"5. Don’t do discretionary policies, follow a rule–preferably NGDP targeting."
"6. Don’t bother with fiscal stabilization policy, use monetary policy"
http://www.themoneyillusion.com/?p=12529
Could anything better make Palley's point that what is called New Keynesianism should really be called New Friedmanism?
P.S. With my apologies to Noah Smith with his contempt for all 'literary flourishes' and stylized facts, much less an actual look at one thing that 'Keynes really said', when you hear Krugman claiming that he and everyone he knows says what Palley says already from within the NK orbit, I think of one of Keynes many classic quotes.
'First they say you are totally wrong and then they say you have said nothing new.'
P.S.S. For his part, at least Sumner himself admits to being about stylized facts more than rigorously microfounded models. I wonder what mainstream econ guys like Noah have against literature. I mean it's quite debatable who has added more utility to the human spirit.
I don't get the criticism that GT is literature but while I understand the need for science to be science-assuming econ is a science-still, the antipathy that a Noah Smith has for literature is quite fascinating actually.
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