Monday, September 15, 2014

Philip Pilkington — Krugman at the Rethinking Economics Conference: Still Wrong on Monetary Theory

The Rethinking Economics conference in New York took place over the weekend. Anyway, Paul Krugman was on a panel with James Galbraith and Willem Buiter. The panel was interesting in and of itself. But what really caught my eye was when Krugman was confronted by an audience member on his support of NAIRU, the loanable funds theory and the theory of the natural rate of interest.
The audience member who asked this question was Rohan Grey, a friend of mine who runs the Modern Money Network who helped co-organise the event. You can see the question and the response in this video clip.
Go Rohan!
I don’t really want to get into the question of NAIRU too much as this would take us too far off track. But the other two questions provoked an interesting response from Krugman. First of all, he simply asserted that the loanable funds was true. Then he went on to assert that the natural rate of interest was true. “Clearly,” he said, “there is always some rate of interest that would produce more or less full employment”.
Krugman is an neoclassical monetarist and a Samuelson "Keynesian."
Krugman’s monetary theory is almost entirely wrong. He flip-flops on the loanable funds question and he is simply wrong on the question of a natural rate of interest. He also holds to an incorrect view of what a liquidity trap is that he picked up from John Hicks. While it is extraordinarily unlikely that he will give up on these ideas — he has dug in far too much now to concede these points and he seems unwilling to even openly debate them — I only hope that his errors will help to ensure that others do not make the same mistakes.
 So much for the economic champion of the "left."

Fixing the Economists
Krugman at the Rethinking Economics Conference: Still Wrong on Monetary Theory
Philip Pilkington

5 comments:

Matt Franko said...
This comment has been removed by the author.
Matt Franko said...

"The fact of the matter is that Krugman is self-contradictory on this point. And self-contradiction is the surest sign that one is simply incorrect or has not thought through a particular point on any great amount of detail."

LOL! you're too nice Phillip!

The Just Gatekeeper said...

I'm going to step in and defend PK a little here. Krugman is an economist, not a banker. He has never worked in banking or as a regulator, so no one should expect him to actually understand banking. When we say that the money multiplier is a myth, it is because we understand the agency operations, largely governed by Regulations A and D. These are legal rules, not economic theories, and economist are notoriously bad at understanding or even caring about laws. It's almost an obligation of economists to mindlessly repeat the unsubstantiated myths that have been concocted and promulgated by their profession. These statements are not derived from an actual understanding of laws or operations, so they should simply be ignored. Economists rarely if ever understand how banking actually works in my experience. Its like criticizing a dentist for not understanding neurology...its just the wrong field.

Tom Hickey said...

Right, Justin. They are more properly called economic theorist. The engineers are in business and finance and they have by and large rejected what the economic theorists say, or at least don't pay much attention to it operationally. Because they understand operations and realize that economic theory has almost nothing to do with actual operations. Unfortunately, policy makers haven't figure this out yet, but their money is not on the line.

Matt Franko said...

Yeah but Justin Phil here is not talking about some detailed point of understanding... here is the context:

"If Krugman states that he adheres to the view put forth in the Bank of England paper which he claims he learned from Tobin then why does he continue to endorse the loanable funds theory when asked about it? "

You dont have to work at a bank here....

This is like saying A does not equal B and then going all around and saying A equals B.... no banking required...

rsp,