In the last few weeks, what began as a semi-civil battle of ideas between “saltwater” Keynesians of Krugman’s persuasion and “freshwater” economists of the Chicago school has escalated into a two-way barrage of insults and name-calling.It still is not well-understood that "freshwater" and "saltwater" are terms applied to what was going on in the field of macroeconomics in the 1970s. This post also refers to the "Chicago School." If Bloomberg Businessweek had actually figured this out, they would call the opposing movement "Minnesota Macro," Eugene Fama would not be a member of the movement, and John Cochrane would be a semi-member. If Robert Lucas were identified as a member of the Minnesota Macro movement, that would be correct.
What's happening in monetary policy and macroeconomics.
Friday, February 10, 2012
The world may be catching on to the fact that the economics profession is not entirely on board with the ideas of Paul Krugman. We still have some work to do though:
Posted by Stephen Williamson at 12:26 PM
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I didn't know Lucas was considered part of it, since he's long been at Chicago. And my perception as a layman was that MM = RBC, a step more extreme than Lucas' argument that monetary stimulus only has an effect if it's a surprise (and you can't systematically surprise folks since they'll start expecting it). But I suppose it makes sense since a lot of it was inspired by him, and he wrote stuff with Sargent like "After Keynesian Macroeconomics".ReplyDelete
By the way, fresh from his op-ed critiquing libertarianism, Jeff Sachs has pointed his guns at Krugman as unrepresentative of the economics profession.
I believe that MM is not just RBC. It involves formulating macro theories in the form of dynamic stochastic general-equilibrium models occupied by optimizing agents and evaluating the model's usefulness by calibrating parameters, running simulations, and then eyeballing the predicted path of the variables to see how well they mimic the actual path (as opposed to using regressions). RBC is a subset of such models.Delete
No, Lucas is part of it. Lucas and Wallace were in Graduate School together. Lucas, Sargent, and Wallace interacted extensively throughout 70s and later, and Lucas and Stokey later visited for long stretches of time at the Minneapolis Fed. Those people are all tied together, as are the ideas. It's not just RBC at all. Much more to it than that. That's part of the misunderstanding.Delete
RBC is a subset of what you are talking about, and what you are talking about is a subset of MM.
"The world may be catching on to the fact that the economics profession is not entirely on board with the ideas of Paul Krugman. We still have some work to do though" And a bloody good thing too. He has gone from being an economist to have essentially entered the realm of politics as a shill for left wing economic ideas. There are many better economists of all stripes and nationalities out there besides Krugman (sorry, don't mean to be negative, but that chap really gets under my skin).ReplyDelete
Can you write a post on debates between the chicago guys and the minesotta guys in the old days? Has there been a consensus or does significant difference of opinion persist?ReplyDelete
Sure, no problem. That's interesting. One difference is in the approach to monetary economics. Neil Wallace is about the fundamentals of monetary exchange and banking, and how that is important for thinking about policy. Lucas was a proponent of cash-in-advance, which Wallace hates. Sargent and Wallace wrote work that was very anti-Friedman and anti-quantity theory of money, but there is a side of Lucas that is very Chicago-school-Milton-Friedman quantity theorist. In other ways, though, Lucas, Sargent and Wallace are all on the same page. There are many differences among people working within the Minnesota school. It's not monolithic.Delete
Thanks for the follow up.Delete
Why are we commenting on Krugman instead Rep. Scott Garrett, R-N.J., who told Bernanke last week during a congressional appearance that he was taken aback that the Fed would offer unsolicited advice to Congress, putting forward proposals which Garrett said mirrored in many ways ideas being pushed by the Obama administration to deal with the Seven Trillions in lost home equity.ReplyDelete
It would seem that economists should be able to agree that Garrett is completely out of bounds. If Greenspan had forewarning of 9/11, would it have been inappropriate for him to have told Congress?
The Fed White paper has a great deal of useful factual information.
Why is doesn't credit Keen? Who knows?
Prescott, Sargent and Sims all left Minnesota some time ago. Minnesota is now running on empty.ReplyDelete
When I say "Minnesota Macro," that is a set of ideas that has spread everywhere - NYU, Princeton, MIT, Stanford, UCLA, ASU, Wash U, Wisconsin, Yale, and many other places. Minnesota is still a good place, though. Not empty by any means.Delete
As the careful reader knows, you can tell a lot by looking at the circumstantial evidence. I use the metaphor of a turtle sitting on a fence post. We know he didn't get there by himself.ReplyDelete
The circumstantial evidence that supports the case against Williamson, and the other Very Serious People, is what he chooses to write about.
Thus, he attacks Krugman but never the house Republicans.
For example, Bernanke just testified before the House, only to be bothered with endless questioning of his policy of keeping interest rates low, which means that CD holders get no interest.
Krugman, of course, has written well on the folly of such questions:
But what the people who want to raise rates are demanding is that we take the price floor that is causing this destructive surplus, and raise it higher.
"Yes, savers would like higher returns, just as farmers would like higher prices for their butter. But free-market oriented economists, of all people, should understand that you can’t just decree higher returns without paying a price in economic disruption."
Now, one would think that a blog like this would join with Krugman, rather than attacking him, but no, no word here, that Eric Cantor (he ran the hearing) is as much or more a wack job as Ron Paul.
Now this blog did take on Ron Paul.
Inquiring minds want to know, Why not Eric Cantor? Why Paul Krugman. Who do you think is the real enemy?
You can't fight everyone at once. Eric Cantor doesn't do economics, and I haven't thought about him much.Delete
"Eric Cantor ... I haven't thought about him much."Delete
Trust me, Eric Cantor is thinking about you and your beloved Federal Reserve.
Because this is a blog about economics. I hope Stephen doesn't turn this into a crappy political blog for people like you--for whom all conversations must be twisted away from costs and benefits, and towards the advance your political views. Read Krugman for that crap. In your own post--you quote Krugman operating in this "political hack" capacity. Read him, and get lost.ReplyDelete
This blog took on Paul when Paul took time out of his schedule to propose a large-scale economic policy (End the Fed, gold-standard, etc).
Really, when it did stop being crude to behave in a way that people know your politics in 10 seconds after opening your mouth? How embarrassing for you.
did you miss the memo?Delete
economics is the means and method by which political power is used to acquire and keep wealth (and more political power)
no one knows this better than economists, which is why Krugman is being attacked for telling the truth
any discussion of economics is nothing but a discussion of politics
any move you make will make someone happy and someone mad
there is no win win to this, especially because in the short run, if you have a compliant buffoon like Greenspan running the Fed, the people running the Goldman Sachs of the world can steal riches unimaginable to every day folks.
Greenspan let the housing bubble run for only 4 years, but the bankers got a decade of bonuses and 7 million families have been foreclosed.
"Really, when it did stop being crude to behave in a way that people know your politics in 10 seconds after opening your mouth? How embarrassing for you."Delete
What do you think my politics is. I'm actually working on a couple of things that I'll post this week about that, so people like you are clear on it. I am a Democrat, and feel quite strongly about it.
Hahaha , Economics is in the name & politics is in the substance. So much for economics without social welfare, so much for economics without equal opportunities, ... We know, deep down in our hearts, which "profession" is the ideological instrument of the right. Keep on mocking, but never try to think my silence as stupidityReplyDelete
You write of "economics without social welfare."Delete
That is a good way to describe the Fed under Greenspan from 2002 to 2005.
Greenspan let the housing bubble run for only 4 years, but the bankers got a decade of bonuses and 7 million families have been foreclosed and millions have lost their jobs
you probably think the solution is repealing the minimum wage
Trust me. What I say about Krugman has no political motivation to it. I just think his economics and tactics are unsound.Delete
What do you take to a knife fight?Delete
why are the two of you guys spamming this blog?ReplyDelete
It is clear that you have no use for a tallying of costs and benefits, and seek only clever talking points to have fun with your innumerate friends.
Really, do go away, the interweb is rather full of the endlessly political narratives you seek.
"any move you make will make someone happy and someone mad"ReplyDelete
If that's true--you've just asserted that we're at a Pareto Efficient allocation right now!!
So, your beef can really only be that some have a smaller chunk of the pie than others, not that the pie is too small...
and since markets with "powerful" parties will rarely if ever be efficient, you've also asserted that such power is not consequential.
Is that what you wanted to say? :)
so be careful when you blather on about "well, you see it's all politics, you naive economist..."
your beef can really only be that some have a smaller chunk of the pie than others, not that the pie is too small...Delete
no, my economic success and the success of my family is tied to the long run health of our economy. I 7 to 7 it, 6 days a week, in professional services. My life depends on the velocity of business, transactions, deals, sum and substance "growth," rapid growth.
my beef is that, since the start of the Reagan Revolution, we have made a series of economic and political choices that have destroyed the Nation, including under investment, under funded R & D, free trade, uncontrolled illegal immigration, stupid unpaid for wars, tax cuts that had second and third order effects that literally forced disinvestment, permitted expansion of private debt by the Fed to hide and conceal all our ills. I could go on and haven't even started on education.
To what do I plead guilty. I am dependent on mail street, not wall street.
This argument would be easier to follow if every Tom Dick and Harry didn't call himself "Anonymous". Find some original fake names, for heaven's sake! (Sorry Steve, carry on.)ReplyDelete
As with most templates I use, the Google blog template permits various options, and I set this up in a way that worked and then forgot about it. I could look through the setup options and figure out how to force people to take a fake name, if possible, but if someone knows a quick fix, let me know and I'll do it. Better still, just identify yourselves, you wimps.Delete
I am a student at a non-freshwater economics department. It's 2012 and my professors still make fun of freshwater economics and claim there is a difference between the two. When you say that there is no distinction I simply don't believe you. I don't know what you are talking about.ReplyDelete
More likely your professors are the ones who are confused, and I'm guessing, so far removed from research that they think of ISLM as a new-fangled model of the macroeconomy that that new kid Hicks just thought up.Delete
i don't know. may be you are right. it's not a great department but it's a top 20. if it's happening here, im guessing it's happening at other places as well.Delete