This page has been archived and commenting is disabled.
Steve Keen vs. Krugman/The Science of Economics
Having been an onlooker of the recent tiff between Paul Krugman and Steve Keen, I was very eager to see what Mr. Keen had to say in tonight's LSE public lecture on "Banks Versus the Economy." Observing how Keen had quarreled with Krugman and effectively ate his lunch, I thought he would bring a lot to the table. I was wrong.
Keen had raised the (very interesting) issue about how neoclassical economists and their models fail to recognize the role of banks in the economy. When attempting to defend against this allegation, Krugman acknowledged that banks do play a role in the economy, and that in fact the Fed is fully able to contain the supply of money via monetary policy tools (i.e., manipulating the amount of reserves banks hold and therefore restricting or encouraging lending). In a word, neoclassical models still assume no banks in the economy, so point to Keen here. Moreover, Keen closely adheres to Hyman Minsky, whom I find very inspiring and am glad to hear Keen reiterate Minsky's theory of debt and banks in the economy. Keen uses Minsky to prove that the Fed does not in fact have control over credit in an economy, since it is solely borrowers and lenders who influence credit, and that reserves have nothing to do with the amount of credit in an economy. For instance, the Fed only has a 10% RRR for household deposits, and does not have a RRR for corporate deposits. The amount of credit in an economy consists of the demand for loans by borrowers, and supply of loans that lenders are willing to lend, irrespective of reserves, end of story.
But while Keen is quick to chastise neoclassical economists (namely Krugman) for inadvertently proclaiming that their models reign supreme whereas they fail to incorporate substantive variables and therefore fail to reflect reality in the least, Keen offers no alternatives. My main issues with Keen and his (horrific) showing tonight, are as follows:
If he goal is to denounce macroeconomic models and their failure to account for real world phenomena, he should not be bringing microeconomic models and their assumptions into the equation. These are two separate issues. Since his attack is on economic models' failure to predict crises such as the one we have just/still are experiencing, his condemnation of microeconomic models is superfluous
If he wants to attack micro and/or macroeconomics and their models, then he cannot only point at neoclassical economics since he is raising an entirely different discussion, namely the discussion role of models in economics
To (1), Keen denounces the assumptions of perfect competition and utility maximization in the economics courses taught in universities today. This, I understand, is why he targets neoclassical economics, given its prevalence in economics programs globally. However, Mr. Keen acknowledged himself importance of the role of abstraction in his own "sect" of economics (whatever that is), but has decided that it is bad if the "neoclassical" tag slapped on it. If he is going to debase unrealistic models in economics, he has to address models across economics, not just within one realm (2).
Moreover, microeconomic models should not have been mentioned at all if he is discussing Dynamic Stochastic General Equilibrium (DSGE) models and their role in the macro economy. DSGE's do not account for many endogenous factors in the real world, such as regime shifts, and they make drastic assumptions such as intertemporal optimization, perfect information, a single representative agent, zero transaction costs, and no banking sector. These are the models that professionals relied on leading up to the crisis, so it is good that Keen is raising awareness of this fact and calling for newer and better models to guide policy. But this issue does not relate to an individual ideology or any individual such as Krugman; it relates to the question "what role should models play in economics?"
There are two answers to this question, none of which Keen addressed (or even seemed to think about addressing). One is that they should emulate the real world, and should be considered worthless if they do not contain information from the real world and do not describe what occurs in the real world. Ironically these proponents are called realists. The other side tends to believe that models do not need to contain real world information at all, but as long as they either a.) tell us about some factor that occurs in the real world or b.) lead to correct predictions, then the model will do just fine. Proponents of this camp are instrumentalists. Clearly Keen is just another realist, and he could have simply conceded to this and we could have moved onto bigger and better things.
In essence, the role of models in economics should have been the topic of discussion tonight and should be what Keen is out campaigning for. Instead of useful insights regarding how to fix the banking system, we got a campaign against neoclassical economics (yawn). He proposed no alternative models (except that he is building a model which emulates the real world in its entirety, named, you guessed it! Minsky), but he did offer some groundbreaking fiscal policy solutions!
His solution to global debt overhang is for governments to implement a "debt jubilee" whereby governments pay consumers (rather than banks) to either a.) pay their debts off or b.) if they don't have debts, use that cash to SPEND. Wait a minute, this guy who I thought was a neo-Hayekian superhero who finally toppled Krugman from his high-horse is proposing that government cut out a check to a.) people with high debt (i.e., less well-off individuals) so that they can pay down their debt, and b.) to individuals who DON'T have debt because they are wealthy enough that they don't need it. Excellent, now the poor are "less poor" and the rich have more cash to inflate our economy back to (wait for it) equilibrium. What an absurd "solution."
Finally, Keen has not even read into Austrian economics. He admitted not having done so because he is too focused on toppling neoclassical economics. How does he expect to do this with no viable replacement?
All said, Krugman is a boob. This is a quintessential example of how an "expert" in one facet of a profession is assumed to be infallible. Krugman won the prize for his trade theory and his theory of "new economic geography." I would assume the concept of banks are not mentioned once in his research. So he is not an expert in monetary policy, or the banking sector as a whole, and should not step into this foreign territory. Keen has demonstrated that this nobel-laureate, NYT-writing rockstar is as fallible Lindsay Lohan. But Keen should keep to what HE specializes in (i.e., Minsky), and focus his arguments in the right areas, before the whole profession of economics turns on him next.
»
- Chris Celi's blog
- 14342 reads
- Printer-friendly version
- Send to friend
- advertisements -
Price discovery is dead. Thanks to the Fed and TBTF.
Krugmans problem is that he is proven wrong time and time again but rather than admit it he always has some excuse such as it was not tried long enough, it was done for too long, the size of it was too small, the size was too big, etc. Krugman is not aware of ever having been mistaken, his directions simply were not followed closely enough. Couple that with his obvious desire for central planning solutions over any free market solutions and that in a nutshell is PK. If only TPTB would follow his precise instructions (which change like the weather each new column when they are not working) all would be right in the world.
TPTB just cannot achieve PK's Chi where all his prescriptions based on his modeling must be implemented to a T aka Goldilocks style or they do not work. PK is a 'homeopathic economist'.
Krugmans problem is that he is proven wrong time and time again but rather than admit it he always has some excuse such as it was not tried long enough, it was done for too long, the size of it was too small, the size was too big, etc. Krugman is not aware of ever having been mistaken, his directions simply were not followed closely enough.
_________________________________________________
US citizen Krugmann has no problem. Being proven wrong is no problem in US citizenism.
US citizen Krugman makes money, rather hefty sum of it.
He is popular, invited to shows, lives an exciting life and his name will be remember by US citizen historians.
Other people have bigger problems than Krugmann. US citizenism rewards well propagandists and fantasists.
Krugman is both.
AnAnonymous said:
Apparently being proven wrong is no problem in Chinese citizenism. The Chinese citizenism strategy when being proven wrong is a clever three-part subterfuge:
1 - Deny as fantasy, using much offuscation.
2 - Ignore and flee like running dog.
3 - Repeation as necessary.
This is easily proven. Watch now and learn as this is shown to be the case.
http://www.zerohedge.com/news/guest-post-four-signs-asia%E2%80%99s-rise-...
Chinese citizenism step one now completed.
http://www.zerohedge.com/news/guest-post-four-signs-asia%E2%80%99s-rise-...
Notice no response to this from AnAnonymous. Chinese citizenism step two now completed.
Next is repeation as necessary.
Chinese citizenism subterfuge is predictable like morning sunrise.
Used his book in Principles. I remember one week Krug put out an op. ed. advising action that dramatically contradicted the material in his textbook. What a hack. Thankfully I did not have to use another of his textbooks, though professors seem to love handing out his articles. They always say, "I'm not trying to influence your politics one way or another, and I'm never going to tell you my political affilliation," right before the attempted indoctrination.
Here is a greater contrast in mind changing moments in history. Alan Greenspan used to be in Ayn Rand's intercircle and was supposed to have agreed with Objectivism.
In 1987 he was appointed the chairman of the federal reserve. The rest is history with the low interest rates and all. Ayn rolled over in her grave.
looked at some of my old college textbooks - 2 authored by Krugman - and 1 by Fred Mishkin - how embarrassing!!
"In 2006, Mishkin co-authored a report called "Financial Stability in Iceland".[3] The report maintained that Iceland's economic fundamentals were strong. The report was commissioned by the Icelandic Chamber of Commerce in response to critical coverage of the Icelandic economy and certain Icelandic companies in the international business media.[2] Mishkin was paid $124,000 to co-author the report.[4]
Iceland subsequently experienced a spectacular collapse two and a half years after Mishkin's report. According to the documentary "Inside Job," on Mishkin's curriculum vitae (CV) the title of the report was changed to "Financial Instability in Iceland". At the present time (March 2011), Mishkin's CV lists the report with its original title.[5] Mishkin wrote a note published on October 6, 2010 at the Financial Times' blog [6] titled "The economist’s reply to the “Inside Job”" explaining his participation in the documentary "Inside Job". The director of "Inside Job," Charles Ferguson, responded in detail [7] to Mishkin's note on October 14, 2010 at the same blog."
I am coming to the conclusion that anyone associated with economics, or economic analysis, who has the syllable "Mish-" in their name is a complete idiot.
A couple examples off the top of my head:
- Krugman said we need a housing bubble (he actually didn't mean a housing bubble) and we see how that turned out
- Krugman advocated the big stimulus package and said it will cure our problems (but it just wasn't big enough)
- Krugman thinks a debt problem can be solved with more debt (unfortunately it requires infinitely more debt)
I've followed Steve Keen for some time now, and he was one of only a handful of those in economic academia to correctly predict the economic crash of 2008. While I'm not an economist by training (I'm a statistician/data miner because that's what pays the bills), I do understand the process of creating models to predict the future. His main beef with mainstream economics is that a) it ignores the role of debt in the economic system and b) that the models used by mainstream economics are largely theoretical. On the first point (A), he is closely aligned with the likes of Eric Janzen of itulip.com and his Ka-Poom theory of economics and how debt bubbles are the underlying cause of the boom-bust cycles of the 20th century. Keen has been able to model this process out quite nicely using some off the shelf software designed for the modeling of dynamic systems. In this regard, Keen is much closer to, say, an engineer than an economist in terms of the mathematical approach to model out real world events. So, to say he is in the realist camp is an accurate statement, though, not a complete one because his use of mathematical models and systems theory to investigate the causal links in observed real world behavior. His contention that there should be a debt jubilee gets at the underlying problem of too much debt. His thought of giving money to the masses to pay off (some of) the loans is not a bad idea in that it avoids the deflationary pressure of simply wiping away the excess credit (which would cause a contraction of the money supply). In order to make such a hairbrained idea work, you'd have to sharply reduce the leverage (i.e. increase capital ratios) and get rid of the derivatives. Good luck with any of that.
No worries, though. No one is going to listen to anyone who promotes the idea of changing the system until the whole thing collapses and the Wall Street white shoe boyz have made off with all the bonus money they can possibly siphon off the dying carcas of the once great American economy. At that point, they'll trot out socialism, communism, facism, or whatever system they feel will cement the wealth transfer in place. The last thing they want is the losers (a.k.a. "customers") of places like MF Global asking for their money back. That would be the worst of all possible outcomes.
Anyone who has worked with models (statistical or deterministic) for any length of time understands one thing.... Garbage in = Gargage out.
Nuf said.
This might interest some of you:
http://strikelawyer.wordpress.com/2012/04/03/krugman-keen-money-banking/
Same topic, anyway.
Here's my take:
http://strikelawyer.wordpress.com/2012/04/03/krugman-keen-money-banking/
I find Keen's demolition of straw men to be tedious. Beating up on the neo-classicall economists of 200 years ago is hardly interesting. We all understand the shortcomings of their models. They are still useful analytical frameworks, assuming one understands these limitations.
Instead, as the author suggests, Keen should work on his Minsky model and make a new contribution. Meanwhile, he should read a few Austrians. Also, he should accept demand theory and revealed preference theory as useful, if not exhaustive and all-explaining, constructs. they don't need to be perfect to be helpful
"Beating up on the neo-classical economists of 200 years ago . . ."
Umm, weren't those the "classicals?"
Perhaps, like most latter-day "economists", he is not as interested in honest academic pursuits as much as peddling a particular (pro-statist) political agenda?
Keen wouldn't be able to teach in US. Keen's understanding of modern banking excesses come from Marx. You can't mention Marx in the US unless your name is Michael Hudson.
Forgive me if I am being obtuse, but in what possible sense is a raging statist such as Krugman "neoclassical"? Unless "neoclassical" economics is now being defined as the diametrical opposite of classical (i.e., free market) economics.
akak said:
That is exactly what is happening.
See conservative vs. neoconservative for an analogous redefinition.
So what would a "neoliberal" be? An actual conservative?
And here, all along, silly ol' me always thought that "neo" just meant "new" instead of "anti".
.
Confusing, isn't it? Such is the eternal nature of neo-Tibetan Chinese citizenism newspeak algebraic coconutism.
Chinese citizenism linguistic blobbing-up: make me laugh!
I believe you need a write off of private debt while peserving deposits (merely convert savings into goverment money / debt) - however that wall of new spending would drive oil prices crazy.
Rational polices such as taxing excessive oil use of cars and such with the aim of reversing the credit "investments" effect on the physical economy.
oil prices will rise anyways. once Wall Street collapsed...even though the dollar actually rallied on the news...the greenback ended up going right back down to the record lows it's at right now. not only oil and gold but ALL commodities sprinted ahead like that Jamaican guy in the last Olympics. So basically "I agree with you" PROVIDED you have an economy big enough to handle the debt load. These bankers lie worse than politicians. There's so much "off the balance sheet" crap "you can't let those things get too big to begin with" if you can help it. As Europe is now discovering once you do it's "game all over the place" when that happens and you try and socialize lending (the money get's parked right back at the ECB!.) in other words "now the real challenges begin." prices are moderating...interest rates are tightening, demand is falling, housing is double-dipping. Wall Street actually should have collapsed last fall...only with Ms. Lagarde being put at the head of the IMF and Super Mario coming on board was WALL STREET saved. "The jury is still out" as they say on the EU as a whole.
When their is no hard money, it's all credit.
There are those of us who are not rich, and don't have any debt. It wouldn't be very fair to only give those in debt a "jubilee". Many of us who are not in debt have made that choice, and that needs to be taken into account.
I don't want to have to go out and drum up some debt so I can participate.
Of course, a lot of rich people would get money they don't need, maybe there could be an asset cut-off.
Coopster
do not worry about fair, it isn't and will never be..
the entire point of spending most of my free time reading ZH and other Global Financial Crisis related sites is to figure out where to be standing when it all falls down. This is the greatest show of a lifetime, it will not be repeated in ours, it is more exciting than any sports and it is happening NOW. Unfortunately it will end horribly for most but maybe, with luck and intelligence and reasoning and luck some of us can survive and others create wealth far beyond our means otherwise. In 2010 I realized that something was horribly wrong. After the fear subsided I began to try to create opportunities for myself. I suggest all do the same. No promises, we could all die (at least financially as most probably will) but maybe, if you are standing in the right spot, positioned and ready....
If you are in the USA - you are still thinking you live in a normal and rational society. That ended in 2008. You live in a kleptocracy now. The people who put someone in power get your money and wealth or they threaten violence.
This was my thought, too. A cutoff should target the shrinking middle class, leave out the wealthy. If it did, I could support such a jubilee that rewards both debtors and savers.
Couldn't agree more with this perspective. Would it not be quite awesome of there were "competing" currencies, instead of the Fed having a monopoly on the creation of our fiat monetary unit? This individual would support an economic environment where precious metals and other far more "sound" monetary units would compete against what is now essentially a counterfeit monetary unit (US FRN).
Can't they find a better scratching post than Krugman - he does not strike me as very sharp his arguments are so obtuse. That an he is prime example of only using facts that support your argument.
And who the hell says Krugman is neo-classical?
More like neo-Marxist, if anything.
Oops. I wrote 'politics' as 'poolitics'. Some of these self-important economists just end up falling into groups sacrificing objectivity and scientific rigour (it's not a science though!).
Economics is science, however when you come to apply it you also need a philosophy. That is science doesn't tell us what is moral or immoral, it simply predicts relationships - a philosophy is needed to determine which outcomes are ethical, and which are not.
The problem with a great deal of economics is it is based on psuedo science, or that philosophical tools or arguments are applied duing the course of analysis, instead of properly being employed during synthesis.
Where economics cannot be reduced to infallible logical propositions (true economic theory), it is either empirical science - or rather more unfortunately superstition, wishful thinking, mumbo jumb and psuedo science.
There IS a clear cut scientific basis for economics - however this small bastion of pure reason is so often occluded by irrational, self interested philosophy or random application of scientific principles without respect to a coherent underlying theory.
Modern economics is best described as witchcraft - however that does not mean that a scientific basis for real economics does not exist. Being a scientist by trade and I having read a lot on Austrian economics -I have been convinced that economics does indeed exist as a science, though little practiced.
Scientific processes require irrefutable logical statements, such as;
'A singlular and discreet economic good cannot be in two places at once.'
'Something that is consumed entirely today cannot be consumed at a later time.'
'Price is an agreement in value by purchaser and vendor.'
... and so on. Where economic theory is entirely composed of such irrefutable logical statements, it comprises a science.
Where it does not comprise of such pure logical argument (and that is a prolific field, best described as witchcraft) - then it is not a science.
Clothe enoug for govrment wrk.
Interesting post . I will try to bring up some of these questions and talk about the role of models in economics with Dr. Keen when I interview him on my show tomorrow (Capital Account).
Lauren - i like your show. We need to shag!
Lauren,
You are one very bright light in a very dim array of tv interviewers. Keep up the great work.
LaurenL,
Please read this article prior to talking with Dr. Keen. It has much insight into models in economics.
http://mises.org/daily/2280
http://mises.org/daily/2280
Nice link, thanks.
"Economic statistics cannot be accepted at face value." Are you suggesting the CPI might possibly be WRONG? Sir... dear sir that is outrageous.
Ms Lyster and Capital Account and RT (Russia Today) -
First-rate.
Russia Today is already the most honest and informative global television news network in English.
The RT website needs a little make-over - the Al Jazeera English website looks much better - but RT is unrivalled in how it covers things and speaking the truth.
Perhaps re-brand the network as 'RT Global News' ... re-format the website ... and become generally known as the finest TV news network in the world.
second that
I never thought in my life that Russia would have the most honest and objective TV news. All US TV is sh*t.
I do not watch tv. What I see is all via the internet so I can't really do a comparative evaluation but...what I have seen of RT is quite good, what I have seen of broadcast and cable (as it appears on the web) is quite bad. It is in fact so bad that I view it as Pravda of the 1980s...how ironic it is then that even Pravda covers stories better than the MSM...or just sad...
Roughly every six to eight months I turn on the "Evening News" just to see how bad they are.
It is the worst in my lifetime. They lie about everything, using all the tricks.
They make the communists of the cold war look truthful.
We, the people, are in real trouble.
I am pretty much the same - though i don't actually have TV connected. Sometimes when I travel I get a room with CNN and so on, and I switch it on until I start feeling sick - there is absolutely no program I could watch that wasn't filled with propaganda and utter nonsense. I mean absolutely every channel.
If you can believe this, I found a nature channel - and I thought, hey this is going to be harmless .. nope .. they started talking about man made warming, water constraints and donating to wildlife funds .. Global Warming is part of the NWO global govt plan, water scarcity is about controlling water sources (which happens in many countries already, where the only water you can get comes in bottles) and wildlife funds are simply ways to fleece well meaning people of anything they can get, their costs run so high that very little if any money is left over - and the use of that money is highly questionable anyway.
Western TV is pure poison.
Its amazing isn't it?
A major network can get caught red handed editing/splicing words out of context to make the viewer believe a false reality and nothing happens to them. No fine, no contrition, no advertisement is pulled, no one is even fired for what is a premeditated lie.
The apology (when it comes) is forced by the truth of the matter, yet they feel no guilt or shame in having to give it.
The apology itself (to them) is just a way to stop the criticism. Just a "oh well, I guess we have to do this" device so that they can move on to their next act of journalistic malpractice.
One example, there are many, it's just the latest...
http://www.sfgate.com/cgi-bin/article.cgi?f=/n/a/2012/04/03/state/n184721D23.DTL