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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.
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nmewn, pardon my glaring ignorance in the matter, did I understand it right?
a major network get's on a crusade on what it perceives as an injustice: that this gentlemen while patrolling killed an unarmed youngster and is not even indicted for manslaughter. the network then starts to spin and "massage" the material to make the missing indictment more likely and to make a political point. I'd call it propaganda - many call it "activist" journalism.
without taking sides as I have little clue on the matter, would this not be a further case for a judicial process? also settling the newsie's responsibilities?
You have the essentials of it. With freedom of the press and speech comes the responsibility (personally and corporate) to use it wisely.
I've said before I believe Zimmerman was over zealous and should have stopped "tailing" when the police dispatcher told him "you don't have to do that"...meaning...to continue to follow Trayvon. And we don't know that that is exactly what he did and Trayvon seeing him turning around took it as weakness on Zimmerman's part and attacked him as one eyewitness is claiming.
By all appearances it looks to me that that two people came together under unfortunate circumstances and now a young man is dead.
Back to the subject...
This whole thing is now being "agenda" driven. Black Panthers are breaking (have broke) at least three Florida laws by issuing "Wanted: Dead or Alive" posters on Zimmerman. News organizations are putting up stories leaked from one side as fact when those are not the facts.
I have to go to work but I'll return to this...
//////////////////////////////////
continuing...
The first thing they did (the MSM) was accept and publish a five year old picture of Trayvon when anyone can see its not the picture of a seventeen year old. Then they jumped on the racial angle before the facts were out because his name was Zimmerman, I guess. Finding out later he was not "white" they invented the word "white Hispanic" which no one knows what the hell that means as far as I can tell. Are "white Hispanics" more prone to violence more than "non-white Hispanics"? No citation/study was offered or given. Then the president throws gasoline on it by saying Trayvon would look like him if he had a son...narcissistic doofus that he is...everything has to be about him, a comparison to him.
Whats even more egregious than all of that, is the kid laid in a morgue for around a week as the family looked high and low for him. Even asking the authorities if they had found him.
The whole damned thing is a tragedy Ghordius from a lot of angles.
Not the Lauren Lyster? Good work on RT and CA! Draw him out of his cult to see objective solutions. Thanks.
SGFTQEF,A?
Lauren Lyster is a studio anchor and correspondent in RT’s Washington, DC bureau.
From protests outside the White House to heated debates on Capitol Hill, Lauren covers the controversial political issues in the US capital and strives to give a voice to people mainstream media ignores.
Before joining RT, Lauren was a reporter and news anchor for Time Warner Cable SoCal News covering the Los Angeles area, where she also filled in as producer and host of a live talk show. Her news reports on issues including the foster care system and the increase in homeless children in schools also appeared on CNN Headline News in southern California.
Lauren earned her Bachelor's degree in journalism, with a double major in gender studies, from the Medill School of Journalism at Northwestern University. There she also investigated miscarriages of the criminal justice system focusing on wrongful murder convictions as part of the renowned Medill Innocence Project.
In addition to her experience in news, Lauren brings her background in finance to RT, having worked previously as a senior equity research analyst covering publicly-traded US and European companies.
Yeah, we get it - she's smart, informed, and attractive. Plus she interviews people we respect like Steve Keen and Mike Shedlock. What's not to like?
Like poolitics, Economics is not a science.
Thank you.
It's a religion -
You're Welcome.....
Economics has been TRYING to prove it is a science for decades...so it embraced equations and algorythms -- it totally blows the human factor - we live in a human world no?! the day human emotions can be forecasted with formulas......
Not only that -- but it is dominated by the most linear, male-brained dorks ever isolated into one "profession".
I thought it was dismal.
Only because people insist that it's a science.
Dismal, yes. Science, no. h/t "The Experts Speak"