Submitted by Robert Murphy via Mises Canada blog [9],
[10]
Paul Krugman may (or may not) know a lot of economic theory and is a very clever writer, but you should never ever trust him to recount tales of battles between Keynesians and other schools of thought. His misrememberings in this realm are so astounding that they would impress Brian Williams.
For example, back in December [11] Krugman informed his readers that “[r]ight-wing economists like Stephen Moore and John Cochrane…have some curious beliefs about history,” including their belief that “the experience of disinflation in the 1980s was a huge shock to Keynesians.” In contrast to this right-wing myth, Krugman explained, what actually happened is that “Keynesians came into the Volcker disinflation…with a standard, indeed textbook, model of what should happen. And events matched their expectations almost precisely.”
Now what was so astonishing about Krugman’s version of history–as I detailed here at Mises Canada [11]–is that he conveniently ignored the fact that he himself had written a memo wondering if the U.S. were sitting on an “Inflation Time Bomb” in 1982. So if indeed the Keynesian textbooks of the day predicted the Volcker disinflation, Krugman must not have been reading them.
We’ve got yet another example of Krugman’s conveniently selective memory, this time concerning the earlier stagflation of the 1970s (rather than the disinflation of the early 1980s). On February 28, Krugman wrote a post [12] in which he argued that the cohort of economists coming out of MIT in the late 1970s and early 1980s ended up wielding far more influence than their peers at Chicago. Krugman then went on to explain this dominance by the intellectual openness of the MIT group:
What I remember, then, was that the spirit of MIT economics in the 1970s was very much not one of intellectual imperialism. At Chicago they believed that they had The Truth, and all other views were nonsense to be consigned to the dustbin of history. At MIT, which had played such a large role in bringing Keynes to America, there was a lot of searching and self-doubt — my classmates would sometimes say things like “The rational expectations guys were right about stagflation, so might they be right about the rest?” There was almost a hint of an inferiority complex.
But not too much of one. Everyone was doing rational expectations in some version — Olivier and I worked out the geometry of anticipated shocks…But there was a generally shared view that perfect flexibility of prices was a bridge too far…
The result was that MIT macroeconomics was teched up — everyone learned how to write down and solve rational expectations models, everyone learned how to emulate Lucas disciples — but didn’t unlearn Keynesian insights.
I know plenty of economists who were bothered by this post from Krugman. (For example, David R. Henderson points out the bait-and-switch [13] involved.) But what struck me in the above excerpt is Krugman’s offhand admission that the Chicago School crowd had been right about the stagflation of the 1970s, and that this indeed posed a serious challenge to the Keynesian school–it even caused soul-searching and self-doubt among Krugman’s classmates, with the solution that they had to amend the Keynesian apparatus they had inherited from the 1960s to incorporate the innovations of Lucas et al.
The reason this struck me as so odd, is that in other posts Krugman seemed to be saying that this type of intellectual history was a conservative myth. For example, back in 2009 Krugman wrote [14] the following:
One argument you often hear from anti-Keynesians — it pops up in comments here — is that the experience of stagflation in the 1970s proved Keynesian[ism] wrong. It didn’t; what it did disprove was the naive Phillips curve, which said that there’s a stable tradeoff between unemployment and inflation. By the end of the 70s most macroeconomists had accepted some version of the Friedman/Phelps natural rate hypothesis [15], which says that sustained inflation gets built into price-setting, so that inflation can persist for a while even in the face of high unemployment. But that’s very far from rejecting the basic Keynesian insight that demand matters.
Still, many people continue to use the 70s to denounce all things liberal or activist [16].
What’s odd, though, is how little talk there is about the way the 70s ended — which I viewed at the time, and still do, as a huge vindication of Keynesianism.
Here’s what happened: the Fed decided to squeeze inflation out of the system through a monetary contraction. If you believed in Lucas-type rational expectations [17], this should have caused a rise in unemployment only to the extent that people didn’t realize what the Fed was doing; once the policy shift was clear, inflation should have subsided and the economy should have returned to the natural rate. If you believed in real business cycle theory [18], the Fed’s policies should have had no real effect at all.
What actually happened was a terrible, three-year slump, which eased only when the Fed relented.
It was 79-82 that made me a convinced saltwater economist [19]. And nothing that has happened since — certainly not the current crisis — has dented that conviction.
Now as with all things Krugman, I haven’t here shown an outright contradiction. But when Krugman in 2009 wrote “One argument you often hear from anti-Keynesians — it pops up in comments here — is that the experience of stagflation in the 1970s proved Keynesian[ism] wrong,” did he give the impression that he heard this argument from his Keynesian classmates at MIT in real-time during the stagflation itself?
Of course not. In that 2009 post, Krugman made it sound like this was ex post myth invented by bitter supply-siders who were distorting history. Indeed, he has a whole series of posts (example here [16]) talking about the myths of stagflation in the 1970s, and how those events didn’t really impact Keynesianism the way critics suggest.
There are two Krugmans the Historian, depending on the situation. When he wants to explain why Keynesianism is a better model of the economy, it’s nothing but tales of successful predictions, especially regarding (price) inflation, without mentioning the spectacular failures of actual Keynesians (including Krugman himself) in this regard. Yet when he wants to explain why Keynesians are better scientists, Krugman is quite open about the weaknesses of the approach, and recounts episodes where the Keynesians were indeed bested by their Chicago School (or other) rivals. None of this would be too problematic, except for the fact that the first Krugman will often denounce his critics for recounting history along the very same lines that the second Krugman does.