Skip to main content

Krugman on Friedman, Austrians, and Paradise Lost

I was a bit busy this week and did not weigh in on Krugman's latest incursion (and here too) on the history of economic ideas. He correctly dismisses Conservative economists in pre-Keynesian times, and particularly Hayek (and Austrians), who suggested that recessions and depressions were useful, as not relevant. And also, notes Friedman was more sophisticated. He also notes correctly (as was pointed out here before), that Friedman used when he was forced to present a complete model and ISLM with a Phillips Curve, that was not very different from the more Keynesian versions of the model done by the Neoclassical Synthesis authors.

He is more positive about Friedman because:
"He [Friedman] was willing to give a little ground, and admit that government action was indeed necessary to prevent depressions. But the required government action, he insisted, was of a very narrow kind: all you needed was an appropriately active Federal Reserve... [But Krugman does not ] want to put Friedman on a pedestal... [since] the experience of the past 15 years, first in Japan and now across the Western world, shows that Keynes was right and Friedman was wrong about the ability of unaided monetary policy to fight depressions."
Note that Krugman also notes Friedman's critique of Austrian business cycle theory (see here), which shows that in spite of being marginalist and part of the mainstream, still the extreme laissez faire view makes them part of the fringes  of the profession. In other words, Austrians stand for the mainstream as the Tea Party stands for the more moderate right wing.

Perhaps the most important point in Krugman's reflection on the state of the profession is his confession that he used to consider himself "a free-market Keynesian — basically, a believer in Samuelson’s synthesis. But [he is] far less sure of that position than [he] used to be." Good enough. Note, however, that what he means by a 'free market' Keynesian is a peculiar mix.

The Neoclassical Synthesis, was based on Hicks ISLM and Modigliani's fixed wages. The fundamental idea is that with wage flexibility the system would lead to full employment, a proposition that Keynes denied in the General Theory. In addition, the capital debates have shown, and Samuelson admitted in 1966, two years before Friedman re-introduced the Wicksellian notion of a natural rate, that the neoclassical parable in which substitution led to full employment of factors of production does not hold.

So, beyond the ideological stance (which made more sense at the time of the Old Neoclassical Synthesis, during the Cold War) Free Market Keynesianism was always kind of a misnomer. Remember that Keynes in 1926 suggested that Liberalism (in the traditional European sense of Laissez Faire) was dead.

Comments

Post a Comment

Popular posts from this blog

What is the 'Classical Dichotomy'?

A few brief comments on Brexit and the postmortem of the European Union

Another end of the world is possible
There will be a lot of postmortems for the European Union (EU) after Brexit. Many will suggest that this was a victory against the neoliberal policies of the European Union. See, for example, the first three paragraphs of Paul Mason's column here. And it is true, large contingents of working class people, that have suffered with 'free-market' economics, voted for leaving the union. The union, rightly or wrongly, has been seen as undemocratic and responsible for the economics woes of Europe.

The problem is that while it is true that the EU leaders have been part of the problem and have pursued the neoliberal policies within the framework of the union, sometimes with treaties like the Fiscal Compact, it is far from clear that Brexit and the possible demise of the union, if the fever spreads to France, Germany and other countries with their populations demanding their own referenda, will lead to the abandonment of neoliberal policies. Aust…

A brief note on Venezuela and the turn to the right in Latin America

So besides the coup in Brazil (which was all but confirmed by the last revelations, if you had any doubts), and the electoral victory of Macri in Argentina, the crisis in Venezuela is reaching a critical level, and it would not be surprising if the Maduro administration is recalled, even though right now the referendum is not scheduled yet.

The economy in Venezuela has collapsed (GDP has fallen by about 14% or so in the last two years), inflation has accelerated (to three digit levels; 450% or so according to the IMF), there are shortages of essential goods, recurrent energy blackouts, and all of these aggravated by persistent violence. Contrary to what the press suggests, these events are not new or specific to left of center governments. Similar events occurred in the late 1980s, in the infamous Caracazo, when the fall in oil prices caused an external crisis, inflation, and food shortages, which eventually, after the announcement of a neoliberal economic package that included the i…