Hydraulic Krugman on Wynne Godley

Paul Krugman commented on the NY Times piece on Wynne. There are many little incorrect interpretations, which derive from his lack of understanding of the history of ideas. First, he equates Wynne's model with the old hydraulic Keynesianism (i.e. Neoclassical Synthesis) of Phillips (of Phillips curve fame, but also of the hydraulic model of the British economy). Nothing further from the truth.

Wynne came to economics via P. S. W. Andrews, one of his two most influential teachers at Oxford (the other being being Isaiah Berlin). Andrews and the full cost price authors that were part of the Oxford Economists' Research Group (OERG), under the leadership of Roy Harrod, and were in general more concerned with practical applications than with theoretical first principles. That influenced the way Wynne developed his skills as a modeler at the British Treasury, before being taken by Nicholas Kaldor, to head the Cambridge Department of Applied Economics (DAE), where he built together with Francis Cripps the Cambridge Economic Policy Group (CEPG).

Note that conventional hydraulic models, including the sort of Cowles models like the Klein-Goldberger model of the US economy, put great emphasis on the estimation of parameters based on certain simplistic macro behavior. Wynne took a very different approach to modeling than Klein-Goldberger. He was more concerned with what he referred to as 'model architecture' than with parameter estimation.

The architecture, which was careful about stock-flow consistency, showing that everything came from somewhere and went somewhere so to speak, also imposed a clear causality structure, which determined most of the results. In fact, Wynne believed that significant variations of the parameters might not greatly influence the end result of the model, which was used for simulations and scenarios that helped to understand how the economy functioned, rather than for strictly forecasting purposes.

Krugman then says these models were abandoned because they failed in the face of the Great Inflation of the 1970s, and because they did not deal with consumption in a coherent way. Here again he is wrong. First of all, Wynne's models had no trouble dealing with the inflation of the 1970s, correctly pointing out the effects of oil prices, devaluation, and wage pressures from the cost side rather than demand pull views, and he was one of the few that correctly foresaw the big recession that the Thatcher policies would cause.

On consumption the notion that Friedman somehow is better than Duesenberry and the relative income approach of other old Keynesians goes to show how limited is Krugman's understanding of his own tradition in the field (for more go here). Note that he believes that New Keynesians are just grafting a more sophisticated behavioral decision making approach to old Keynesian stories, without owing up to the limitations that the Old and New Keynesian models, based on rigidities and imperfections to avoid the tendency to the natural rate.

Wynne's model, in the Kaldorian tradition, with a supermultiplier determining growth, and with the Oxford pricing tradition determining prices, was free of the main limitations of the Hydraulic tradition to which Krugman belongs, whether he understands it or not. That is why Jonathan Schlefer, from the NY Times, is correct in suggesting that rebuilding macro on the basis of Wynne's work would make more sense.

On a funny note at the end, Krugman reveals his misconception about the role of old ideas in the history of science, and economics in particular. He says: "it is kind of funny to see a revival of old-fashioned macro hailed, at least by some, as the key to a reconstruction of the field." In his view, old ideas are only relevant if you can formalize them in modern garb, but are not a source of forgotten and incorrectly discarded knowledge that are better prepared to understand how the economy works. The limitations of the 'great economists' of today, make the loss of economists like Wynne all the more painful.

PS: Full disclosure, I'm quite biased on this topic, having worked for Wynne at the Levy Economics Institute for two years in 1997-98.

PS': Two additional posts by Unlearning Economics and Philip Pilkington and a link by Lars Syll (h/t for the link to Unlearning).