Paul Krugman has put up a post in which he complains about apparent closed-mindedness of Chicago-Minnesota RBC and ratex macro-modelers who do not like sticky-prices-wages New Keynesian models and are controlling some leading journals. He argues that at saltwater schools students learn about RBC and such like, while those at the freshwater ones do not learn about other approaches. I think there is some truth to this, and, with some exceptions, such as Robert Lucas, some of the people out of the Chicago-Minnesota mafia have made complete fools of themselves with their hysterical attempts at explaining what has gone on, combined with an overbearing arrogance and aggressiveness towards anybody who disagrees with them.
However, I think that once again Krugman is dropping the ball here. In terms of explaining what has gone on the NK sticky-wages-prices gang has not done any better than the fundamentalist loonies out of Chicago and Minnesota (and related places such as Arizona and Rochester and certain regional Feds). They all look pretty silly. After all, the bubble and the crash do not look like they are at all explained by either some exogenous productivity shock or by excessive wage stickiness. Neither is even remotely in the ball park.
Of course, what may have Krugman really upset is that his department at Princeton has hired one of the most overbearing and arrogant of all the Minnesota macro-modelers, Pat Kehoe, who is very loud about stating that "we have all the answers," and reportedly he is attempting to take over grad macro teaching at Princeton. In this case, maybe Krugman has a bone to pick, given that this stuff would probably be displacing the NK stuff, although what they really need to do is get serious about Hyman P. Minsky and agent-based modeling and some other approaches.
Is Michael Woodford going along with this?
ReplyDeleteHas Woodford left Columbia for Princeton, or are you thinking of someone else? Princeton politics aside, I'm curious as to whether Krugman's claim that they simply don't teach NK economics at Minnesota is literally true. And the really silly pronouncements from Chicago have come from finance specialists like Fama. I doubt that the macro people are so clueless.
Kevin, thanks. I stand corrected. Woodford was at Princeton prior to 2004, when he went to Columbia. I had not heard about that.
ReplyDeleteI have heard claims that NK is taught at Minnesota, although the modelers there disdain it. I would agree that at Chicago the economists have been less making fools of themselves than Cochrane and Fama. Note that in my post I exempted Lucas, whose defense of economic theory in The Economist last summer was very eclectic in its approach and praised the Fed for considering a wide array of theoretical approaches when making its policy during the crisis.
Barkley, it was Pat Kehoe who was recently hired by Princeton, not his brother Tim, who is still at Minnesota, FYI. It's also worth noting that Kehoe has done some recent work with NK-type sticky price models.
ReplyDeleteI metion the latter because as a Minnesota alum with heterodox sympathies, I think you're mostly right on with this post. Krugman exaggerates the differences between "saltwater" and "freshwater" schools. To my knowledge, they don't teach first year grad students NK models at Minnesota, but that's mostly because they don't see those models as much different from the DSGE models they teach, just with a some nominal rigidities thrown in (which the Minnesota guys mostly consider ad hoc). The idea that these guys are ignorant of NK work is ridiculous.
fresherodox,
ReplyDeleteApologize for failing to keep the Kehoes straight. Remind myself to double check who is whom before I post again on people being in or moving about from econ department to department.
Thanks for your insight, which sounds right.
BTW, turning into a pumpkin for several days while off to conference at Dallas Fed on behavioral views of consumer behavior.
I am of the opinion that clashes between NK and Friedmanite academics are like rooting for sports teams. Neither seem to properly address the reality of money and credit. These two things were different one from the other in the past. Gold was a fungible commodity respected by all sovereigns and accepted by all sovereigns in settlement of tax or tribute. In the new order this is not true. The sovereign creates its own tokens and respects only those tokens. IMHO neither neoclassical or NK "teams" actually deal with this reality. It seems to me that here in the United States we are having a battle which may allow the banks to be sovereign and the government to be some sort of hired hand. Libertopia at last. And in this new order the banksters will not even be restrained by the reality of a fixed commodity. In such a world it will be back to barter. What is disgusting is the lack of respect for this threat on the part of the home town "fans".
ReplyDeleteMost of us "little cheeses" are becoming very concerned over the lack of clear real political action concerning money itself. Many of us see the Republican assault on government as it has been and continues to be. All actions of the last 30 years have been coordinated to destroy the value of the dollar and to thus destroy the credibility of government. The insanity of it is exposed by fears over the deficit, as though there is some form of intrinsic backing for the money. And by playing along the NK economists and the Democrats are ceding the battle to the neoclassical nincompoops, all the time focused instead on whether government "borrowing" and spending is a proper address to economic regulation.