Another view on “policy pragmatism” in mainstream economics

Paul Krugman—orthodox economist? Heterodox economist? Pragmatic economist? New Keynesian economist? Michael Stephens recently commented on an article in the Economist that discussed MMT, as well as two other non-mainstream schools of macroeconomic thought. The article contrasted the three relatively unfamiliar and unorthodox approaches with “[m]ainstream figures such as Paul Krugman and Greg Mankiw[, who] have commanded large online audiences for years.”

As Michael points out,

If you step back, what’s slightly unsatisfactory about [describing Krugman simply as a mainstream economist] is that Krugman is, right now, more in tune with the policy preferences of two-thirds of these “doctrines on the edge of economics” than he is with the reigning fiscal or monetary policy stance of the US government. 

But as Michael well knows, Krugman is hardly alone among neoclassical scholars in most of his policy views. Micheal’s point is true of quite a few mainstream economists right now—they are far more flexible on the policy issues that dominate the agenda today than they are on many other economic issues. This excerpt from a recent essay written by Marc Lavoie may help to illuminate the very significant differences of opinion that distinguish such forward-thinking neoclassicals from numerous heterodox economists around the world:

Paul Krugman (2009) has also made quite a stir by ridiculing freshwater macroeonomists — the New Classical authors from Chicago and Rochester — in his review of the evolution of macroeconomics, criticizing both their assumptions and their apparent lack of knowledge of elementary Keynesian economics, as the most famous New Classical authors reverted to what should have been well-known pre-Keynesian arguments to counter the justification of stimulus programmes. Despite throwing some barbs to his fellow New Keynesians, because they too easily embraced the efficient market hypothesis and rational expectations, Krugman seems to be confident that pragmatic economists will manage to put macroeconomics back on track, by appropriately taking into account, so it seems, behavioural economics and behavioural finance, as exemplified by the work of the likes of Akerlof and Shiller….

…. It would seem that Krugman and others [as examples, Lavoie mentions Willem Buiter and Charles Goodhart] see potential [in these more-realistic versions of neoclassical macroeconomics], when so far, there is just a glimpse of hope.

…. They barely mention, when they do, the work of heterodox Keynesians, such as that of the post-Keynesians, or more precisely in the context of the present financial crisis, the work of Minskyans. Clearly, the hope is that through some miracle, salt-water macroeconomists (pragmatic economists) will manage to incorporate real-world concerns in the state-of-the-art mainstream macroeconomic models. But as Kaldor (1966, p. 310) remarked a long time ago, “it is the hallmark of the neo-classical economist to believe that, however severe the abstractions from which he is forced to start, he will ‘win through’ by the end of the day — bit by bit, if he only carries the analysis far enough, the scaffolding will be removed, leaving the basic structure intact. In fact these props are never removed”, for otherwise the whole structure collapses.

One example of the fundamental shibboleths that continue to vex almost all mainstream reporting, op-ed pieces, academic articles, etc., about current macro policy issues is the assumption that full employment will tend to be reached in the medium and long runs, perhaps with the help of occasional run-of-the-mill stimulus plans. This stabilizing tendency will reliably prevail, according to mainstream Keynesian thought, unless the economy is in a special sort of situation unique to depressions, slumps, or unusually harsh recessions. Just one example: the need to plan ahead for fiscal and monetary policy contraction in the US is urgent in the view of many neoclassical Keynesians, though probably not Krugman’s.

I hope I am not offending mainstream economists with the broad-brush summary in the preceding paragraph, but a belief in stable full-employment equilibrium (allowing of course for various labor market “frictions” completely unrelated to the business cycle) continues to dominate the mainstream discourse. For a few examples of other views, you might glance at Lavoie’s essay, which is entitled “Are We All Keynesians?”, this book on certain classic versions of post-Keynesian economics (which, by the way, discusses Kaldor), or (for scientists, modelers, and other technical readers) Piero Ferri’s recent  book, which contains helpful discussions of key weaknesses in neoclassical theory, as well as many new ideas about the dynamic behavior of the economy.  (Prof. Ferri is known well here for having collaborated in his research with the late Levy Institute scholar Hyman Minsky. (Link to our Minsky digital archive here.)