Tuesday, April 3, 2012

Some minor points on Keen/Krugman/Rowe kerfuffle

If you don't follow, don't worry about it (I barely do).

I did not follow this from the beginning and am trying to wade through it now, and honestly it's just a lot of fighting over modern macro models.

Two things I definitely disagree with Keen on:

1. He's making a fuss over how people are misinterpreting him, and a lot of it originates from his discussion of the "underlying principles" of DSGE models. Nick Rowe, Paul Krugman, and others jumped on Keen for an uninformed characterization of the underlying principles of DSGE, and then Keen gets REAL bent out of shape, as do his defenders. He subsequently protests that what he was talking about was New Classical macro! I'm sorry, Keen, but if you want people to understand you you've gotta spell it out better than that - and if they don't understand you you certainly shouldn't get mad at them. The "underlying principle" of DSGE models go way back to the 1920s, and have nothing whatsoever to do with New Classical macro. If you ask someone about how DSGE modeling approaches first started coalescing, they'd mention Ramsey and Solow, which came DECADES before New Classical macro. That's the natural interpretation of "underlying principles". If you mean New Classical, just say "New Classical" and don't blame Krugman or New Keynesians or DSGE for models that came out in the 70s and 80s.

2. Keen's "more Keynesian than Keynes" attitude is frustrating too, and he insists non-Post-Keynesian Keynesians call themselves "New Walrasians" because that's what the IS-LM model is. He's right about the IS-LM model, of course - and I take that as a compliment. Walras was a brilliant economist, and any decent modern economic theory owes Walras a lot. But that's beside the point of whether we're "Keynesian". Keynes and Hicks did disagree on the relevance of the loanable funds market to the determination of the interest rate. Many of us think Hicks had it right. But the model itself incorporates all of Keynes's own insights. This isn't really sufficient for saying we're not Keynesians. As far as I know, Keynes and Robinson never accepted the idea of mark-up pricing that Keen is famous for promoting in his theory of the firm. Robinson and Keynes preferred the New Keynesian interpretation of a departure of price from marginal cost as a result of market power. This was the whole point of Robinson's book on imperfect competition -a New Keynesians treatise ahead of its time! Should we banish Keen from the Keynesian paradigm for this? Probably not. He should extend the same courtesy to Krugman.

I may develop an appreciation of Keen yet... one of my courses this fall will be Macroeconomic Political Economy, which will have heavy doses of Post-Keynesianism. I'm looking forward to it. Nevertheless, this first foray into Keen leaves me less impressed with him than I know many of you wish I would be.


  1. I thought Keynes was assuming perfect competition in the General Theory. I believe both Richard Kahn and Joan Robinson did complain after Keynes's death that imperfect competition wasn't in the General Theory. Also, Daniel Kuehn, you make it sound like Joan Robinson and John Maynard Keynes were close. Have you actually read the correspondence between Joan Robinson and John Maynard Keynes? The opposite seems to be the case—that they weren’t close.

    Dr. Michael Emmett Brady has accused Joan Robinson of “intellectual dishonesty”. In fact, Dr. Brady even calls Richard Kahn and Joan Robinson “Lord and Lady Macbeth”! Why? He contends that Joan Robinson and Richard Kahn were “very jealous” of Keynes’s success, and upset at the fact that he didn’t seem to take an interest in their theoretical contributions. Thus, both of them claimed that there were all kinds of mathematical errors in the General Theory, that Richard F. Kahn was the real author of the General Theory, and that according to Gerald Shove, Keynes “never took the twenty minutes necessary to understand the Theory of Value”! Note that Joan Robinson made this last claim AFTER the death of Gerald Shove—ergo, there would be no way to verify the statement.


    And Dr. Brady isn’t alone in accusing Joan Robinson of intellectual dishonesty. The monetary economist Harry G. Johnson has accused her of intellectual dishonesty (see Donald Moggridge’s biography of Johnson). Paul A. Samuelson has questioned the mathematical competency of Joan Robinson, in fact. (See a book by Marjorie S. Turner on Robinson and the American economists.)

    In my opinion, not all of Post-Keynesian economics is worthless—Minsky’s Financial Instability Hypothesis is the result of an interesting Fisher-Keynes-Schumpeter synthesis—but the founders of Post-Keynesianism need to be questioned, especially regarding these fishy statements, some of which have been absorbed by later generations of Post-Keynesians—including Steve Keen.


    1. You're right - they had their frictions. I'm not sure how personally close they actually were - Robinson could be very dismissive. For all I know they got along fine in real life.

      I don't recall much producer theory in the General Theory at all so it seems odd to me to talk about whether imperfect competition ought to have been in the General Theory.

      The point is this - Keen accuses Krugman of not being Keynesian because he departs from Cambridge Keynesians on the loanable funds point. Well Keen departs from Cambridge Keynesians on the imperfect competition explanation of prices not equaling marginal costs. Does that mean Keen isn't a Keynesian just like Krugman isn't a Keynesian? By Keen's standards, we'd have to throw him out too.

  2. I'm sorry, Keen, but if you want people to understand you you've gotta spell it out better than that - and if they don't understand you you certainly shouldn't get mad at them.

    You wrote that just to make me laugh hysterically, right Daniel? Thanks, it made my morning.

    1. The difference is, I'm right!

      Seriously, though, I complain when I don't feel people have invested the proper legwork or are just making things up. If Keen wants to assert that Rowe and Krugman are just making things up, he can give that a shot. But I don't see how you get the "underlying principles" of DSGE from models that only came around after the earliest DSGE models have been developed.

      If I ever complain about something that obvious, make sure you bring this up again. But I'm not sure this makes sense.

  3. Daniel Kuehn: I agree with you on that point regarding Keen. But what is your opinion of Post-Keynesianism's intellectual currency? Are they intellectually bankrupt, or intellectually rock-solid?

  4. DSGE just seems invulnerable to logical criticism, as its proponents are constantly shifting the goalposts 'clearly you haven't read the most recent developments..' 'oh that's not REAL DSGE' etc.

    I basically fall back onto two simple facts when discussing what you mentioned above:

    - DSGE couldn't see the crisis, and is really, really sucky at modelling it. Keen, on the other hand, predicted it - not stopped clock predicted it, actual predicted it.

    - As for LP versus LF, the main implication of Keynes' pure LP model was that low long term interest rates (and by extension, international stabilisation) were key to success. This was demonstrated to work pretty effectively post-WW2.

    1. 1. I have no idea what you're talking about with DSGE
      2. I'd need more evidence on Keen. I have a hard time taking people who claim they can predict complex systems seriously.
      3. Right - the LP was an essential element. You don't need a pure LP theory to do that. Hicks was a Keynesian.

    2. 1. See the latest from Krugman - Keen attacks the 'core' form of DSGE, Krugman misreads him, says that NK DSGE* is better. Look at Mark Thoma's twitter, too - he actually claims that New Classical DSGE is not DSGE at all! It's like stabbing goldfish.

      2. We aren't talking day, time, month etc. It's just that he looked at the build up of private debt - which is central to his models and an afterthought in DSGE ones - and concluded it was unsustainable. He sounded the alarm bells in 2005 I believe.

      3. I'm not sure that's true - IS/LM is part of the theoretical justification for using rates to 'manage' the cycle rather than keeping them permanently low. Maybe this is worth a post from me.

      *I'm aware all of these labeling doesn't occur much in academia

  5. Daniel,

    DSGE as in assuming (1) representative households and (2) representative firm and (3) aggregate capital indeed has long history but it is not immune to deep problems:

    1. Aggregation of consumers is really problematic
    2. Aggregation of capital can be incoherent--and it is not just CCC, Franklin Fisher and others have written about the problems from a purely technical point that is unrelated to CCC. BTW, Andreu Mascollel wrote a paper that essentially had a SMD type reuslt for interest rates.

    So, even though DSGE has a hoary tradition, it is on shaky ground. In that sense, when NK add some stuff to th basic DSGE model, they are indeed adding epicycles to a fundamentally flawed model. That is what Keen is talking about.

    The real problem is most economists aren't even aware of this problem and they assume that this is a problem specific to RBC. Or they are being deliberately obtuse. You decide.

    1. Try this:

      Fatih Guvene, "Macroeconomics with Heterogeneity: A Practical Guide", Economic Quarterly—Volume 97, Number 3—Third Quarter 2011—Pages 255–326


    2. Vimothy,

      Nice try! There is still RA within each agent type, and given the limited number of agent types you are still left with RA. I am not convinced at all. In any case, the results are all over the place and pretty useless--you can derive pretty much anything you want given the assumptions that you make. They give us no insight other than what are self-evident from the assumptions. In fact, that is pretty much true of most DSGE macro.

      BTW, nothing on capital aggregation.

      I am not going to bring up other insurmountable problems. The microfoundations project is a dead-end but there is so much sunk capital that we will not continue to see more an more fancy modifications which will be more debates about how angels can dance on the head of a pin.

  6. I was not really defending Keen but rather objecting to the form of the argument. Assume Keen does *not* know the difference between NK, NKDSGE, DSGE, New Classical models, styles and assumptions. It had nothing to do with the debate btw him, Krugman and Rowe. Their argument took the form of Keen said something stupid here therefore his argument their is bullshit. I was taught that was not only bad form a fallacious form of argument. Nick knew that and that is why he apologized.

  7. "Robinson and Keynes preferred the New Keynesian interpretation of a departure of price from marginal cost as a result of market power. This was the whole point of Robinson's book on imperfect competition -a New Keynesians treatise ahead of its time!"

    You're bundling a very complicated story into a too-small container here. AFAICR, Joan Robinson said she embarked on the study of imperfect competition in the hope of getting to grips with the problem of unemployment, but she abandoned that approach when she saw that Keynes's idea of effective demand was more satisfactory. So she rejected New Keynesianism well in advance, much as Keynes rejected rational expectations when he wrote the Treatise on Probability. Keynes never gave serious attention to the idea of imperfect competition; for him Price=Marginal Cost, with some qualifications about User Cost that hardly anyone pays attention to now.

  8. Nice post. I was checking constantly this blog and I'm impressed! Very helpful information particularly the last part :) I care for such info a lot. I was seeking this certain info for a long time. Thank you and best of luck.
    Also see my webpage: smo dienstleistungen


All anonymous comments will be deleted. Consistent pseudonyms are fine.