Saturday, February 4, 2012

On Cowen on Keynesianism: Krugman gives us Part 1, DeLong gives us Part 2, and Noah Smith gives us some head-scratchers

I think there's been a good set of responses to Tyler Cowen's odd claim recently about Old Keynesianism.

My first reaction to Cowen - part 1 of a rebuttal - was "there's lots to Old Keynesianism. Some of the most useful insights for 2008-present have revolved around how wacky everything behaves when interest rates are extremely low, investment demand is weak, and demand for liquidity is high. Any theory that explains that wackyness has some obvious value, and nothing that happens in 2012, 2013, 2014... changes the fact that Old Keynesianism is a theory that provides a damn good roadmap to 2008-2011". Krugman covers this part 1.

My second reaction to Cowen - part 2 of a rebuttal - was "I'm not sure exactly what premise you're arguing from to get this conclusion, but you seem to think that Old Keynesianism implies that market economies can't recover on their own, without government. I've heard this interpretation of Old Keynesianism on several non-Keynesian blogs, and in various youtube videos of note. But I have never had a formal presentation of Old Keynesianism in an academic setting that ever suggested anything like this. Furthermore, I've never read anything in Keynes to suggest this. I've always understood Old Keynesianism to argue: the volume of employment is contingent on investment demand, which itself is contingent on two things: the anticipated returns to an investment, and the cost of making that investment. Furthermore, Keynes tells me that investors aren't fortune-tellers and assessments of the future returns to an investment can be volatile. The economy recovers when investment demand recovers, which recovers when the marginal efficiency of capital recovers." (a.k.a. - Of course the economy can recover on its own! Who ever said it couldn't?). Brad DeLong provides this part 2.

Noah Smith provides a number of puzzlers. Why does Cowen seem to think the liquidity trap is some kind of permanent condition? What real shock is Cowen talking about exactly? Why does Cowen make so much of one month of data?


  1. I have a theory about what motivates TC...


  2. does this mean that we get to continue our trillion dollar plus deficits as long as we need them, as they are not Keynesian?


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