First on what macroeconomics has become:
Simon Wren-Lewis says something quite similar to my own view about the trouble with macroeconomics: it’s mostly political.Krugman is very right here, especially about Keynesians and especially about his column! You don't get more political than Krugman.
Krugman also does the very important service of again linking Milton Friedman to Keynesian economics:
What’s the evidence that Keynesians respond to evidence? Just think of how the view we call Keynesian has evolved since the 1950s. Time was when Keynesians were highly skeptical about the effectiveness of monetary policy under any circumstances; evidence, including but not only Friedman and Schwartz, persuaded the school otherwise.But Krugman's full column is a mess, he pretty much admits that current day Keynesians have no theory and fly by the see of their pants, adopting whatever theory fits the empirical data of the moment:
The idea of the natural rate, that there was no long-run tradeoff between inflation and unemployment, was very much disliked by people like Jim Tobin, but accepted by nearly everyone after the experience of the 1970s.How can you hold theories in your head that contradict one another, at different points in time? Is Krugman saying that if the empirical evidence again shows that there is "no long-run tradeoff between inflation and unemployment," that he returns to the first "theory"?
More recently the revisions have tended to go in the other direction, with a revival of the concept of the liquidity trap in the light of Japan’s experience, and a renewed acceptance, again based on evidence, that wages are downwardly rigid – and hence that the natural rate hypothesis breaks down at low inflation. And there’s a widespread acceptance that we were paying too little attention to debt and the financial sector.
Bottom line: This shows that Krugman has no theory and attempts to spin tales based on whatever the current empirical data show, and that he is quite willing to reverse his tales 180-degrees based on the new circumstances. This is not economic theorizing. It is a perfect example of why it is incorrect, in the science of economics, to use empirical data to create theories. As Ludwig von Mises and Friedrich Hayek have pointed out, in the science of economics, we are dealing with super complex matter. Because we are dealing with super complex matter, we can not, as Krugman attempts to do, pull out a few data points and claim some kind of correlation as theory.
What the economist must do, to obtain general economic theories, is to deduce from basic principles And here I direct you to Human Action by Mises, to see how this is done.Using deductive logic, Mises creates the entire theory of economics. Theory that holds over time and does not have to be changed with every new data set. Misesian theory can explain why there is "no long-run tradeoff between inflation and employment" and also, without Krugman type contradiction, explain downward economic spirals.